AmaBhungane

PIC’s dodgy oil investment, Erin Energy, going down the tube

By amaBhungane 26 April 2018
Caption
Malaysian FPSO provider Bumi Armada has allowed Erin Energy to flow its oil from the Oyo field offshore Nigeria into the Armada Perdana FPSO cargo tanks and a one-off cargo offtake despite Erin’s outstanding debts towards the FPSO owner. Photo by Bumi Armada via Offshore Trader.

A R4-billion Public Investment Corporation investment could be wiped out as Texan oil firm files for bankruptcy. By Craig McKune.

Another politically connected, multibillion-rand Public Investment Corporation (PIC) booby trap has blown up in state pensioners’ faces.

The threats that lead to this might have been evident to PIC for years, but it threw good money after bad, and now it faces a good chance of losing roughly R4-billion.

This underscores concerns that, for years, the PIC might have been used as a piggy bank to support cronies, distorting its investment decisions. The PIC manages assets worth nearly R2-trillion, mainly for the Government Employees Pension Fund (GEPF).

Houston-based Erin Energy’s New York and Johannesburg listed stocks went into freefall on Wednesday, following a hurried, after-hours statement from it the day before – and this came just three hours after we sent Erin our questions for this article.

Our questions explained how Erin was in the process of losing its only cash-generating asset – a Nigerian oilfield –, that this risk had been evident for years and that Erin had failed to tell investors about it.

Read our correspondence with Erin, PIC and other parties here.

The failure appeared to constitute securities fraud under US law, we suggested.

Erin did not respond. Instead it issued an evidently rushed regulatory disclosure to the US Securities and Exchange Commission, explaining its position.

This included how, one day in January this year, a naval helicopter had landed on the ship that receives, stores and transfers Erin’s Nigerian oil. Nigerian soldiers and police emerged from the helicopter, weapons drawn to protect the Lagos court sheriffs who proceeded to chain and lock the vessel’s main oil export valve, effectively plugging Erin’s entire business.

Then, the Nigerian government refused “indefinitely” to give Erin the permit it needed to uplift oil.

Late on Wednesday, Erin faced the inevitable and filed for bankruptcy with a Texas court.

We rang the alarm bells in 2014, when a dubious PIC process unfolded to enrich a friend of then-president Jacob Zuma and the ANC.

At the time, Erin (it was then named Camac Energy) was led by its founder, Texan-Nigerian Kase Lawal, who was its chairman, CEO and controlling shareholder.

He was already infamous for various business deals.

Among others, the Mail & Guardian exposed in 2003 how Lawal had appropriated discount Nigerian crude meant to benefit South Africa. He was assisted by leading ANC figures and by a letter from then-president Thabo Mbeki to his Nigerian counterpart. Lawal denied wrongdoing.

In 2010, Lawal began donating millions to Zuma’s education trust, and he accompanied Zuma in 2011 to get an honorary doctorate from his alma mater, the Texas Southern University.

By 2013, when the PIC was considering investing in Erin, Erin was on the verge of bankruptcy.

But none of this appeared to concern the PIC investment committees and its then chief investment officer (CIO) Dan Matjila (today its CEO and CIO). They handed Erin $270-million (nearly R3-billion) in 2014 and took a 30% stake and a seat on the board.

With the money, Erin bought what it called the “economic rights” (we will return to this, too) to Nigerian oil mining licenses 120 and 121, which included the productive Oyo oil field.

Erin had bought the rights from companies owned by Lawal and his family, who walked off with most of the PIC’s cash.

Three months after the deal, the PIC’s then CEO Elias Masilela departed suddenly and without explanation. According to a Business Times report, this followed clashes between him and Matjila, “in particular” over Camac.

Oyo turned out not to be as productive as Erin had forecast, and Erin shareholders sued its directors over the deal. They argued that Erin had paid Lawal far too much and that the directors were culpable. Their arguments were heard by a Delaware court, which dismissed them as there was not enough evidence to prove culpability.

However, the judge reserved devastating criticism for Lawal.

Lawal appeared on all three sides of the transaction: as sole point of contact for [the] PIC, as controller of [Allied Energy, from which Erin bought the oil rights], and as controller of Erin,” she wrote. “In practice, his behaviour gave rise to a very real appearance that, by seeming to speak for all three counterparties in the transactions, Lawal really was negotiating with himself in shifting around assets for his own benefit.”

But it was worse than that.

Lawal’s Allied Energy had in 2012 bought 40% of the oil rights from a subsidiary of Italian oil major ENI – but Allied only paid $100-million of a $270-million purchase price, according to court records.

Obviously, this posed a risk to Erin, which relied almost entirely on its ability to pump and sell the Nigerian oil, but it never disclosed this to investors.

Did the PIC know about ENI’s dispute with Lawal when it invested in Erin? It did not answer our question about this.

