Exploration saga began in grubby little Dublin room

A deal which has led to one of the biggest controversies ever on the Irish Stock Exchange, the appointment of an investigator by the Department of Enterprise Trade and Employment and the potential loss of millions of pounds of shareholders funds, was first outlined in a small and somewhat grubby boardroom on the top floor of a Dublin office building.

It was Wednesday, March 29th, 1995, and Jim Stanley, then chairman and chief executive of Bula Resources plc, was outlining the deal to his fellow directors in the Bula offices in South William Street, Dublin.

Around the table were Pat Mahoney, Tom Fitzpatrick, John McGilligan, James Morrisey, Alexandr Marichev and Tatyana Kirillova.

The two Russians, husband and wife, had been appointed to the Bula board as part of an earlier deal also arranged by Stanley.

Since 1993, Stanley had been travelling a lot, spending much of his time in Russia making contacts and looking for deals. He outlined the deal. There was a western Siberian company with the lengthy name of Khantyman siysknefte gasgeologica, or KMNGG, which owned 50 per cent of the licence for an oil field in Salymskoye. Another company, called Mir Space International Ltd, owned the second 50 per cent. Mir Space was a 100 per cent subsidiary of Mir Oil Development Ltd, and the licence was its only asset. Both Mir companies were registered inthe British Virgin Islands.

The deal was that Bula would buy into Mir and thereby into the Salymskoye oil fields. Bula would then raise the money to bring the oil fields into production. An independent, reputable British firm of petroleum engineers had produced a report for Bula. "The oil accumulation has been estimated to contain 585 million barrels of proven and probably recoverable oil reserves," Stanley told his fellow directors.

The details of the venture were: in return for 25 per cent of Mir's stake in the Salymskoye oil field, Bula would pay 101 million Bula shares to Mir Oil. At any stage in the following four years Bula would have an option to buy the rest of Mir's stake for a further 303 million shares. At the time the 101 million shares were worth around £2.5 million. The board approved the deal, subject to due diligence.

The Salymskoye venture

Unknown to the small shareholders, Bula's earlier engagement with Russia was beginning to show signs of trouble. The two Russian directors, husband and wife Marichev and Kirillova, representatives of a company called the Russian Corporation, were unhappy with the new deal. They had first introduced Stanley to the Russian figure behind the new deal, Vladimir Tokarev.

KMNGG had a share in the oil field the Russian Corporation wanted developed. Tokarev was general manager of KMNGG at the time and had met Stanley through his involvement with the Russian Corporation deal. Now KMNGG were pursuing their own project with Stanley.

Marichev and Kirillova were annoyed that Bula, which was committed to finding investment to fund their oil field, was now doing a similar deal with another Russian concern.

Marichev and Kirillova voiced criticisms of the KMNGG deal. Salymskoye was a very difficult area to work in, they said. Shares in Bula were being given to Mir Oil, but who owned the Mir companies?

The Irish directors viewed the Russians' criticisms of the Mir deal as the product of the bad blood which now existed between the Irish and Russian directors.

Gouldens, a firm of London solicitors with offices in Moscow, carried out due diligence in Russia.

LK Shields solicitors of Dublin established for Bula that both Mir companies had been founded and registered in the British Virgin Islands in October 1994. The registered shareholder was a company called Chamonix Corporate Secretaries Ltd, with an address in another offshore location, Jersey. Chamonix was a company formations business, setting up companies on behalf of clients and providing nominee directors.

It was not its practice to reveal the names of the beneficial owners of companies it established.

Bula knew of Chamonix, having used its services when establishing a company in Panama in the early 1990s. Its nominee director was Susan Neil and she was also acting as a director of Mir. Bula asked her, in order to facilitate the deal, whether she would say who owned Mir. She told the company, in confidence, that Mir was owned by a Charles Ellis, from South Africa.

Stanley confirmed this to the board. He was asked to declare, in writing, that neither he nor anyone connected with him, had any involvement in Mir. He did so.

The deal was concluded on September 2nd, 1995, and 101 million Bula shares were transferred to Mir. Bula then began to show the details of the deal to institutional investors. Two came on board: Morgan Grenfell and Capital International. Between the two of them they bought Bula stock worth approximately £9 million, with the understanding that the money be used to develop the Salymskoye oil field.

