On October 28, 2010, EnerCom's Oil & Gas 360® published the following interview with ERHC Energy Inc. Chief Executive Officer Peter Ntephe.
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ERHC is an American oil and gas investment company with an emphasis on West Africa. Currently, ERHC has substantial exploration-stage assets in the deepwater Gulf of Guinea. The company has working interests in six of the nine Blocks in its Joint Development Zone (JDZ). Its technical partners, Sinopec Corp. and Addax Petroleum (a wholly owned subsidiary of Sinopec Corp.), operate three of those blocks. In addition, the company's portfolio also includes two Blocks of the Sao Tome & Principe Exclusive Economic Zone (EEZ).
During the interview, Peter provides his view on the exploration potential that exists in West Africa and what the future for development is in the area. Further, he discusses the company's exploration and acquisition strategy as well as the pre-salt similarities that exist between Brazil and West Africa. Please see below for the entire interview transcript. The interview can also be found in PDF format by clicking here, or navigating to the Media Page.
Click here to view Oil & Gas 360's previous write up on ERHC.
10 Good Minutes with Peter C. Ntephe, Chief Executive Officer of ERHC Energy Inc.
Oil & Gas 360®: Please tell us a little about your background and how you got started in the oil and gas industry?
Peter Ntephe: I have been in the oil industry in one way or another throughout my career. After my first degree, in law, in the mid-1980s, I joined a leading corporate commercial law practice in Port Harcourt, which is known as the capital of Nigeria's oil industry and foremost city in the Niger Delta. Virtually everything about business there, including law practice, was about oil. I worked extensively on upstream, midstream and downstream aspects of the industry. To further my career and skills, I earned my first Master's degree with major concentrations on oil and gas law and environmental law. I have earned other degrees since, including a degree in management. This was at a time when agitation was emerging in the Niger Delta for community rights and environmental protection. My thesis on permanent sovereignty over natural resources and the rights of indigenous peoples made some interesting findings and suggestions.
I also had a stint in the National Assembly of Nigeria working as chief legislative aide to the then Chairman of the Senate Committee on Judiciary and Legal Matters. In that capacity, I was privileged to work on the treaty that gave rise to the Nigeria - SaoTome and Principe Joint Development Zone (JDZ). Subsequently, the opportunity came to join ERHC in 2001 as part of a new management team constituted to turn around the Company's fortunes following a takeover. I have been with the Company in various capacities since - first, as corporate secretary and then moved into general executive management, having gradually become grounded in all aspects of the Company's business. I have been fundamentally involved in the Company's business since I joined, including key participation in the securing, negotiating and maintaining of the Company's oil and gas interests in the Gulf of Guinea.
OAG360: Tell us about ERHC. What is the company's exploration and acquisition strategy and provide us your areas of operations?
PN: ERHC is an American oil and gas investment company with an emphasis on West Africa. We focus on identifying undervalued exploration and production (E&P) assets and leveraging our business acumen, connections and relationships with world-class exploration and production companies to realize exceptional value from these assets.
Currently, ERHC has substantial exploration-stage assets in the deepwater Gulf of Guinea. We have working interests in six of the nine Blocks in the JDZ. Our technical partners, Sinopec Corp. and Addax Petroleum (a wholly owned subsidiary of Sinopec Corp.), operate three of those blocks. Our portfolio also includes two Blocks of the SaoTome & Principe Exclusive Economic Zone (EEZ), each of which we currently hold 100%. We have the further option to select up to 15% interest in two additional Blocks following the completion of the EEZ's First Licensing Round, which is currently in progress.
As we have seen in recent months in the Gulf of Mexico, deepwater exploration is a highly technical endeavor that must not be rushed. We are currently supporting our partners in conducting studies based on the information gathered during a five-well exploratory drilling campaign in JDZ Blocks 2, 3 and 4 that wrapped up in January 2010. Natural gas was discovered in at least three of the wells, all of which were drilled on time and within budget. The ongoing studies will guide decisions regarding how exploration will proceed in the years to come.
Regarding our acquisition strategy, we are in the process of assessing various opportunities along the coast of Sub-Saharan West Africa - both onshore and offshore. This is where we have a real home-field advantage and can add significant value that many others cannot. Our primary objectives are to complement and diversify our current asset portfolio both in terms of development lifecycle and geography. Currently 100% of our assets are exploration-stage in the deepwater Gulf of Guinea. We would like to add development-stage and production-stage assets beyond the deepwater Gulf of Guinea in order to better manage risk and accelerate the pace of achieving revenues.
OAG360: What do you believe investors should be looking at with ERHC? Are there any near-term catalysts analysts should look for?
PN: We have several key initiatives underway, each of which we expect to have a positive impact on the Company's near-term and long-term valuation.
First, we are making progress toward adding a listing on the AIM of the London Stock Exchange, which will augment our current trading on the OTC BB. The AIM is where our peer companies that are focused on the African oil and gas industry are listed. It is a market that is familiar and comfortable with the opportunities in that part of the world, which we believe will reflect positively on our valuation. An AIM listing also opens the door to institutional investors, most of whom are barred from investing on OTC BB traded companies. And it represents a new pool of capital that can help us to fund future acquisitions.
