WEST AFRICA: Potential for oil brings new problems to São Tomé

Feb. 1, 2003
Until recently, few had heard of the two tiny volcanic islands that comprise the Democratic Republic of São Tomé and Príncipe (STP). But that was before the release of seismic reports last year indicating that 6 Bbbl of oil reserves may lie near their shores in the deepwater off the western coast of Africa in the Gulf of Guinea.

Until recently, few had heard of the two tiny volcanic islands that comprise the Democratic Republic of São Tomé and Príncipe (STP). But that was before the release of seismic reports last year indicating that 6 Bbbl of oil reserves may lie near their shores in the deepwater off the western coast of Africa in the Gulf of Guinea. While these potential riches should be a boon for STP, the country finds itself in the center of international political and business wrangling.

STP covers 1,001 sq km. With only 150,000 citizens, it is the smallest member of the United Nations and one of the few stable democracies in West Africa. With an estimated GDP of $189 million, life is a far cry from the modern comforts much of the world enjoys. By all measures, the quality of healthcare, education, food, utilities, housing, communications, and transportation is sorely lacking.

Against this backdrop, there are prospects for significant oil revenues. But the journey from the initial seismic reports to today's plans for a licensing round for nine offshore blocks in 2003 has not been an easy one.

Mixed reports

Much has been reported in the media about the irregular pace of development of the Joint Development Zone between Nigeria and STP. STP and Nigeria agreed that the revenues from the JDZ would be allocated 60% to Nigeria and 40% to STP. The countries have not yet agreed on the structure or timing of the licensing round for the JDZ.

Despite that, the Environmental Remedi-ation Holding Co. (ERHC), a Nigerian-owned company, released a statement to the media that indicated incorrectly that the JDZ licensing round would take place in September 2002. Both STP and Nigeria wish to go forward with the licensing round as soon as possible, but the round has been delayed as the countries attempt to implement certain elements of the treaty.

In particular, STP has concerns about several key contracts relating to the JDZ. From the country's view, the contracts would essentially cede STP's oil resources to private parties.

Press reports on the JDZ situation have given the impression of STP as a lone ranger, acting without regard for Nigeria and unwilling to adhere to the rules laid out by the Joint Development Authority.

President de Menezes clears the air

Fradrique de Menezes, the President of São Tomé and Príncipe, has come forward to attempt to clear the confusion over the licensing plans. De Menezes, 60, worked for several American companies such as ITT and Archer Daniels Midland. A former government minister and ambassador to the European Union, de Menezes was elected president of the island nation in September 2001, just months before seismic data collected by PGS revealed the potential for significant hydrocarbon accumulations in São Toméan waters.

In his first definitive interview with the oil and gas media, de Menezes admitted that the past year has been difficult.

"Change is always hard. And change of this complexity, coupled with the magnitude of money at stake, is going to create a lot of friction. Although we have tried to prevent it, there has been a good deal of bickering and jockeying for positions of power, both inside and outside of the country," said de Menezes.

SRA issues

A major stumbling block in STP-Nigerian relations is the Special Regime Area, which is the portion of Nigerian block 246 located in the JDZ that is to be solely managed by Nigeria. In exchange for São Tomé's giving Nigeria exclusive rights in the SRA, Nigeria was supposed to provide STP with 60,000 b/d of oil, an oil refinery, training for STP's Coast Guard, a deep-water port and logistics facility, and study grants for 200 São Toméan students.

Nigeria and São Tomé and Príncipe.
Click here to enlarge image


Now, Nigeria has reduced the amount of oil that is to be delivered to 10,000 b/d. This situation leaves STP unwilling to move forward. Failure to resolve this issue will continue to hamper progress in developing the JDZ.

The remainder of STP's territorial waters lies in its own Exclusive Economic Zone. STP ann-ounced in December 2002 that it would begin preparations for development and eventual licensing round in its EEZ. The government decided that it is in STP's best interests to begin preparing the way forward by putting EEZ legislation into place and by collecting further geophysical data. Although the EEZ presents its own challenges for hydrocarbon exploration, President de Menezes expects interest in EEZ exploration to pick up as additional data is gathered. STP has not yet announced the timetable for developing the EEZ.

Contract concerns

The de Menezes administration seeks to renegotiate several contracts inherited from the administration of Miguel Trovoada, former president of STP. The contracts are with ExxonMobil, PGS, and ERHC.

For the past eight months, contract negotiations have been ongoing, mostly in São Tomé. Renegotiation of the contract with ExxonMobil was concluded in August 2002. The resulting agreement awaits formal approval from the Joint Ministerial Council.

STP has notified PGS that it would like to renegotiate two contracts before going forward. STP also objects to a contract with ERHC, a subsidiary of Chrome Energy Corp. of Nigeria.

Creating a transparent business culture

President de Menezes said STP's primary objective is to work with Nigeria and all parties to support the licensing round process, not obstruct it. One of his objectives is to create transparency in the development of STP's oil resources and dispel the image of West Africa as an unethical place in which to do business. To lay the proper foundation, Atlantic Oil & Gas Plc of Scotland is advising President de Menezes on a wide range of energy issues.

São Tomé/Nigeria JDZ.
Click here to enlarge image

"It's the perfect opportunity to inject a long overdue shift in the way oil operators and others are oftentimes forced to operate in West Africa," said Dr. Ken Forrest CBE, non-executive director of Atlantic Oil & Gas and former director of the International Oil & Gas Directorate of Trade Partners UK. "We want to help STP pave the way now for making straightforward business dealings the rule, not the exception. By pioneering the way forward for a transparent culture where West Africa's oil industry is viewed as an open, honest place in which to do business, everyone wins, not just São Tomé," he added.

Local support

Apart from the value of the resources themselves, a considerable economic spin-off from oil and gas discoveries will come from providing infrastructure and services required to support the extraction of the oil.

"To put it in perspective, at its peak the international oil and gas operators in the UK sector of the North Sea were spending about $12 billion annually to support their operations, with the UK achieving above 70% local market share," said Forrest. "Left unchecked, much of this would have been spent outside the UK. A major portion of this investment was dedicated to providing specialized production facilities on fixed offshore platforms. Other oil exporters have targeted an even greater share of oil-related expenditures."

Because of the water depths around STP, a network of floating production facilities will be necessary. Though most of these facilities will come from the Far East and Europe, STP can provide other supply services.

"STP will be capable of supplying services on the islands to support JDZ and EEZ operations. They will also provide supply bases, warehouses, maintenance workshops, and other facilities," Forrest said. "STP aims to participate fully in the oil and gas operations off her shores."

The way forward

De Menezes has developed an ambitious strategy to revitalize the country. Several of his initiatives will start with the first injection of oil revenues. "One of our top priorities is to train our workforce to carry out not only quality oilfield practices, but provide them with skills that will go a long way to developing a thriving tourism industry. Work will begin immediately on raising the standard of living, especially with regard to improved health care, education, and new housing," de Menezes said.

The president intends to make STP a model for hydrocarbon development for the region. More-over, he has a broader vision of STP as a country that is firmly committed to democracy, human rights, good governance, free press, and a transparent business culture. President de Menezes acknowledges that STP has work ahead of it.

"Nevertheless," he said, "it is an incredible opportunity to think that as a result of the probable oil find, STP has the chance to be transformed from a tiny, sad backwater to a bustling hub of prosperity. For the first time, our citizens are looking forward with genuine anticipation and hope for the future."

President de Menezes has hopes of seeing licensing rounds in both the JDZ and EEZ in the near future. It remains to be seen whether his vision of a new model for oil producing-countries – one that will benefit all of the people of São Tomé and Príncipe – will be realized.