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Off the map in Africa

ERIC REGULY

Friday, January 11, 2008

GENEVA — Jean Claude Gandur is not building an oil company the normal way.

Most fledgling oil companies build reserves first, production second. Addax Petroleum, the company he founded in 1994, is doing it the other way around.

Most oil companies, especially those listed in North America, avoid war zones and political hot spots, or, once in them, are forced out (Talisman Energy's flight from Sudan comes to mind). Not Toronto-listed Addax. It moves with alacrity into messy areas like Iraq and Western Africa and was on the verge of jumping into Iran a couple of years ago. Mr. Gandur dropped the Iran project after receiving agitated reactions from the company's politically correct Bay Street underwriters.

And most oil companies are neither based in Geneva, best-known for United Nations' agencies and secretive banks, nor expect takeover offers from Asian energy interests, the exit scenario considered most likely by Mr. Gandur, Addax's chief executive officer and controlling shareholder. "We are the reverse of most companies," he said.

But moving against the pack — or on "the road less travelled," as one analyst puts it — has so far worked wonders. Addax has come out of nowhere to become Canada's fifth-largest offshore oil producer (it has no domestic Canadian production). It is the biggest independent producer in Nigeria and sixth largest in Western Africa, among the oil world's last exploration frontiers.

Addax isn't the only medium-sized, North American-listed company in West Africa and Iraq. But its fondness for exotic locations may be the start of a trend borne of necessity. Conventional oil reserves in politically stable countries are becoming exceedingly hard to find, one of the reasons prices have gone from $10 (U.S.) a barrel in 1998 to almost $100 today. To find reserves of any size, companies big and small are hunting in the offshore and onshore regions of West Africa. Mr. Gandur says Nigeria, Angola and the deep ocean in the Gulf of Guinea are probably the last oil discovery and development frontiers.

The firm's share price has more than doubled from the 2006 initial public offering at $19.50 (Canadian), giving the company, flying under most investors' radar, a market value of $6.8-billion. Among mid-sized oil companies, Addax's post-tax cash flow, an estimated $1.4-billion (U.S.) in 2007, is considered lavish. All of it is funnelled into exploration and development.

Big goals in risky territory

With production and reserves climbing rapidly, Mr. Gandur thinks he can double the value of the company in a few years. In the third quarter of 2007, average production was 127,000 barrels a day, up 40 per cent from the same quarter in 2006. Analysts expect the figure to rise to 142,000 barrels a day this year, though the figure could be bumped up next week when Addax publishes new reserve numbers. At last count, its proven and probable reserves were 354 million barrels.

Analysts compare Addax to the old Hurricane Hydrocarbons (later PetroKazakhstan), the TSX company with no Canadian production that found its fortune in Kazakhstan and happily lost its independence in a bidding war in 2005. China National Petroleum Corp. paid an astounding $4.2-billion for the former penny stock.

Mr. Gandur describes Addax's oil projects in Iraq and West Africa as potential "company makers." The big caveat, of course, is political risk. Iraq prohibits oil exports from Kurdistan, where Addax's reserves are located. Nigeria appears to be relatively stable. But anyone who remembers the uprising against Shell Oil and other companies led by Ken Saro-Wiwa, who was executed by the Nigerian government in 1995, knows that oil companies and the Nigerian people are not always allies.

From a different cloth

Addax is not your standard oil company and Mr. Gandur, 58, is not your standard oil man.

You can tell that the moment you step into his slick corner office, housed in a blandly modern insurance building in a quiet neighbourhood near downtown Geneva. The walls are covered with posters, the desk with art catalogues.

The posters and catalogues, in fact, depict antiquities from his private collection, housed in his lakeside mansion just outside the city. He only half jokes that he wants to turn Addax into a money machine so he can indulge in what he calls his "passion" for expensive antiquities. "I have the finest collection of Egyptian bronzes outside of museums," he boasts in one of the few interviews he has given as the company's boss.

The Egyptian, Hellenistic and Roman pieces range from ivory figurines from about 4000 BC to a bronze Roman lamp decorated with a Medusa head from the second or third century AD. They include a 62-centimetre gold Egyptian funeral mask that is among Mr. Gandur's most treasured works.

The collection is of such high quality and diversity that it warranted a special exhibit in 2002 at Geneva's Musée d'art et d'histoire, the only time it has been on display. Descriptions and photos of the hundreds of works filled a 160-page catalogue. Mr. Gandur's name was not associated with the exhibit, nor was his name mentioned in the catalogue. His is a private passion. As one of the richest men in Europe — his 25-per-cent stake in Addax alone is worth some $1.7-billion (Canadian) — he can afford to compete with the world's leading museums for the historic objects he covets.

Mr. Gandur was born in France, is a Swiss citizen and the son of an Italian pediatrician. He grew up in Alexandria, where he learned Arabic and began his love affair with history and antiquities. The Middle East and sub-Saharan Africa have been intimate parts of his life since then. He has travelled to Africa regularly for most of his career, much of that time working as a commodities trader, and has become close to the highest-ranking politicians and executives in many countries. He has a diplomatic passport from Senegal, and became a Grand Officer of the Lion Order of Senegal and a Commander of the National Order of Benin. For a decade he was the honorary consul in Switzerland for the Democratic Republic of the Congo.

