Tiny firm gets nation to back off
Houston oil company fights off seizure of operations in Georgia
WASHINGTON — In May, Texas Sens. John Cornyn and Ted Cruz wrote to Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin on behalf of a little-known Houston oil company, describing a deteriorating situation in the former Soviet republic of Georgia.
The company, Frontera Resources, was on the verge of losing its contract with the Georgian government to develop oil and gas reserves near the Caspian Sea. In Cruz’s and Cornyn’s telling, what was happening to Frontera had “geopolitical implications,” signaling resurgent Russian influence in the region and threatening U.S. pol
icy to help Georgia to become “stable and energy independent” and remain aligned with the West.
The letter, however, left out one detail: Frontera, dogged by creditors, had tried for more than 20 years to tap the Georgian oil fields — with little outward signs of success.
Nonetheless, two months later, the Georgian government announced it would hold off seizing Frontera’s operations, explaining, “Despite the state’s absolutely solid position in the dispute with Frontera, it is inadmissible to cast a shadow on (Georgia’s) international reputation.”
How tiny Frontera, which operates from a small office building next to the Galleria shopping mall, came to harness the power of the highest levels of Congress in its conflict with the Georgian government is a story that begins in the aftermath of the Cold War, stretching from the democratic revolutions that followed the breakup of the Soviet Union to the fracking revolution that opened up new oil fields in previously inaccessible rock.
It develops alongside the emergence of an authoritarian Russia intent on reasserting its influence in former Soviet territory and the West’s efforts to contain those ambitions. It involves a cast of prominent players in Texas politics and business — and, of course, money, all tied to a potentially massive oil and gas discovery.
After the Soviet Union broke up in 1991, U.S. officials and businessmen flocked to former Soviet republics such as Georgia where state-run industries, including energy, were opening to foreign investors. Among them was Bill White, the former deputy energy secretary during the Clinton administration who would become Houston’s mayor in the mid-2000s.
Washington to wildcatting
White wanted to look for oil himself. After leaving the administration in 1995 with contacts such as the Georgian President Eduard Shevardnadze, he partnered with Dino Nicandros, who had just retired as the CEO of Conoco, and Nicandros’ son, Steve, who had helped run Conoco’s international drilling operations, to form Frontera. Lloyd Bensten, the former treasury secretary and Texas senator, was also an investor.
This high-powered team focused on emerging markets, looking at Bolivia, Mexico and Ukraine before settling on an old Soviet drilling site in Georgia’s Karu Basin, “one of the oldest hydrocarbon basins on the planet,” White said. His company signed a contract with the Georgian government in 1997 to explore Karu, but it didn’t take long to realize the challenge they faced.
“Our geoscientists thought it had significant potential from the source rock, but we found out the source rock was very (difficult to drill), with very high pressure that created enormous drilling hazards,” White said. “The Soviets had drilled 40 wells there, all of which had underground blowouts or other problems.”
White stepped away from Frontera’s day-to-day operations in the early 2000s to run the Houston investment firm WEDGE Group, leaving the company in the hands of Steve Nicandros, the former Conoco executive who would go on to become a major Republican donor.
The son of an industry legend — the first foreign-born CEO of a major U.S. oil company — Nicandros had watched the ascent of George P. Mitchell, known as the father of fracking, who had spent decades figuring out how to free natural gas from shale rock. Nicandros wondered if he could pull off the same feat with Georgia’s difficult-to-drill oil field.
In 2005, he launched an initial public stock offering that raised $80 million and listed Frontera on the Alternative Investment Market, a submarket of the London Stock Exchange for smaller, riskier firms. In Nicandros’ telling, so began a long period of experimentation. Frontera would frack a well, watch it fail, analyze what went wrong, and do it all over again.
“The odds are against you. The first time you frack a field it isn’t going to work. You’re learning. You observe it and try to do it again and again and again,” Nicandros said. “Then, there’s the supply chain challenges. It’s not like Texas. When we started fracking wells, there weren’t fracking trucks anywhere, so you had to mobilize them from Europe or further away.”
After more than two decades in
the
Georgia, Frontera has produced little evidence that the oil deposits can be extracted profitably from the Karu Basin’s rock. And time appeared to be running out.
Fight for survival
In 2018, after numerous contract extensions, the Georgian government moved to reclaim drilling rights for almost 2,000 square miles that were signed over to Frontera, filing a suit with the Permanent Court of Arbitration, an international body in the Netherlands.
Within a year, Frontera’s stock, which had been on a steady decline for years, fell to less than 40 cents a share and was delisted from the Alternative Investment Market. Its largest creditor, a California distressed debt investor named Steven Hope, has moved to liquidate the firm, claiming Frontera was four-years delinquent on repaying a $14 million loan that Hope acquired at auction in 2012.
“Whenever it seems like (exploration) might be working, it gets time for them to pay some money and then it never happens,” said John Cornwell, a Houston attorney representing Hope. “Either something is happening we don’t understand, or it’s desperation to keep alive a pretty large investment made many years ago.”
For two decades, Frontera Resources maintained a low profile in Georgia, a nation with virtually no oil and gas production, but one that provides a crucial land route for pipelines running to Europe from Caspian Sea oil operations.
