Having also seen your footprints elsewhere after disappointments in deepwater Gulf of Guinea, especially in view of your partnership agreement with CEPSA in East Africa, may we conclude that you are making strategic relocation?
Yes, it was a strategic shift because, if you recall, ERHC’s sole focus was the JDZ, and all the expectation was that a commercial discovery would be made. If that commercial discovery had been made, the business model of course was either to sell it or most probably sell the company for a premium and deliver value for the shareholders and go on and start something else. That is how the pure exploration model works. But that didn’t work.
And by April 2010 we had announced to our shareholders that there was no commercial discovery made. The drilling campaign happened between September 2009 and January 2010. By April, we had announced the results as we knew them, that it wasn’t possible to make a declaration of commerciality which meant that as much as that business proposition was concerned, up to that point, it had failed. So the question for ERHC was that if the core business proposition had failed up to that point, what were we going to do? Should we shut down the company which was a possibility? Or should we start again?
After an entire series of discussion it was decided that we start again, to renew and revive the business model. But you also build strategy based on you previous experiences. So what we did is to think. If you are going to remain in the offshore, for a small company you will always need an operating partner because deep offshore is a game for only big partners. There is limited number of companies in the world which can do deep offshore at any particular point in time.
So, if you are going to remain exclusively deep offshore, you are always going to rely on a partner. The JDZ was a special case in terms of G & G data that were available, and its proximity to Nigeria. It is not always that you have that in a frontier province. So we decided that it would be too risky to continue the company to remain exclusively in the offshore. Instead of that we are going to switch the business model entirely to onshore. And I will give you a reason for this. It is cheaper onshore, and it is easier to operate onshore. So, theoretically it is easier for a small company to run the show, to become operator onshore so that it controls its own destiny which was what we wanted. That shouldn’t rule out the fact that we might need partners at one stage. We thought that if the crunch came, theoretically we could run the whole show: do the drilling, raise the money and do it. It is not like that deep offshore.
So we decided to start again, we decided to go onshore. But being a small company, again, you have to look for a place where there is low entry cost. Balance the cost, of course, by a working petroleum system. We had to look for a working petroleum system and the first place we found was in Chad. Chad has been a producing country since at least 2003. It has an export pipeline. It has a refinery. It has a well defined basin and a well defined oil industry. Well defined exploration hasn’t been done. It has majors operating there. It has CNPC. It has ExxonMobil, and up to a point, even Chevron. So there is an industry there but for some reason Chad was under the international radar. It wasn’t one of those places that companies were rushing into or world’s attention was focused. So reasonably you could still get exploration acreage at reasonably low entry cost. So we focused on Chad and it became the first country we went to and we got our blocks in 2011. And then at this time East Africa was opening up. Big discoveries have been made in Uganda.
Uganda would have been our next point of call but there is always problems there: administrative problems relating to the Tullow-Heritage discovery. And when we made our inquiry in Uganda, they were trying to revive their statutes, having made a discovery and it will take time. But we now did something; and we said if there had been discovery as expected in the East Africa rift valley system, then it meant that if you look beyond the political boundary and look at the rift as a geological occurrence, and look for other places in that rift, even if not in Uganda, you could see a similar discovery, similar geological setting as that which yielded discovery in Uganda. And the next place we looked at was Kenya. When we looked at Kenya, we looked up the rift system and Kenya was interesting.
Because there was no commercial discoveries of note but Kenya was looking to attract people particularly after its neighbour or so called sister country has had discovery. So we went into Kenya and started the application process, started looking at the blocks that had been made available, chose where we thought most likely that we would see an analogue with the Uganda discovery, and eventually we negotiated a PSC. Funny enough while we were still negotiating the PSC our foresight was proved to some extent through a discovery by anothercompany. That affected us in terms of the fact that the terms of our PSC went up but it still wasn’t overly expensive.
So, we negotiated a Kenyan PSC and got that signed in 2012. Therefore, we have moved from being a company with offshore focus to one with onshore focus. The next thing now was to actually start operating the blocks, and Kenya was attractive to everybody. When we sounded the industry, Kenya was very attractive. So we started working very quickly on Kenya. We carried out our full tension gravity study in 2013, and immediately we finished that CEPSA farmed in.