He studied law at the University of Lausanne, in Switzerland, and began his career as a trader for Philipp Brothers (later Philbro), the aggressive trading shop that spawned Marc Rich, the former fugitive pardoned by Bill Clinton on his last day as U.S. president.

Mr. Gandur joined Philipp after Mr. Rich left in 1973. The Philipp experience left him with an appetite for risk and honed his ability to move with lightning speed. He was on safari in Tanzania in 1990 when he learned Iraq had invaded Kuwait. His immediate thought was that oil prices would quickly double, but how to make the trade? The camp had radio phones only and the phone operator told Mr. Gandur he would have to wait to make a call. "I ripped a hundred-dollar bill in half and gave him one half," he said. "I told him if he put the call through, he would get the other half."

The incentive worked, the oil options were bought and Mr. Gandur made $4-million (U.S.) overnight.

Building Addax Petroleum

After he left Philipp in 1983, Mr. Gandur worked at a variety of commodity traders and formed his own trading company, Addax & Oryx Group, named after two species of African antelopes, in 1987. AOG, as it's called, is Mr. Gandur's main holding and operating company and has about 900 employees, about 50 per cent more than Addax Petroleum. Its activities range from crude oil trading and gasoline stations to natural gas storage and gold exploration, all in Africa. One of AOG's holdings is Axmin, a gold company that has traded on the TSX Venture Exchange since 2001. Mr. Gandur is Axmin's chairman.

In 1994, AOG hived off its oil exploration and development business, called it Addax Petroleum, and gave it a clear strategy: Exploit underdeveloped, but proven, oil plays in spots that wouldn't rank high on your dream honeymoon list. In practice, that meant loading up on production and exploration blocks in the West African nations of Nigeria, Cameroon and Gabon and in Iraq, though Addax has tried to nab properties in Iran, Libya and other oil-rich but politically delicate countries. "Addax has taken on more political risk than other oil companies, but less geological risk," said Al Stanton, an analyst at Royal Bank of Canada's investment arm.

In the early years, production took priority over exploration. The cash flow from pumping oil would fund the growth in reserves. A few years later, Mr. Gandur made plans to turn Addax into a fully independent, listed company with a credible team of executives and directors. An early recruit was Michael Ebsary, 46, a Queen's University MBA, an alumnus of Bank of Nova Scotia and Bank of Montreal and the former project-finance manager of Elf Aquitaine (now Total SA) in Paris. "At Elf, I knew there was a glass ceiling as a foreigner," he said. "Building a small company from scratch has been great fun. We are small but we're an extremely active company."

Mr. Gandur and Mr. Ebsary chose a Toronto listing because of familiarity — Axmin already had a Toronto address — and because the exchange has been historically kind-hearted toward small resource companies. The United States was out of the question, if only because of the hassle of the Sarbanes-Oxley financial reporting requirements. The only other option was London, where investors are generally less fearful of political risk. "We did a beauty pageant in London and Toronto, and Toronto won," Mr. Ebsary said.

Next came a blue-chip list of directors. The Addax board's Canadian content includes Peter Dey, formerly chairman of Morgan Stanley Canada and the Ontario Securities Commission; James Davie, a former RBC Dominion Securities investment banker; Gerry Macey, formerly executive vice-president of EnCana; Wesley Twiss, who was Petro-Canada's chief financial officer until 2000; and Stephen Paul de Heinrich, an old African hand and associate of Beldi & Cie, a Geneva corporate finance firm.

In keeping with Mr. Gandur's belief that on-the-ground political connections are crucial — the official Addax bumpf calls it "mutually beneficial relationships with local stakeholders" — the company also recruited Afolabi Oladele, one of Nigeria's most experienced oil fixers. He had spent much of his career working for Nigeria National Petroleum Corp., where he handled deal making with the big oil companies. Rounding out the team are Jim Pearce, Addax's chief operating officer who was Chevron's deep-water expert in Nigeria, and Brian Anderson, an Addax director who was chairman of Shell Nigeria. Analysts have said they consider the seasoned directors and senior executives the company's best asset.

The Toronto IPO was planned for 2004, but was delayed while Addax cleared up some accounting snags. It finally went to market in February, 2006, in a deal led by RBC and Merrill Lynch Canada. Addax has since added a London listing, though Toronto dominates the trading. For a relatively small company, it is lavishly followed by analysts on both sides of the Atlantic.

Across the Atlantic

While Toronto is Addax's trading home, all the action is overseas. How did Addax leap out of the shadows to become one of West Africa's most prolific producers?

Mr. Gandur says making nice with the locals helped. "In Africa," he said, "people like to talk to company builders. The CEOs of [the multinationals] probably never go to Africa. If you want successes there, you must create friendships, they must like you." Maintaining relationships means he spends about 200 days a year travelling, and doing so without the convenience of a company jet.

