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'The Best Thing That Could Happen to the Country Is If No Oil Is Found'

Bribery, Bullying and Bad Deals Shatter Poor Nation's Dreams of Petroleum Boom

Xan Rice in São Tomé

SAO TOME - Luis Prazeres was the first native-born airline captain in São Tomé and Príncipe, and the country's first minister of natural resources. He knew a lot about flying and nothing about oil. But neither did anyone else in the tiny African island nation, which had just been told it was on the verge of a petroleum boom.0714 03 1 2

"There were all these foreign companies telling us that we had huge oil reserves, and bringing us agreements to sign," said Prazeres, who took up his minister's post in 1999. "Nobody here understood how complex it was."

Other governments are now finding themselves in similar situations. Rising oil prices have led to a surge in exploration in countries with little or no petroleum experience. Hopes of petrodollar bonanzas have already been raised in Ghana and Uganda, while prospecting companies are crawling over Gambia, Madagascar, Tanzania and Somalia.

Yet São Tomé's bitter experience should serve as a cautionary tale. In the decade since a little known Texas oil firm wandered into government offices with an audacious plan, the 160,000 inhabitants of the lush, somnolent islands have seen dreams of their country becoming the next Brunei or Kuwait melt away in the equatorial sun.

Their leaders have signed some of the most lopsided petroleum contracts in history. Bribes have allegedly been offered and pocketed. Regional bullies have muscled in, and in May the government fell to a no-confidence vote. "We have already seen everything that goes with an oil boom," said Rafael Branco, the newly appointed prime minister. "Everything, except a single drop of oil."

Offshore reserves

The twin islands of São Tomé and Príncipe squat in the Gulf of Guinea. Their nearest neighbours are Nigeria, Cameroon, Equatorial Guinea and Gabon. All have found significant reserves of oil, much of it offshore.

In 1997, a tiny Houston-based company called Environmental Remediation Holding Corporation (ERHC), which had no history of oil finds or production, decided São Tomé might have its own deep-water deposits. In return for near-exclusive mineral exploration and exploitation rights for 25 years and a half share of profits, ERHC offered São Tomé $5m and its marketing services.

São Tomé, heavily in debt and reliant on donors to fund most of its $30m budget, was desperate for cash. The deal was signed. Industry watchers such as Mohamed Yahya, of the UK-based peacebuilding NGO International Alert, would later describe the contract as "one of the worst in the history of oil". And ERHC's gamble paid off. Seismic data showed there could be up to 11bn barrels of oil under the sea around the islands. The most promising area was north of Príncipe, in waters also claimed by Nigeria.

Nigeria, with decades of oil experience, agreed to establish a joint authority over the oil zone, but insisted the profits be split 60:40.

When São Tomé's current president, Fradique de Menezes, was elected in 2001 he threatened to have ERHC's contract torn up, but by then the US company had been bought by Chrome, a Nigerian firm headed by a businessman with strong ties to Nigeria's ruling regime. Though the contract would be renegotiated twice, pressure from Nigeria ensured ERHC's deal remained vastly disadvantageous for São Tomé.

Meanwhile, the potential oil reserves were causing excitement abroad. After the 9/11 attacks, the US government was seeking ways to reduce reliance on oil from the Middle East. Democratic, largely stable, and with a US-friendly president, São Tomé seemed ideal.


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Several top US lawyers soon arrived to offer assistance in managing the oil contracts. A team from Columbia University's Earth Institute helped draft model legislation that would ensure transparency and hold back some of the oil revenues for future generations.

"All people could talk about was oil, oil, oil. The politicians made it sound like it would start flowing tomorrow, and everyone was just sitting back and waiting for the proceeds," said Arlindo Carvalho, who was oil minister from 2003 to 2005.

The best blocks in the joint São Tomé-Nigeria oil zone had been put up for auction in 2003. In the first round, only one consortium, led by Chevron and ExxonMobil, emerged with a successful bid. São Tomé's share of the fee was $49m - a lot to a tiny country, but far less than expected. Late in 2004, more than two dozen companies competed for the remaining blocks. Many were Nigerian-linked firms with no experience of oil production.


A report by São Tomé's attorney general a year later concluded the auction had lacked transparency, was subject to "serious procedural deficiencies and political manipulation", and had resulted in winning bids from unqualified firms. ERHC's preferential rights had discouraged the more reputable companies from bidding, and cost São Tomé up to $60m in fees, it said.

Even more damning, to São Toméans, were allegations in the report that their politicians had been bribed. One of the president's top advisers was revealed to own a stake in ERHC, while a company controlled by Menezes was found to have accepted $100,000 from Chrome. Menezes and Chrome said the payment was a legitimate election contribution.

Public anger was followed by disappointment at the oil drilling results. When Chevron tested its deep-water block in 2006, it struck oil but not in commercial quantities. Other companies plan tests next year. The government also intends to sell exploration rights in its exclusive territorial waters in 2009.

Even if commercial quantities of oil are discovered, it will be at least six years before production starts.

"There is a lot of exhaustion with the whole process," said Paulo Cunha, who managed the Columbia University project. "But I think it would be wrong to brand São Tomé's oil experience a failure. It still has time on its side."

Others are not so certain. There is still very limited oil expertise on the islands. And given the alleged corruption, many local people have serious doubts that oil revenues could be managed properly, regardless of the good laws in place.

"São Tomé's institutions remain among the weakest in Africa," said Yahya. "The best thing that could happen to the country is if no oil is found."

© Guardian News and Media Limited 2008

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