During the winter of 1995/1996, work began on moving heavy equipment to the sites of the first two wells to be drilled. A project office had been set up in the Siberian city of Tyumen but Stanley, working in London, was in overall command. In the second quarter of 1996, drilling began.

Eventually, on October 13th, 1996, Bula told the stock market, the media and shareholders that the testing programme on well 705 had shown it would produce 942 barrels of oil per day. It was less than had been expected but it was a viable well. The Bula share price did not move.

The expectation was that production would begin by the end of 1996 but there were delays. By March 1997 production still had not begun, and worrying communications were coming in to Bula headquarters in Dublin. Eventually a report was filed. Well 705 had not produced the results announced or anything like them. The October announcement was incorrect. The stock exchange and the Bula shareholders had been misled.

On April 14th there was a meeting in the offices of the legal firm L K Shields and Partners, on Upper Mount Street. Present from Bula were Jim Stanley, Pat Mahony, John McGilligan and Tom Fitzpatrick.

The meeting opened, Stanley submitted his resignation, and left.

His 16-year career with the company was over. The resignation was announced the next day.

Meanwhile, an investigation was under way into the circumstances surrounding the issuing of the October statement. It was to emerge that reports written at the time on-site in Siberia had noted the insignificant oil flow. The chief geologist in the London office, Tim Howell, told Bula the incorrect and much more positive results were dictated to him over the telephone from Siberia. Working to Stanley he had then drafted the report. (Howell has since left Bula.)

On May 5th last, Bula announced to the public that the October drilling announcement was incorrect. It is the first time in the history of the Irish resources market that such a misleading statement had been issued.

What had happened was extremely embarrassing for the directors of Bula. What made it even worse was that the misinforming of the stock exchange had happened against a background of worrying developments involving Mir Oil and its shareholding in Bula.

Sale sends incorrect signals

The deal between Mir and Bula stipulated that the shares transferred from Bula in September 1995 to Mir could not be sold for at least one year, i.e. until September 1996. On February 20th of this year Neil informed Bula that 28 million of the Bula shares had been sold. Bula in turn announced the news to the market. Shareholders and analysts wondered why the shares were being off-loaded. Back in February news on production in Siberia was still being awaited. As far as Bula was concerned, the sale sent out all the wrong signals.

An investigation by Bula established that the 27 million shares had been sold in November 1996 and January 1997. They would have earned the vendor approximately £700,000.

Bula was faced with a considerable mess. Mahony, the new managing director of Bula, set about trying to establish what had happened with the Salymskoye deal. In May he travelled to Moscow and met with Vladimir Tokarev, the former general manager of KMNGG, and Nikolai Bogatchev, a former Soviet diplomat who had established a position in the Russian oil business.

Bogatchev and Tokarev are co-vice-chairmen of a new Russian-US venture which, among other assets, owns KMNGG.

Tokarev, who was appointed to the board of Bula as part of the Bula/Mir/KMNGG deal, does not speak English. Bogatchev, who has spoken with The Irish Times in Moscow, told Mahony that Tokarev and Stanley had done most of the negotiation for the deal. Bogatchev told Mahony that it was their understanding that at all times they were dealing with Bula.

Mahony submitted an affidavit in the Dublin High Court on September 12th last. He told the court what Bogatchev had said at the Moscow meeting:

"Bogatchev stated that in discussions between his company and Mr Stanley in early 1995 regarding the future possible development of the Salymskoye oil field his company had believed that they were at all times dealing with Bula.

"KMNGG's understanding was that Mir Space was an off-shore subsidiary controlled by Bula and that its involvement was necessary in order to minimise the potential future taxes that might arise from the deal."

Bogatchev has repeated this view to The Irish Times. He said the negotiations on behalf of KMNGG were conducted by Tokarev. One of the contracts signed between KMNGG and Mir was signed by Dmitry Talvirsky on behalf of Mir. Talvirsky, who works for KMNGG, allegedly told Bogatchev that he signed for Mir because he was asked to by Stanley. He had no power of attorney.

When the Mir/KMNGG joint venture Eastern Resources was being established an R F Avakyan signed on behalf of Mir. The name is Armenian. It is unclear who Avakyan is. Some even wonder if such a person exists.

Stanley was the only Bula director involved in the negotiations with KMNGG. For most of their business in Russia, Bula uses the services of Elena Loven, a native of Moscow who married a Swedish diplomat, lived in Ireland for a number of years, and now lives in Stockholm. Ms Loven, told The Irish Times that almost all of the company's dealings in Russia involved her.