Indeed the relationship between Nigeria and the majors such as Exxon Mobil, Shell and Total seems to be souring, though they remain significant producers in that part of the world. In November. Tony Chukwueke, head of Nigeria's Petroleum Resources Department, was quoted in a Bloomberg story as saying the government is "tired" of dealing with the multinationals and wants smaller players to bid for exploration and operating rights. Addax couldn't be happier.

Connections seemed to have worked wonders for Addax, but you have to wonder just how deep the connections went. Take Dan Etete, who was Nigeria's oil minister between 1993 and 1998. He served under the late Nigerian dictator Sani Abacha, who was widely considered one of the most corrupt and debauched strongmen in African history (he allegedly looted $3-billion from state coffers and died in the presence of two prostitutes, possibly from a Viagra overdose). Mr. Etete is to stand trial in France for suspected money laundering as part of probe into alleged kickbacks paid by the oil companies for contracts in Nigeria. Addax's man in Nigeria until 2000, Richard Granier-Deferre, is being tried as an alleged accessory.

For his part, Mr. Gandur said: "Addax Petroleum never paid a bribe to anyone. The allegations against Richard Granier-Deferre have nothing to do with the company. The company has always and will continue to conduct its business only in accordance with the law and the highest ethical standards."

Addax began business in 1995 by reviving a small abandoned field off Ivory Coast. Its first big break came in 1998 when an American oil company called Ashland decided to sell four offshore Nigerian oil properties. The Nigerian government threatened to repossess the assets. Addax convinced Mr. Etete that repossession would send a bad signal to the oil world. Mr. Etete agreed and allowed Addax to buy the Ashland properties, then producing 8,000 barrels a day. It nailed them for the equivalent of pocket change. Today, after a $1-billion investment program, they form the heart of the company, with production of more than 100,000 barrels a day.

Since then, Addax has been in constant motion, both onshore and offshore, in Nigeria, Cameroon and Gabon. In the spring of 2006, the company signed production-sharing contracts in an offshore region, known as the Joint Development Zone, shared by Nigeria and the tiny island republic of Sao Tome and Principe. One of Addax's partners in the region is a company associated with wealthy Nigerian business tycoon Emeka Offor, who is said to be close to Olusegun Obasanjo, Nigeria's president until last year. The Nigerian government is reportedly investigating the awarding of an offshore Nigerian block known as OPL 291, which was eventually landed by Mr. Offor's company and Addax. Mr. Gandur and the analysts say they are unaware of any probe.

Later in the year, Addax bought TSX-listed Pan Ocean Energy for $1.6-billion (Canadian), its biggest acquisition. Pan Ocean gave Addax promising production and exploration properties in Gabon.

Mr. Gandur has some advice about investing in Nigerian oil: Don't believe all the headlines. He says the political risks, at least against his company, are not as elevated as you might believe. Yes, civil unrest has disrupted Shell's Nigerian production, but not Addax's. Addax has lost only one employee, apparently in a botched kidnapping in 2006. Furthermore, Nigeria has never broken an Addax contract. "I've been in there 30 years and never had any problems," he said. Mr. Pearce, the chief operating officer, attributes Addax's relatively hassle-free existence to "great community relations."

Kurdistan is another story. There, the geological risk is small, the political risk enormous.

Addax has a 45-per-cent stake in the potentially huge Taq Taq field about 320 km northeast of Baghdad. The problem is that no Iraqi national law exists to allow oil exports from Kurdistan. Any production has to be consumed locally. Unless the national law changes, and a pipeline is built, the field is little more than a dream.

Addax believes Taq Taq contains as much as 2.7 billion barrels, of which 20 to 40 per cent is recoverable. Addax and the analysts drool over the field's money-making potential. UBS analyst Memet Kont estimates the field could produce 200,000 barrels a day, well in excess of Addax's total current production. Costs might be $2 (U.S.) a barrel, the analysts say. Royalties are $3 and the local price for the oil is $30 a barrel, leaving a fat profit of $25 a barrel. Not bad, and the profit would soar if an export pipeline were built because the price and the volumes would rise substantially.

Will the law change? Mr. Gandur is optimistic but admits the politics are "complex," given the Iraq war and Kurdistan's tense and often bloody relationship with Baghdad and the Turks. Getting Taq Taq going, he says, is his "emotional" obsession.

Becoming a target

It doesn't take a genius to figure out the exit strategy. You can assume the Addax lads are not around for the long haul. They want to bulk up the reserves and production and double the size of the company, at which point takeover approaches from the biggies are probable, perhaps inevitable. Rising oil prices — Mr. Gandur is a believer in the peak oil theory — might speed up the doubling process.

Mr. Stanton, the RBC analyst, said Addax "is not an acquisition target today, but it will become one because it's a growth story." He and the Addax executives think Asian buyers, perhaps the Chinese, are the logical suitors. Why the Chinese? Because they have a voracious appetite for oil, are highly tolerant of political risk and know how to win the hearts and minds of the leaders of poor countries. They do so by funding big local infrastructure investments.

Mr. Gandur has one other goal: Buy more antiquities with his Addax profits. "Money in the bank is no fun," he said.

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