That is as far as the business model is concerned. It was very successful. We have operated it well and demonstrated for the first time in history that ERHC could operate by itself. So, it was very well done for us in Kenya. In Chad it has been a bit more difficult or challenging because the circumstances are a bit different. First of all we had to reorganize the data that existed. We had three blocks in Chad. So we reviewed all three and decided that it would better for us to focus our resources on the block that was most prospective, recognising that we are a small company.
So, for several months we entered this negotiation with government of Chad where we voluntarily relinquished two of the blocks and then had a presidential decree recognising that relinquishment and authorising us for the block which we retained. And having done that and sorted that out in 2013, in 2014 we started out gravity and magnetics. We conducted an aeromagnetic and gravity study over two focused areas we identified in the block. We finished that at the end of last year and that has enabled us produce prospective resource estimates. And based on that, we can now focus on our seismics. So, our seismic programme is being planned by our technical team. We are making progress in both ends. And you can see that what we have done is a strategic shift. Rather than relying on our partners we are doing it ourselves.
You had an interest in a company that was reversely acquired by Oando. So how are you managing the realignment of interests?
Well, what we wanted to do Oando did before us probably because they had more money than we could muster at the time. That company is Exile Resources which has interest in the Akepo Field in Nigeria. So, what we wanted to with Exile Resources was to a large extent what Oando did. First of all, we wanted to see if we could explore the possibility of a reverse take-over so that we could get exposure to listing in the Toronto stock exchange which is a major listing, more major than that the platform that we currently trade.
That is one. Secondly, it would give us access to the Akepo Field which has proven reserves and could quickly gone on to production. However when we started making our moves, as a public company we had to disclose everything we did, and whether it was down to us or down to their own exclusive strategy, Oando now moved very quickly and completed a take-over of the company.
Our stake in that company remains. And, of course, with Oando’s reverse take-over our proportionate control was reduced just like all the existing shareholders’ shares were diluted. In the new entity we have roughly 420, 000 shares in Oando Energy Resources. We had several million shares in Exile but when they did the reverse take over everything was compressed because they did a reverse stock split as well.
So, our interest was diminished to a level where it is no longer considered significant. So, that just remains a passive portfolio investment that we are monitoring and exhorting Oando to raise the shares value to $10 per share so that we can make a profit. Oando shares at the market remains below that and we, just like any other investor now, are still hoping that it will rise spectacularly.
If you missed the Exile Resources, would you position for acquisitions in the ongoing divestments by major multinationals in Nigeria?
You heard me talk about strategies and low entry cost. We have our own strategies which emphasize low entry cost. The divested assets in Nigeria command very high entry costs. You talk about Neconde that is paying almost a billion dollars. You talk about the disputed Chevron assets and the contentious bids range around a billion dollars. Our organization as a whole has not reached a billion dollars even. Yes, we could theoretically do something bad and raise the money and imperil the future of the company. So, it is very difficult and it is not the easiest thing to do. It stretches our model as an exploration company and Nigerian acquisitions are beyond where we are at the moment. Most of the companies that have done it are producer companies. Brittania-U has been producing from its offshore Ajapa field. Seplat, of course, doesn’t need introduction as a producer.
You have the OML 40 which has Elcrest, comprising Starcrest which is affiliated to us and Eland which is owned by our former director here, but they are parleying experience from Addax Petroleum because the people that founded Eland were with Addax Petroleum. So it was a production experience they were parleying into that acquisition. We are an exploration company and if we have to do production, it must be a gradual process of organic growth. But to buy a production asset, we have to do something that is radically different.
Our strategy has been to concentrate on exploration assets and try and drive value to the extent that you can organically and naturally without imperilling the company raise the money to do production. So we have a keen interest in those assets that the IOCs are divesting but more from the knowledge perspective, the research perspective, to see how they are going, to see how people are raising money, to see how it fits into our business model for the future and collate that information and feed it in at some point in our own funnel of growth; but it is not our immediate plan for the mean time. Acquisition is right there in our strategy but it is not our immediate priority. The immediate priority is to ride the storm, take advantage of and exploit our existing assets, and if all that is successful, then look for an expansion.