She worked as translator and consultant for Bula when the company was negotiating the Bula deal with KMNGG. She said she never sat in on a meeting where anyone present was representing Mir.

Asked how the Russians could have come to believe that Stanley was representing Mir and that it was a Bula offshore company, Loven said she could not explain that. Tokarev and Stanley just seemed to know about Mir, she said. She was told that the owner was a Charles Ellis.

Following the Moscow meeting between Mahony and Bogatchev, Bula launched an investigation into the ownership of Mir. It also met once again with Stanley in the Maryland House boardroom. The directors told Stanley what Bogatchev had told them. Stanley told the directors that Bogatchev was wrong.

On July 14th Bula wrote to Chamonix in the Virgin Islands stating that it wished to contact Charles Ellis. Susan Neil wrote back to them saying Ellis was no longer the beneficial owner of Mir and had not been for some time. Neil did not respond to a request for information on how to contact Ellis.

The South African connection

Under the terms of the 1990 Companies Act a company can ask that a shareholder reveal to the company the identity of the beneficial owner of that shareholding. On August 21st such a request was sent to Neil in relation to Mir. Neil responded that she was not subject to Irish law and would not disclose the information requested.

This gave the company an opening. On September 12th, Bula went to the High Court and won an order that the remaining 74 million shares given to Mir as part of the Salymskoye deal, should be "frozen". The court granted the order. It means the shares cannot be traded or sold. On Monday last the order was extended for a further three weeks. Meanwhile, a trawl through the courier records for the London office of Bula revealed an address for a Charles Ellis in South Africa. Correspondence about Bula had been sent to him by Stanley. Bula sent Ellis a fax on August 29th. A return fax was received on September 8th.

"Dear Sir," wrote Ellis. "I have received your letter dated 29th August 1997. At the outset I wish to record my surprise at the content and the various allegations contained therein."

Ellis told Bula he didn't know what it was talking about. A property developer in South Africa, his full name was Charles Lloys Ellis and he said he had first met Stanley four years ago, when he was on holiday in Hermanus in South Africa and his daughters had become friendly with Stanley's.

"I have no knowledge of, nor have I ever had any dealings (either as referred to in your fax or at all) with Mir Oil, Mir Space or KMNGG."

Lloys Ellis told The Irish Times that he had become annoyed when he received the Bula fax. He had telephoned Stanley in London. "He said it was nothing to do with me, that it was another Charles Ellis. He said I shouldn't concern myself and that I shouldn't talk to the press."

"I was very upset and I told him I was very upset." Lloys Ellis said he had no communication with Stanley since then. Two documents given to The Irish Times, one a letter from Lloys Ellis to Bula, and another a letter from Mir Space to a potential business partner in Russia, have completely different signatures for Lloys Ellis.

After receiving the fax from Lloys Ellis, Bula wrote to Stanley and to Neil. The company has not received any reply from either party.

Since the KMNGG/Mir/Bula deal the Russian company has become part of a new holding company called KMNOC, with OC standing for Oil Company. The company has western partners with access to substantial funds, according to Bogatchev. He expects the Salymskoye oil field will now be developed by the new concern. They will buy out Bula. "We will compensate them. We don't want to screw anybody."

The Russian is critical in his assessment of Bula. "Everything they did in Russia was a mess. I don't know how they survive."

He claimed the Russians argued against the type of well drilled with £7 million supplied by Bula, but that Bula went ahead anyway. He also contended that the licence for the oil field could never be transferred from KMNGG to Eastern Resources.

Both these points are hotly disputed by Bula. Company secretary Ivan Walpole said the transfer of the licence was not yet complete but would go ahead. Bogatchev's view was "probably a negotiating position". The drilling had been agreed by the board of Eastern Resources, which had Russian directors and had also been recommended by a study commissioned by Eastern Resources and carried by a Russian institute.

He said Bula would "consider an attractive offer" if one came from KMNGG, but that it had not yet been decided that the Russians and Irish are to part.

Bula is in negotiations with KMNGG about its involvement in the Salymskoye field. Yet the deal is between KMNGG and Mir, and not KMNGG and Bula. Bula managing director Pat Mahony, said he had ideas about how to overcome this, but was not going to disclose them.

Bula is determined to salvage as much as it can from the Bula/Mir/KMNGG deal, said Mahony.