Cobalt’s Blind Date

Oil is big business. And it leads some companies to take big risks with FCPA compliance.

Take Cobalt International Energy, Inc., for example.

In its annual report filed with the SEC on March 1, Cobalt repeated a disclosure, of sorts, about FCPA compliance in an Angolan development project.

The company suggests it was forced by the Angolan government to partner with two local oil and gas exploration and production companies about which Cobalt knew nothing, apparently, beyond the companies’ names.

Cobalt said:

In connection with entering into our Risk Services Agreements for Blocks 9 and 21 offshore Angola, two Angolan-based E&P companies were assigned as part of the contractor group by the Angolan government. We had not worked with either of these companies in the past, and, therefore, our familiarity with these companies is limited.

That lack of knowledge about government-nominated intermediaries in a country like Angola (ranked 168 on the Corruption Perception Index), in an industry like oil and gas, should raise enormous compliance concerns.

What’s Cobalt doing about it? “We are continuing to look into . . . a connection between senior Angolan government officials” and one of the companies nominated by the Angolan government.”

Cobalt’s full disclosure in its March 1, 2011 Form 10-K can be found here.

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Last year, the NGO Global Witness had this to say about Cobalt, Goldman Sachs, which is financing Cobalt, and Angolan corruption:

It seems extraordinary that Goldman Sachs would back this kind of deal in Angola, a notoriously corrupt country . . . .” said Diarmid O’Sullivan of Global Witness.

Cobalt will operate the two blocks, meaning it will be in charge of drilling for oil, with Sonangol, Nazaki Oil and Gáz and Alper Oil as its minority partners. Sonangol declined to explain to Global Witness why it chose these two companies. Alper Oil’s website provides little detailed information about its activities, not even a contact phone number. Nazaki Oil and Gáz does not have a website.

Nazaki Oil and Gáz is covering its own costs but Alper Oil’s upfront costs are being paid by Cobalt, which aims to recoup them out of future revenues. So Alper Oil could make huge profits if oil is found, without investing any capital upfront or taking any risks, and loses nothing if no oil is found.

Transparent management of the oil sector is crucial to the economic future of Angola, a country so poor that the average life expectancy is a mere 46.5 years.5 But Sonangol’s actions raise serious concerns about whether it is acting in the public interest or the interests of the ruling elite.

In March 2010, Global Witness revealed that Sonangol nominated a son-in-law of President dos Santos of Angola to the board of a key investment vehicle. In August 2009 we revealed that a private company, pre-qualified by Sonangol to bid for oil rights, had shareholders with the same names as top officials, including Sonangol’s chairman.6 Sonangol declined to comment on these cases.

Cobalt replied to written questions from Global Witness on its own behalf and that of its shareholders, including Goldman Sachs. Cobalt’s letter said: “Please be assured that we have devoted considerable resources towards mitigating the specific risks identified in the statements that you have included in your letter.” Cobalt’s letter also said that the company had retained two law firms for the “specific purpose” of addressing these risks and continued to work closely with them.

However Cobalt declined to answer specific questions about the deal, including a request to identify the ultimate beneficial owners of Alper Oil and Nazaki Oil and Gáz, on the grounds that this would “involve selective disclosure of non-public company information and, in some cases, to do so would also be a breach of the confidentiality provisions of agreements by which [Cobalt] are bound.”

So it is not clear whether or not Cobalt and its investors know who the ultimate beneficial owners of these companies are. “In the highly corrupt and predatory environment of Angola, the public is being asked to take it on trust that deals with opaque partners are ethical. After the sharp practices of the credit crunch and the fraud charges levelled against Goldman Sachs in the United States, this is a tall order,” said O’Sullivan of Global Witness.

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We’re grateful to the reader who sent us the links to Cobalt’s latest Form 10-K and to the Global Witness release.