ENI’s subsidiary fought for its money, and in February 2017 the London Court of International Arbitration found in its favour, ordering that Lawal’s Cayman Islands-registered holding company Camac International owed ENI $200-million.

This finding was recognised and enforced by Nigeria’s courts (leading to the oil seizure this January) and a Cayman Islands court issued a winding up order for Lawal’s Camac International.

But Lawal had by then sold the “economic rights”, so ENI’s dispute had nothing to do with Erin or the PIC, right? Apparently not.

Last month, Erin coyly described a previously undisclosed problem in its annual report. While it had bought the “economic rights” to the oil license in 2014, the oil license was actually still formally assigned to the seller, Camac. Erin disclosed that it had “no control” over Camac’s “ability to retain the [oil] rights”.

Erin said:

“If [Camac] is unable to retain and hold rights to [the Nigerian oil license], … it could have a material adverse effect on our results of operations and financial condition and the value of our securities.”

What Erin did not disclose was that this was its only cash-generating asset and ENI was busy liquidating the company that owned it, Camac.

We wrote to the PIC earlier this month to ask if it was aware of the problem. Its response appeared to be a long way of accusing Erin of securities fraud. It said:

It is a requirement of [the New York and Johannesburg stock] exchanges that companies listed on their platforms should disclose information that is necessary for the shareholders to make informed investment decisions. This requirement extends to information that could have a material impact on the company and for the shareholders.

To the contrary, [Erin] did not disclose the issue of the [Nigerian oil] contract in its [Johannesburg] pre-listing statement and prior to PIC acquiring its shares. This disclosure was only made public in Erin Energy’s annual report for the financial year ending 31 December 2017.

As a matter of fact, the company and its management did not disclose this issue to its board members. PIC’s representatives on the Erin Energy board became aware of the production sharing contract matter about the same time when the disclosure was made public.”

A financial analyst (wishing to remain anonymous) summarised this for us as “an implausible ‘mushroom defence’; meaning: ‘Erin fed us shit and kept us in the dark.’”

We pressed PIC to explain how its due diligence had failed so badly. How did it not know precisely how Erin owned its single cash-generating asset? PIC said:

Regarding whether the PIC has conducted due diligence before investing in Erin Energy, please note that due diligence is a prerequisite for all investments that the PIC undertakes. Internal documents and discussions that inform investment decisions are confidential.”

But it was even worse.

In 2016, as ENI was suing Lawal’s Camac, the PIC’s investment committee agreed to secure a $100-million bank guarantee so that Erin could borrow for drilling and other expenses at the Oyo oil field.

Erin’s loan was finalised in January 2017, and it pledged its assets as security – essentially the oil rights that were ultimately owned by Camac.

Should Erin not be able to repay the loan, and should the oil well happen to be locked up, the banks could ultimately turn to the PIC for the cash.

As it happened, just days after Erin finalised its loan, the London arbitration court found that Camac must pay ENI $200-million, leading through various courts to the day in January this year, when the helicopter landed on Erin’s boat.

According to Erin:

On January 31, 2018, [the ENI subsidiary], in conjunction with armed personnel from the Nigerian navy and police force, and sheriffs of the court, and under the guise of a routine naval inspection, landed a helicopter on the [floating production storage and offloading vessel (FPSO)] Armada Perdana.

Once on board, [ENI’s] entourage, including armed personnel with weapons drawn, forced their way into safety restricted areas of the FPSO and chained and counter-locked the vessel’s main export valve.

[ENI’s] use of weapons and flash photography in this area was a significant violation of industry safety procedures.

[ENI] asserted that the [Erin] crude oil stored on the FPSO was being seized pursuant to the [Nigerian court] writ.”

Erin sought an order setting aside the writ. It said:

[Erin] is the owner of the crude oil on the FPSO, the writ did not authorize [ENI] to attach [Erin’s] crude oil, and the attachment of Erin’s crude oil interfered with its constitutionally protected property rights, among other things.”

Erin did not describe the outcome of its court application, but it said Nigeria’s department of petroleum resources had declined to give it a permit for its scheduled oil offtake at the end of March. According to Erin, this was “due to [ENI’s] improper use of the writ and its interference with [Erin] operations, as well as its court proceedings”.

It said the government then suspended Erin’s oil processing indefinitely and, as of Tuesday, “the first quarter crude oil offtake is still delayed, the Oyo field production operations, including the FPSO, are still suspended and [Erin] is continuing to work to resolve these matters”. 


On Wednesday night, Erin filed its voluntary petitions with the US bankruptcy court.

Considering the PIC’s $270-million equity investment and the fact that Erin had drawn $65.6-million against the $100-million PIC-backed loan but held $9.1-million in cash security, we calculate that the PIC could lose roughly R4-billion.

The PIC was not immediately available for comment. DM

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