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Norwegian Play for the Oil Rights in São Tomé

Political contacts all the way inside São Tomé’s presidential family enabled the Norwegian seismic services company PGS to obtain two lucrative agreements in 2001. Today the authorities in the African island state are the losers in the game. They signed a production agreement with PGS but ended up with a new business start-up they had never requested. The companies transferred the rights among themselves, and São Tomé became a pawn in their game.

Artikkelen er mer enn to år gammel. Ting kan ha endret seg.

Political contacts all the way inside São Tomé’s presidential family enabled the Norwegian seismic services company PGS to obtain two lucrative agreements in 2001. Today the authorities in the African island state are the losers in the game. They signed a production agreement with PGS but ended up with a new business start-up they had never requested. The companies transferred the rights among themselves, and São Tomé became a pawn in their game.

(First published in Norwegian Oct 20th 2006)

By Erik Hagen

This article is based on two larger reports that Norwatch has written from São Tomé. Download the articles on the PGS engagement here (pdf).

Petroleum Geo-Services (PGS) obtained extremely good production agreements with the authorities in the island state of São Tomé e Príncipe in 2001. Many wondered how.

This past summer Norwatch visited the tiny state in the Gulf of Guinea – one of Africa’s poorest states – to get to the bottom of PGS’s activities in the country. In São Tomé Norwatch discovered several of the secret agreements as well as correspondence between PGS and the authorities.

The story of how PGS obtained their oil agreements and what happened to the rights during the years after the contract was entered into is long and intricate. One thing is certain: what happened in São Tomé e Príncipe could never have happened in Norway.

From what Norwatch understands, PGS utilized a Canadian intermediary as a bridgehead on the island. The Canadian had close contacts all the way inside the country’s presidential family, and this is how PGS succeeded in landing its contracts – without having been through a bidding round.

And that’s not all. When PGS was criticised for its involvement by the Norwegian press in 2003, the company explained that it wanted to get out of one of the two criticised contracts. But the buyer wasn’t just anyone. What Norwatch now can reveal is that the company that bought the production agreement that PGS had in São Tomé is run by none other than the same man who negotiated the contract on behalf of PGS. Transfer of the rights from PGS to the Canadian intermediary was even carried out without the authorities being able to intervene. Consequently, São Tomé is saddled with a partner it did not want. Now the new company is expecting to become an operator in the most promising areas in the country’s shelf.

PGS denies to Norwatch that the Canadian businessman is supposed to have represented the Norwegian company in negotiations with the country’s authorities and claims that its involvement in the island is completely in accordance with standards in the field.

Lucrative Agreements
The two agreements that PGS signed in 2001 were criticised as being unreasonable. A World Bank-supported report prepared by an American law firm considered them “extremely one-sided” to São Tomé’s disadvantage. One of the agreements concerned seismic surveys in which PGS received the right to map the sea floor of the country’s territorial waters and to sell the data to the international oil industry. The second agreement gave PGS rights to three oil blocks in the country’s territorial waters, in areas that PGS could choose freely. According to the critics, the PGS conditions were much too generous. After the Norwegian newspaper “Dagens Næringsliv” in 2003 published a long article series about the contents of the contracts, PGS chose to get out of the contract with regard to oil production.

It was the newly established company of the Canadian oil adventurer Wade Cherwayko that took over control of the contracts. Norwatch has now learned from the country’s previous petroleum minister that it is this same Cherwayko who negotiated the gilt-edged agreements as intermediary for PGS in São Tomé. Cherwayko’s Caribbean-registered company Equator Exploration has thereby obtained the right to choose freely the best blocks in the whole island state’s territorial waters.

According to several sources Norwatch has spoken to, Wade Cherwayko is a close friend and business partner of Patrice Trovoada, son of the president at that time. The president’s son was called into the negotiations on behalf of the authorities in the middle of the negotiations with PGS. Norwatch has learned this from someone who participated in the negotiations.

With the production agreement from PGS as its only asset, Equator Exploration was soon after the transfer registered at the Alternative Investment Market (AIM) in London, in December 2004. In this operation Cherwayko’s company gained $100 million in share capital. But the only thing São Tomé is left with from the options agreement is $2 million in signature bonus from when PGS entered into its production agreement in 2001. So far, much money has been made as a result of the transaction in oil rights in poverty-stricken São Tomé, but the country itself has received limited earnings.

Impossible in Norway
The authorities in São Tomé are the losers in the game. They signed an agreement with the Norwegian PGS but ended up with a newly established firm they never asked for. Such unanticipated transfer of rights between companies can only occur in inexperienced countries that have not developed petroleum legislation.

According to Erling Kvadsheim, a geologist in The Norwegian Petroleum Directorate it would be impossible to transfer agreements between parts in the manner in which it was done in São Tomé. It is the strict Norwegian legislation that prevents potentially unqualified companies from buying rights in the North Sea.

“I am afraid such transfers have been common in some parts of the world. It is at any rate something we warn against when we give advice to other countries’ authorities,” Kvadsheim told Norwatch.

In 2001, when the agreements were first signed, the authorities had only little experience in oil matters. São Tomé has not found a single drop of oil yet, but great possibilities for rich oil deposits are envisioned. And buying and selling of test drilling rights are already in full force.

Retained the Seismic Services Agreement
In São Tomé Norwatch succeeded in finding two of the original agreements from 2001 and one of the renegotiated agreements from 2003. It is clear that only small adjustments were made when the country’s newly elected president demanded a renegotiation of the agreements in 2003.

The renegotiated production agreement, which was later transferred to Equator Exploration, resulted in two changes. The number of blocks was reduced from three to two, and the signature bonus that PGS was under obligation to pay the day the final contract was to be signed was – perhaps surprisingly – reduced from $5 million to $2 million. Even though PGS lost an oil block, they negotiated an agreement that constituted less risk for the company than earlier. If the future oil wells should prove to be empty, the company would not lose as much as it otherwise would have done.

In the seismic services agreement the authorities got a better deal. At the start PGS was supposed to receive 10% of all signature bonuses that São Tomé was to receive in the future. During the renegotiations, however, this was reduced to 10% of the signature bonus from the first licensing round. According to what Norwatch has learned, PGS is still waiting to receive its share. The amount is supposed to constitute $4.92 million.

PGS has nevertheless retained most of the rights in the seismic services agreement. Up to 2011 the company has in practice monopoly with regard to seismic surveys in the country.

Cherwayko Never Negotiated
PGS claims that its involvement in São Tomé is wholly in line with what the company does elsewhere in the world and that the criticism of its involvement in the island state is history. “It is a completely ordinary multi-client seismic services agreement,” Ola Bøsterud, Vice President Group Communication, informed Norwatch.

PGS says that there is nothing unusual about the seismic services agreement it has with São Tomé today and that it was completely within its rights in selling the agreement on to Equator. The company denies, moreover, that Wade Cherwayko is to have been a PGS representative in the country or that he negotiated on behalf of the company. “Our negotiations were led by our Africa Asset Manager,” Ola Bøsterud told Norwatch. “In negotiations about agreements like this it is quite common for the negotiations to be carried out at the highest level, since these are important negotiations about a country’s future oil and gas activities. This agreement was negotiated with the prime minister and the minister of petroleum of São Tomé e Principe as the other party”, said Bøsterud.

“But Luis Prazeres, Director Executive of The National Petroleum Agency in São Tomé e Principe, who at that time was the petroleum minister, perceived Cherwayko as the PGS representative on the island and says it was Cherwayko who negotiated?,” said Norwatch.

“What we are saying is that we negotiated ourselves and that Cherwayko has never been our representative.”