Second, we are in the process of assessing various acquisition opportunities. For the past few years we have had sufficient cash to fund our operating expenses for the foreseeable future but lacked the larger scale of funds necessary to implement our growth strategy of making new acquisitions. Now we have secured an effective Shelf Registration authorizing ERHC to raise up to $50 million. We carried out the first direct private placement in October to introduce our stock to a new pool of institutional investors and test the appetite of the market. The placement was very successful and enhances our belief that we now have access to the funds required to hasten our acquisition efforts.
Third, we are in discussions with potential operating partners regarding farming into EEZ Blocks 4 and 11, in which ERHC has 100% working interests. Our desire is to structure the relationship with one or more operating partners in the EEZ similar to what we accomplished in JDZ Blocks 2, 3 and 4. In exchange for a portion of our interests, the operating partners agreed to pay us and carry our share of the exploration, development and production costs through to production. Those talks are continuing.
And a fourth factor that could be a near-term catalyst is that we are awaiting the completion of a number of studies to determine how the operators in the JDZ Blocks in which ERHC has interests will proceed with exploration.
OAG360: How is ERHC managing its balance sheet for long-term growth?
PN: We have a very clean balance sheet. Exclusive of the fundraising I mentioned earlier, we have approximately $20 million in cash and cash equivalents. We have no debt to speak of. We also have an extremely streamlined business model with total annual expenses of less than $5 million. The Board has determined that the Company's cash position, prior to new fund raising, should be devoted to working capital to assure continuity of operations until our current assets or new ones start to produce revenues. This is a key reason we are raising new funds for acquisitions with an emphasis on revenue producing assets to achieve long-term growth.
OAG360: How are you leveraging the technical aspect in managing personnel for your offshore operations in the JDZ?
PN: ERHC has a highly streamlined business model. We operate a management structure that is conventional, and perhaps most efficient, for non-operating companies of our size whereby most of our technical functions are carefully outsourced. We have a Vice President in charge of technical matters, a seasoned engineer, who identifies and assembles the best technical expertise available for our requirements on an as-needed basis. This outsourcing model not only enables us to keep our costs efficient but ensures that we can deploy the specialized technical skills required for each task or project. In three of our JDZ Blocks, we are working with world-class technical partners and they handle the technical aspects. Our Vice President Technical liaises with them to ensure the requisite input we provide in all aspects of the exploration activity there. We focus on what we do best: identifying undervalued assets and helping to overcome whatever obstacles stand in the way of these assets realizing full value.
OAG360: How is ERHC currently making capital allocation decisions between your Joint Development Zone and your Exclusive Economic Zone?
PN: In JDZ Blocks 2, 3 and 4, our portion of the costs of exploration, development and production are being carried through to production by our technical partners. Therefore, there is no capital allocation necessary in those blocks. To date, the amount that our partners have paid on our behalf under the carry arrangement is approximately $60 million, which could have put the Company in a difficult situation if we were paying costs as we go. We will reimburse the operators for our share of the costs out of profits in the event oil and/or gas is produced. We always point out that the beneficial carry arrangements we have are testament to the quality of ERHC's assets and its managerial commitment to working out cost-efficient strategies that enhance shareholder value.
To date, no Production Sharing Agreements are signed in the other JDZ Blocks in which we have interests, so it is premature to consider capital allocation. In the EEZ, we intend to structure agreements with operating partners with similar carry relationships.
OAG360: Are you currently listing on the LSE? Where is ERHC in the process and what will this do for the company?
PN: ERHC is well advanced with its plans to list on the AIM market of the London Stock Exchange. When completed, this listing will complement the Company's current trading on the OTC in the U.S.
In the coming weeks, we expect reports to be completed by the Company's advisers and independent experts on the Company and its assets. This will include a "Competent Persons Report," which will include an analysis of the Company's existing portfolio of oil and gas assets conducted by independent engineering firm Netherland Sewell & Associates. The Competent Persons Report will be made public in ERHC's AIM Admission Document.
A listing on AIM will provide ERHC access to a new pool of capital in a market that is enthusiastic about emerging oil and gas companies and knowledgeable about West Africa's oil and gas industry. We anticipate that it could also make ERHC more attractive to institutional investors and potentially reduce the volatility of the Company's share price.
In the coming weeks, we expect reports to be completed by the Company's advisers and independent experts on the Company and its assets. This will include a "Competent Persons Report," which will include an analysis of the Company's existing portfolio of oil and gas assets conducted by independent engineering firm Netherland Sewell & Associates. The Competent Persons Report will be made public in ERHC's AIM Admission Document.
A listing on AIM will provide ERHC access to a new pool of capital in a market that is enthusiastic about emerging oil and gas companies and knowledgeable about West Africa's oil and gas industry. We anticipate that it could also make ERHC more attractive to institutional investors and potentially reduce the volatility of the Company's share price.