That changed for Frontera last winter when 90-odd workers in Georgia went on strike, claiming the company had missed payroll for years and owed them 11 months in back pay, said Sopiko Japaridze, an organizer with Georgia’s Solidarity Network, a labor union. The strike and the new delays only increased the Georgian government’s impatience with Frontera and its inability to produce the huge quantities of oil and gas promised long ago.
With its survival in jeopardy, Frontera reached out to U.S. politicians who determine whether Georgia gets $130 million in foreign aid each year and went on the attack. Frontera executives knew which buttons to push. Zaza Mamulaishvili, Frontera’s Georgianborn CEO, went on the radio denouncing the strikers as plants by the ruling Dream Party while Nicandros speculated that the government was trying to seize Frontera’s oil fields to hand them over to the Russian energy giant Rosneft, “or Chinese or Iranian interests.”
Critical ally
Since gaining independence from the Soviet Union in 1991, Georgia, which sits at the crossroads of eastern Europe and southwestern Asia, has been considered a critical ally in U.S. efforts to limit Russian influence in the two regions.
Georgia’s pro-West tilt appears to have continued under the Dream Party, which won power in 2012. Georgia, which is negotiating to join the European Union, has not maintained an embassy in Russia since Russian President Vladimir Putin invaded Georgian territory in 2008.
“Why would Georgia go against America,” said David Tvalabeishvili, Georgia’s deputy minister of economy and sustainable development, said in an interview. “We are trying to pull American companies into Georgia. It’s one of the government’s main policies.”
But Frontera’s story of falling prey to Russian influence in Georgia has taken hold among Republicans in Washington, where the company has long punched above its weight in lobbying and political contributions.
Since 2016 Nicandros, a regular at political fundraisers in Houston, and other Frontera executives have made more than $180,000 in donations to federal campaigns, almost entirely to the Republican Party, according to the Center for Responsive Politics, a nonpartisan, nonprofit group that tracks money in politics.
Over that same period, Frontera spent almost $500,000 on lobbying Congress. By comparison, EOG Resources, the Houston oil company with a market value of $29.4 billion, has spent $20,000 on federal lobbyists since 2016.
In January Rep. Pete Olson, RSugar Land, stood on the House floor and denounced the leader of the Dream Party, the billionaire Bidzina Ivanishvili, as “Putin’s puppet.”
“Frontera created great jobs in America, great jobs in Georgia,” Olson said. “They’ve created freedom.”
Olson, who is leaving Congress after his term expires, took $5,700 in donations from Frontera in his 2018 reelection bid. His former chief of staff is representing Frontera on behalf of the Washington lobbying firm Cornerstone Government Affairs.
Also criticizing the Georgian government were Rep. Brian Babin, R-Deer Park, Rep. Jodey Arrington, R-Lubbock, and Rep. Markwayne Mullin, R-Okla., all of whom received campaign contributions from Frontera. Neither they nor Olson, Cruz or Cornyn would agree to an interview on how they came to speak out on behalf of Frontera.
The picture painted by the Republicans clashes with the international reputation of Georgia, seventh on the World Bank’s rankings of the easiest countries in which to do business — one spot behind the United States.
“Their pro-western orientation has never wavered,” said Bob Hamilton, a former diplomatic officer in Eastern Europe for the U.S. Army, now a fellow at the Foreign Policy Research Institute in Washington. “What the Dream government did was try to establish a pragmatic relationship with Russia after the war in 2008. That caused some of Georgia’s partners in the West, to claim Georgia was becoming pro-Russian.”
In April, the Georgian government won a victory when international arbitrators ruled that Frontera was in breach of its contract, having failed to prove that any oil and gas could be recovered beyond what Georgian officials say was already being produced from Soviet-era oil fields.
Frontera was ordered to pay the government $8.2 million and hand over almost all the land to which the company was granted drilling rights more than two decades ago.
But Frontera does not plan to walk away. It claims the ruling does not require them to give up all their holdings, which carry value beyond the hope of a big payday.
In the most recent financial analysis of Frontera, conducted by the investment firm WH Ireland in 2017, the company was producing about 55,000 barrels of oil a year from the pre-existing oil fields. While small change for larger oil companies, that works out to $2.2 million a year at current prices.
“There’s enough oil to have a small operation, employing 100 people,” said Japaridze, the labor organizer. “It’s not the big oil that Frontera was talking, but it’s something.”
Passion and pursuit
The Georgian government was working to take over Frontera’s oil fields this week. But doing so required its political leaders to defy U.S. congressional representatives in what could have been a costly protest.
The House Appropriations Committee is considering a bipartisan spending bill that includes a provision to withhold $20 million in U.S. aid until the government proves it is working to “strengthen its democratic institutions” and “ensure the rule of law in the private sector.
For Frontera, the Georgian government’s announcement they would back off seizing their operations offers at least a temporary reprieve — one they hope they can use to their advantage. Nicandros, now 60 and living in Houston’s Memorial Heights neighborhood, insists a big discovery is just around the corner. He just needs more time.
“You have to take something from the passion of the pursuit and the money we put behind it,” he said. “Look at an old friend in Texas, George Mitchell. It took him almost 25 years to figure out how to tap the Barnett shale.”