from Platts Energy Economist
www.platts.com
Can control-change at controversial explorer
Harken Energy finally bury Bush rumours?
Many who maintain US interest in Iraq is motivated by oil cite George W Bush’s previous
experience as an ‘oilman’ as justification. In fact, the president sold out his failing oil and
gas business to controversial Latin America E&P company Harken Energy – and his
judgement of baseball proved a good deal sounder. Here James Norman* investigates the
latest puzzling chapter in the Harken Energy story
Fort Worth, Texas. Revenues in 1989 were $1.1bn,
before the downstream operations were sold or spun off
to Quasha himself in a series of convoluted deals.
But what most distinguished Harken was its bold foray
into international, elephant-scale, exploration. In
January 1990, with George W Bush on its board of
directors and his father, the former CIA director, serving
as President of the United States, Harken beat off no
less than US major Amoco to land a 35-year
production-sharing agreement to explore the entire
offshore territory of Bahrain.
That was thanks in part to the deal-making of former
Mobil and Aramco executive Michael Ameen, still a
Harken director at age 78. Initial partner funding was
from the Texas Bass family. After one dry hole in 1992,
however, Harken gave up the Bahrain concession in
1996, under keen media scrutiny.
In 1993 Harken won the first of six exploration and
development contracts in Colombia, totalling 1.4m acres
of that drug-war battleground. In 1999 it acquired rights
to 80% of a 1.4m acre exploration tract on- and offshore
Costa Rica. And in 2001 Harken signed “technical
evaluation” agreements over 1.4m acres in Panama and
6.8m acres in Bolivia.
Harken, in short, would seem to have been a real mini-
Exxon: global in scope, impeccably connected and
integrated from wellhead to “gas” tank. Its avowed
strategy was “high risk, high potential international
exploration”, balanced with “low risk domestic
exploitation”. Instead, tiny Harken has become more like
a toxic waste dump for bad deals, with a strong odour of
US intelligence spookery and chicanery about it.
Since buying GW Bush’s faltering Spectrum 7 Energy oil
and gas company in 1986, cash-strapped Harken has
done a string of other stock swaps for dog-eared US
upstream properties from such companies as Benz
Energy, Bargo Energy, Pease Oil & Gas, XPLOR Energy. It
also bought Search Acquisition, which was forced into
bankruptcy last summer, followed by its McCulloch
Energy unit, over a $4.1m legal judgment. Harken
settled with creditors for $2.2m.
How does it finance its operations?
Doing the wrong business in the wrong places with the
wrong people has left Harken a debt-laden shell with a
slate of problem properties it can’t afford to exploit, and
which no partner will touch. With little or no visible
means of support, Harken’s continual need for capital
has been supplied by a steady stream of asset sales
and impenetrable offshore financings.
Its recent capital has come mostly from unregistered
high-yield debt offerings to nominee accounts domiciled
in secrecy-sworn Switzerland, Liechtenstein or the
British Virgin Islands, where Quasha’s Lyford is
registered. (In a nominee account, a financial institution
– which may be offshore-based – acts as agent for
principals that remain anonymous.)
Much of Harken’s earlier funding was provided by the
prestigious Harvard investment trust, adding up to what
proved to be an embarrassing write-off of almost $50m
there in 1991. Thinking it was making a timely bet on
rising oil prices and an undervalued little company,
Harvard made repeated large cash infusions into
Harken in the late 1980s. By 1991 Harvard owned
25% of the company.
When GW sold out of Harken
Harvard also bought $64m worth of Harken oil-producing
properties and contributed them for 84% of a
partnership with Harken. Harken, on the other hand, put
in the rest of its US wells and $20m of debt on them.
Critics say this helped the cash-strapped company hide
debt and defer declaring a loss.
A few months before that partnership was formed, in
June 1990, George W Bush sold more than 200,000
Harken shares at $4 each, to help pay off a loan he had
used to buy the Texas Rangers baseball stake that was
to make him his fortune. Six months later Harken would
trade at $1.25/share, then jump to almost $9/share in
mid-1991. But a year later it would be back under $2.
(That would be $20/share now, adjusted for a 1-for-10
reverse split in 2000.)
That stock sale by GW has been dogged by suspicions
that Bush traded on inside information to get out of
Harken before the bad news hit. There has also been a
lingering question over when or if he filed the required
insider disclosures. But a 1991 SEC investigation –
during his father’s presidency – found no wrongdoing
and the matter was dropped. Bush resigned as a
Harken director in late 1993 and a year later was
elected governor of Texas.
The Washington-based Center for Public Integrity has
suggested the unnamed buyer of Bush’s Harken stake
was Harvard. But Harvard Management president Jack
Meyer told the Boston Globe newspaper, as reported last
October, that Harvard did not buy the shares and doesn’t
know who did.
Harvard’s investment “clearly did not work out as well as
we had hoped,’’ Meyer told the paper. But he denied any
intention of currying favour with the then-president or his
son. The paper noted Harvard eventually recouped a
modest $20m profit by selling Harken shares in 1997.