OAG360: Do you believe U.S. investors look at oil & gas opportunities in West Africa/Gulf Guinea differently than perhaps European investors? If there are differences, how would you describe the ERHC opportunity so that it is better understood in all markets?
PN: I believe the region currently presents some of the best business opportunities in the world of oil and gas - and yet, in our experience, many investors in America remain hesitant to get involved. European investors generally seem to be more enthusiastic, probably because of their historic involvement in, and geographic proximity to, the African continent. That is one of the motivations for our listing on the AIM. We believe that AIM investors will have a fundamentally better appreciation of ERHC's assets and value proposition than is typically the case in the U.S.
However, we are not deemphasizing the U.S. markets. To build understanding among U.S. investors, we emphasize the stability throughout the region and the positive track record ERHC has achieved of working cooperatively with governments, regulators and business interests. We tell the story of the substantial assets that we already hold, the world-class partners we have garnered and our home field advantage. We have Board members, management and investors with vast experience of West Africa. We know how to get things done, legitimately, down there. We also point to the profitability of the oil industry in the region and the significant first mover advantages that still exist, particularly with major new discoveries in previously non-producing nations like Ghana and Sierra Leone. We tell the story in terms of ERHC being a strong and proven player in an oil and gas region with incredible prospects.
OAG360: In terms of its strategic position in the global energy market, what do you foresee in the next 5-10 years in terms of West African oil development? Will this remain a frontier region for some time or do you believe the industry is in a position over the next two years to increase production?
PN: The outlook for West African oil and gas development is definitely positive. Nigeria, Angola, Gabon and Equatorial Guinea together continue to provide some of the most prolific oil and gas fields in the world. Just last week, one of the majors announced a significant new discovery, at the Mpungi well in Block 15/06, offshore Angola. There have also been significant discoveries, of recent, in previously non-producing countries in West Africa. These include the Jubilee field, offshore Ghana, with a reported upside potential of up to 1.8 billion barrels and recoverable reserves in excess of 600 million barrels, which was discovered in 2007 and is expected to go into production by the end of the year. In summer this year, another major discovery, comparable to the Jubilee Field, was announced following drilling in the Tano License also offshore Ghana. Up the coast, in Sierra Leone, the Venus discovery, reportedly quite substantial, was announced this summer by the American company operating the relevant license. These new discoveries potentially set up an exploration play of more than 700 miles stretching across the coasts of Ghana, Ivory Coast, Liberia and Sierra Leone. Last month, one of the majors, an American company, announced that it had been granted approval to acquire majority stakes and operatorship in three blocks offshore Liberia which, it believed, were on trend with the new deepwater Cretaceous discoveries in the region.
So these are exciting times for West African oil and gas development. Considering that this region is the principal focus of ERHC, I'm sure you can understand our considerable excitement about the prospects for our company.
OAG360: What considerations would you suggest investors prioritize in terms of the security challenges which have impacted Gulf of Guinea oil development and production?
PN: Our assets in the Gulf of Guinea are 200 kilometers offshore, so the security challenges that some near-shore drilling operations have faced in the past have not been a major factor for us. And while I do not want to diminish the seriousness of security, I also want to assert that some of the lingering concerns about security may be somewhat outdated. The governments, oil and gas industry and community leaders have worked hard to achieve marked improvements in relations.
At the behest of governments throughout the region, the oil and gas industry in West Africa reinvests millions of dollars in communities through corporate social responsibility programs that support healthcare, education and infrastructure improvements and it is making a big difference. That's a story that doesn't get told enough.
OAG360: What is your assessment of the role of China in accelerating development in the Gulf of Guinea and other offshore African oil frontiers?
PN: I can't speak highly enough about Sinopec Corp. They are a terrific partner and I believe their involvement in the Gulf of Guinea is very positive for all involved. We reached agreement to bring Sinopec Corp. into the Joint Development Zone as the operator of JDZ Block 2 in early 2006 and since then have had an excellent partnership with them. In terms of their relationship with us on the JDZ, you could not wish for a better partner. What is unique about Sinopec Corp. is that they approach challenges with a long-term mindset and that is the reason they are gaining a foothold in West Africa. This big picture view can really pay off in oil and gas exploration, and we are very fortunate to have Sinopec Corp. as our partner.
OAG360: Some have made comparisons between pre-salt formations offshore Brazil and the geologic similarities to certain West African regions. In those areas where ERHC is active, do you believe the geology is similar to offshore Brazil? Are other areas in Africa, for instance further south off of Namibia, Angola and Gabon more similar to pre-salt geology in the Santos and Campos Basins?
PN: I am sure the geologists and other earth scientists will have a lot to say about continental drift and plate tectonics. But there is quite a degree of acceptance of certain geological (and even biological) similarity or complementariness between the Brazilian and Western African coastlines. Since the large discoveries in pre-salt formations offshore Brazil, commencing with Tupi in 2006, there has been the belief that pre-salt formations offshore Angola and other African countries in the vicinity will yield similar discoveries as in Brazil. We certainly hope so as that will only serve to take an already prolific region to a whole new level.