Oil Speculation in São Tomé How to Rob an African Nation

The residents of a tiny African island nation have been dreaming of great wealth since oil was discovered in their territorial waters. Companies, foreign powers and corrupt politicians are scrambling for drilling licenses in hopes of striking it rich.

The lobby of the Hotel Miramar in São Tomé would be the perfect set for a tropical spy thriller. It is the best hotel in town, which doesn't mean much, but its air-conditioned lobby, complete with colorful sofas and green potted plants, has become an important meeting place for everyone who has some sort of business on this curious island: profiteers and their assistants, representatives of foreign governments and international organizations and a host of shady characters. Good and bad people congregate in the lobby of the Hotel Miramar, but telling them apart isn't easy.

There are the US Navy troops who march through the lobby every morning and board a bus outside to build a radar station (as everyone knows). In the breakfast room, two women and a man stare silently at their laptops; they're members of a World Bank delegation in São Tomé to meet with government ministers. Then there are the men in faded T-shirts who people say are CIA agents, although that isn't necessarily true. Rumors are commonplace.

The islands of São Tomé and Príncipe make up a single sovereign country, population 160,000. Until a few years ago the islands' only claim to fame were Marilyn Monroe postage stamps, fraudulent sex hotlines and a key export crop, cacao. 

That was until oil was discovered under the sea floor off the country's coast. It could be a blessing or a curse for this tiny nation; and it seems to have made everyone crazy.

The Paradox of Plenty

On the world map, São Tomé and Príncipe are two barely detectable spots in the Gulf of Guinea, almost exactly on the equator, 200 kilometers (124 miles) off the coast of Gabon. The nation is peaceful and democratic and desperately poor. Its inhabitants survive on foreign aid and international loans. Aside from a small cacao crop, the country has no significant products.

The São Toméans could hardly believe their luck when seismic studies completed in the 1990s revealed an enormous reserve of 11 billion barrels of oil just off their coast. They were rich! São Toméans could suddenly dream of becoming a sort of African Brunei, a rich and tiny nation where people could lead carefree lives. Manna from heaven!

Then the rest of the world clued in. Companies from the United States, China, Norway and Canada sent teams to the islands, and foreign governments -- in particular the United States and São Tomé's big neighbor, Nigeria -- began to show interest.

A wealth of natural resources isn't always good for a poor country. It's called the "paradox of plenty," and unfortunate examples proliferate in São Tomé's immediate neighborhood. One is Nigeria, a major oil producer ruled by the corrupt regime of President Olusegun Obasanjo until 2007. Then there's Equatorial Guinea, whose brutal dictator Teodoro Obiang Nguema keeps his people in poverty; and Gabon, where the upper class has almost completely squandered the country's oil wealth; and, of course, Angola, still suffering from the effects of its long civil war.

When São Toméan President Fradique Melo de Menezes took office in 2001, he vowed to keep his country free of such problems. Fradique is a short, muscular man with a large moustache -- a cacao merchant who everyone calls by his first name. He impressed the international community when he spoke of wanting to use the oil wealth to help his country.

Fradique turned to Jeffrey Sachs of New York's Columbia University, the famous American expert on development aid, for advice and support. Sachs has advised governments around the world, and he has written a book called "The End of Poverty." He saw an opportunity to turn São Tomé into a model case, and he took his best teams to investigate the country firsthand. Their goals were to help all São Toméans share in the new wealth while avoiding the error of depending entirely on oil. It was to be a country without violent conflicts.

And thanks to Sachs, São Tomé has a new oil law that may be the best of its kind in the world. It requires oil revenues to be deposited directly into an account with the Federal Reserve Bank in New York. Only a small share of that money can be reinserted into the budget; the remainder has to be saved for the future. Control of the oil itself belongs to a commission made of São Toméans from across the country's political spectrum.

That, at least, is how it should work. But the commission doesn't exist yet. And no one has seen the oil companies' contracts, which were to be made public. This is not exactly surprising, given that politicians in São Tomé have not always abided by the law.

But can São Tomé become a role model for the world? Does the oil even exist?

'The World's Most Important Oil Region'

When President Fradique de Menezes came to power more than six years ago, he impressed both the experts and US President George W. Bush. The New Yorker wrote: "Who needs Saudi Arabia when you have São Tomé?" Bush met with Fradique and 10 other African heads of state in September 2002, and while the others bored the president with speeches in French, Fradique reportedly spoke "eloquently, in nice, only slightly accented English, about the shared interests of São Tomé and the United States." Bush even quit playing with his pencil.