The Globe also reported that it was an associate of
Quasha who first brought the Harken investment idea to
Harvard, shortly before Bush joined Harken’s board.
Another big investor in Harken in 1987 was Saudi Sheik
Abdullah Taha Bakhsh, a Jedda real estate mogul who
controls private construction firm Traco International. He
bought an eventual 33% of Harken’s equity, but that
became reduced to under 5% in 1999 due to Harken’s
dilutive deal-making. Bakhsh got into Harken by buying out
the stake of Union Bank of Switzerland (UBS). UBS had
taken its uncharacteristic equity position in Harken
through a $25m underwriting by Arkansas investment
bank Stephens & Co, shortly after Harken acquired
George W Bush’s faltering Spectrum 7 Energy in 1986 and
during the period he was associated with the company.
According to a 1991 Wall Street Journal report, Spectrum
7 itself had Saudi investors. They were brought in by
James Bath, an aircraft broker accused by one former
business partner of having “national security” ties.
Among the other rich Saudis Bath reportedly represented
were BCCI bank figure Khalid bin Mahfouz and
construction baron Salim bin Laden, a close friend of
King Faud and father of the now-infamous Osama.
Soros deal stays sweet
It was Quasha, Harvard and Bakhsh that together loaned
Harken the $12m cash it used in mid-1989 to buy out
noted hedge fund financier and 16.4% Harken
shareholder George Soros. They later converted that
debt to shares, giving themselves more than 60%
control. Harken was one of a smattering of oil patch
distress plays Soros’ Quantum Fund had undertaken in
the 1980s. Soros got out with what looked like a belowmarket
$4.25 each for his 6.9m shares, just before
Harken’s move from NASDAQ (small companies listing)
to a listing on the New York Stock Exchange.
But in addition to extracting scarce cash from Harken,
Soros got a note for $17m. That was mostly paid off a
few months later when Harken let Soros buy, at cost, the
37% stake Harken had picked up for $16m in Louisianabased
Crystal Oil, then recently out of bankruptcy. It
seems Soros got a sweet deal. Five years later he sold
Crystal’s oil and gas properties to Apache for $98m.
Then he sold the rest of Crystal’s Mississippi gas
storage assets in 1999 to El Paso for $165m plus
$60m of assumed debt.
Some creditors suspect a similar sort of asset-shuffling
may be under way now with Harken’s crown jewel
international properties to keep them out of the hands
of bondholders who want repayment of their investment.
Harken’s non-US interests have been put into a separate
London-listed affiliate called Global Energy Development
(GED), with Harken chief executive Faulkner as chairman.
Quasha has disclosed buying some of GED last year
when it floated 7.4% of itself, raising $1.5m. The thinlytraded
shares of GED have remained at around their
original offer price of 52.5p/share.
Recently Harken swapped another 5.24% of GED for
shares in UK-based New Opportunities Investment Trust,
reducing Harken’s GED stake to 85.6%. GED owns
Harken’s 11.2m acres of exploration tracts in Colombia
and Costa Rica, and the vast scouting rights in Peru and
Panama. At year-end 2001 Colombia had 5m bbl, or 35%
of Harken’s proven reserves, and accounted for 26% of
its $32.4m of revenues that year.
Two of Harken’s four Colombian concessions have
proven reserves: the Palo Blanco prospect in the Llanos
Basin Alcaravan area and the Bolivar contract in the
Middle Magdalena Valley. But the SEC forced Harken to
write down its Colombian reserves by one-third in 2000,
and poor well results prompted a further reduction. Most
of its Colombian lands have now been relinquished.
Harken’s Panama and Bolivia deals produce no income
and its huge Costa Rica tract has been written off after
running into environmental and political opposition. In its
last quarterly financials, Harken said its “Middle
American” operations had revenues of only $550,000 –
from interest and pipeline fees. Its barely 1,000b/d of
remaining production apparently generated no net cash.
Still, Harken claims its Colombian assets are worth almost
$200m – and they appear to have drawn some interest
from outside investors. According to a lawsuit filed against
Harken and GED last autumn by Chicago deal-brokers
Black Point Ltd, units of China hydrocarbon heavyweights
Sinopec and PetroChina signed “letters of interest in
strategic cooperation” with GED, offering to pour not only
money but drilling rigs and what could literally be an army
of manpower into Colombia to develop Harken’s fields.
No thanks, said Harken, uncharacteristically unwilling to
deal. The aggrieved Black Point claims Faulkner and other
Harken officers got cold feet and backed out of the China
venture, around the time Quasha showed up again with
new funding. Black Point’s resulting legal action reveals
that Black Point was initially asked to find Chinese help
by Michael Rohlfs, a principal with Dearborn Partners and
a representative of Saudi Sheik Bakhsh.
* James Norman is a senior writer for Platts Oilgram
News in New York.
US UPSTREAM BUSINESS
ENERGY ECONOMIST / ISSUE 257 / MARCH 2003
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