Fradique reminded his listeners of "the tragic attacks on the World Trade Center and Pentagon" and stressed the importance of alternative sources of oil outside the politically volatile Middle East. His country, he said, lies in a "strategic location in the world's most important oil region -- in the deep sea off Africa's west coast."

It was a smart move on Fradique's part, because oil from this region has driven the Americans nuts. They now import 13 percent of their oil from sub-Saharan Africa; that figure is expected to increase to 25 percent within a few years. African oil is sought-after because of its low sulfur content and its typically offshore reserves, where it can be loaded onto tankers without setting foot on a given country's soil.

To Get Rich, Be a Minister

The man who was the prime minister of São Tomé until February 2007 is called Tomé Vera Cruz, a powerful-looking man charged with running a bitterly poor country. During his term in office, São Tomé slipped into a severe economic crisis. The price of a kilogram of rice jumped fivefold. Food is scarce and mostly imported, with yogurt coming from Libreville in Gabon and pasta from Lisbon. Although electricity is only available for 12 hours a day, the state-owned electric utility raised its prices by 68 percent. An elite police unit recently staged a rebellion, occupying the police headquarters and taking the police chief hostage.

Many blame these new problems in São Tomé on the oil. "We distrust one another," says Tomé Vera Cruz. "Everyone is convinced that others are already raking in money. Many people have stopped working and are waiting for the oil." The new oil law, at least, has now been adopted, he says. "But it's the same as it is anywhere else: You can have laws and all that, but then you have people." He laughs loudly.

There is a saying in São Tomé: "To become rich, all you have to do is be a minister for 24 hours."

Take, for example, the Minister of Natural Resources. His name is Manuel de Deus Lima, and everyone in São Tomé knows his story: When he was working for the country's central bank, he made a deal with a company in Liechtenstein to create a São Toméan commemorative millennium coin. The only catch was that a portion of the profits would go directly to him. Lima was sentenced to two years' probation -- which didn't prevent him from being named minister.

Lima studied in East Germany. He speaks German. When we called to request an appointment, he shouted into the phone, in German: "Oil! Oil! Oil! Everyone comes here to write about it, but no one wants to help us get to it!" Then he hung up.

Not Just Ministers

But the problems aren't purely domestic. The history of São Tomé and Príncipe is a long tale of foreign intervention. When the Portuguese discovered the islands in the 15th century, they were uninhabited. Portuguese ships brought slaves here from Africa with the intention of shipping them to America. The slaves planted sugarcane, and later coffee and cacao. Not much changed -- for centuries -- until a dictatorship in Lisbon was ousted in a 1974 military coup. The Portuguese quickly granted independence to their last remaining colonies, including São Tomé and Príncipe, where 100,000 black Africans and other mixed-race people suddenly had their own nation.

Thirty-three years later, the island still struggles. Despite the $600 million (€380 million) in aid the country has received since independence, the standard of living continues to fall. According to the World Bank, more than 50 percent of the population counts as "poor."

When oil deposits were detected in the '90s, the first businessman to show up was a South African of German descent named Christian Hellinger, who had made his fortune with Angolan diamonds. On arrival he allegedly gave each cabinet minister a generator. Soon he acquired the nickname "King of São Tomé." He moved his air freight company here and was the first to prospect for oil.

Hellinger brought a company to São Tomé that has meant nothing but trouble ever since. The small Louisiana-born firm, now based in Houston, is called ERHC (for Environmental Remediation Holding Corporation). At the time it specialized in disposing oil-industry waste and had no understanding whatsoever of oil production. But ERHC convinced the government to sign a contract in 1997. For $5 million (€3.8 million) the company was granted exclusive rights to market and exploit all of Sao Tome's oil reserves for the next 25 years. The non-governmental organization Global Witness later called this "one of the most egregious deals of all time."

The country made agreements with other companies, including ExxonMobil, but they were apparently just as bad. In the meantime, President Fradique has had some of the agreements renegotiated, but ERHC, now owned by an influential Nigerian, still earns is share from concessions and new oil finds.

São Tomé's second problem was always its powerful neighbor Nigeria, which wasn't about to allow the tiny nation to cash in on oil in its own front yard. Nigeria challenged the maritime border between the two countries and strong-armed São Tomé into an agreement for a "Joint Development Zone," in which 40 percent of the proceeds from oil production would go to São Tomé, and 60 percent to Nigeria.

When the two countries auctioned off the first drilling licenses in 2003 and 2004, things didn't go the way São Toméans might have expected. Most of the major oil companies stayed away, except when it came to the most promising sector in the oil zone, known as Block 1, for which a consortium of Chevron and ExxonMobil secured the drilling licenses at a price of $123 million (€78 million). Nevertheless, it was a momentous day for São Tomé. Its 40 percent share, $49 million (€31 million), roughly equalled the country's annual budget.

But Nigeria held back the money, using its control of the cash to force São Tomé to grant licenses to certain small companies in the next bidding round -- companies owned by Nigerian businesspeople with close ties to the country's politicians. São Tomé's attorney general later uncovered this scheme.

'What Happens if There is No Oil?'

The story of São Tomé and its oil is one of bad deals in a country with no understanding of the oil business. If anyone knows this, it's Patrice Trovoada, the wealthy son of the first democratically elected president, Miguel Trovoada. He's been involved in almost every deal.

He sits on the veranda of his beach villa -- a stout 46-year-old with a big smile -- and denies all blame. He insists that all he ever did was try to save what others had bungled.

He was Fradique's foreign minister at first, and later his oil advisor. Then Fradique fired him, complaining that the Trovoadas were treating the state as their private property. Patrice became his rival.

Today he's the country's prime minister. "My father and I chose Fradique as president," he says. "But one can always make mistakes. The man came into office and started talking a great deal. Blah, blah, blah. About oil. He talked about oil too much. And he fought against everyone, against Nigeria, saying that they were stealing this and that, that it was a bad contract, blah, blah, blah." He snickers.

Patrice Trovoada is known for driving around in a Hummer with his bodyguards. He has spent most of his life out of the country. He speaks Portuguese, São Tomé's official language, with an accent; he has converted to Islam. No one knows how he made his money. He owns a construction company in Houston, Texas. He says he's wrongfully accused of involvement in the drug trade.

He doesn't think much of Jeffrey Sachs and Columbia University. He says that while he supports transparency, he doesn't see why all the oil revenue must be deposited into a locked account. Maybe it would be better to keep some of it in São Tomé.

Trovoada says he wants to clean things up in São Tomé, where politicians have stopped thinking ever since they heard about the oil. They spend money by the fistful, he says. "What happens if there is no oil? What then?" He smiles, clearly pleased with himself.

He also says corruption is part of the island's tradition, and buying votes is par for the course. He does it, he says, and so does Fradique.

Still a Role Model?

The first test drillings were indeed a disappointment. Chevron found oil at a depth of about 1,700 meters (5,577 feet), but in such small amounts and of such poor quality that it was "not commercially viable."

The search for oil doesn't always lead to clear results. Promising seismic data is no guarantee that there is really as much oil as anticipated. It's a little like poker: You have a good idea and you place your bets, and with luck you might win. Finding new oil has become more difficult. Companies are drilling deeper and deeper, and as the price of oil increases, deeper drilling becomes more worthwhile.

The Chinese are now drilling in Block 2, while the Americans drill Block 3. Addax, a Swiss-Canadian firm, is so convinced that oil can be found that it has purchased exploration rights in all four blocks. It acquired Exxon's share of Block 1 in the fall of 2007 for just under $78 million (€49 million). The company's representative, an American named Tim Martinson, says it's important to remain optimistic in this business, and that "some form of production" will definitely materialize, but hardly before 2015.

And Fradique? He has long stopped talking about his ambitious goals. There are rumors that his relationship with the Jeffrey Sachs team has cooled.

Hardly anyone believes now that São Tomé will be a role model for the world. Joaquin Sacramento, a fisherman, stands on the beach in a town called São João dos Angolares, two hours south of the capital. He is sanding his wooden boat, which he has put on blocks on the beach, in a warm rain. He is 39, a very dark-skinned man wearing a red football jersey.

The real issue in São Tomé is actually about him -- whether people like Sacramento will ever derive any benefit from oil, and whether the optimistic visions of Sachs and his team were too bright.

Sacramento has no answers. "We are fishermen," he says. "Someone has to fish. The oil is for the politicians."

He knows about the sea -- he knows its moods and the best time of day for catching certain types of fish. But he knows very little about oil. He's heard the sea turns red when the companies drill, and he doubts this will be any good for the fish.

"The ocean is blue," he says. "That's what they're used to."

Translated from the German by Christopher Sultan

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