Global Intrigue: The Wackiest Rig in Texas

By RICHARD BEHAR/DALLAS

Few ventures in the oil industry have ever produced such a gusher of speculation. Early next month, engineers will drill a 14,000-ft. well near Jarim Reef off the island of Bahrain, a tiny Persian Gulf nation not far from the world's richest oil deposits. If the exploratory pipe hits crude, it will enrich a cast of investors that includes the Bass brothers of Texas, the Rupert family of South Africa, the Harvard University endowment fund and George W. Bush, the President's eldest son. If the well is dry, the episode will prompt shareholders to wonder why they ever put faith in a Texas-size enigma called Harken Energy Corp.

The suburban Dallas company is surely one of the most mysterious and eccentric outfits ever to drill for oil. Harken consists of almost no assets besides an exclusive 35-year contract to explore for crude in Bahrain. When the country's rulers handed Harken that deal early last year, it puzzled oil experts around the world. Why would Bahrain stake so much of its financial future on an obscure, money-losing company with no refineries and no experience in offshore oil exploration? "It was a surprise," says Jay Gallagher, a senior analyst for Petroconsultants, one of the world's largest oil information outfits. "Harken is not traditionally a company that explores internationally."

The deal ignited oil-patch speculation that Bahrain's rulers see the arrangement as a way to gain influence with the Bush Administration. The President's son, known informally as George Jr., is a Harken investor, director and consultant. No one has produced evidence that Bahrain has won any favors from the White House in return. Yet the financial connection has caused the Administration some discomfort, most notably last fall when reporters asked whether the young Bush's gulf investment had any influence on his father's decision to send troops there. Said Bush's son last October: "No, I don't feel American troops in Saudi Arabia are preserving George Jr.'s drilling prospects. I think that's a little farfetched."

Yet the tiny country, with a population of 500,000 and a land area only four times the size of Washington, D.C., is unabashed in its desire to foster a warm relationship with the U.S. Last week the President greeted Bahrain's emir, Sheik Isa bin Salman al-Khalifa, with a 21-gun salute at the White House in honor of his nation's role as the principal allied naval base during the gulf war.

The firm Bahrain chose to find its bonanza has a freewheeling history, even by Texas standards. Harken director E. Stuart Watson, a former executive for oil giant Atlantic Richfield, calls the Dallas company's deals "convoluted" and difficult even for industry veterans to grasp. Says Harken founder Phil Kendrick, still a small shareholder: "Their annual reports and press releases get me totally befuddled. There's been so much promotion, manipulation and inside dealmaking. It's been a fast-numbers game." Some former executives charge the firm with routinely inflating its assets to make its balance sheets look better. Harken's longtime chief executive, Mikel Faulkner, insists the operation is "clean." But Faulkner, an accountant, offers this advice for those trying to decipher Harken's financial statements: "Good luck. They're a mess."

Harken began life in the late 1970s as an unprofitable collection of Texas oil wells for investors seeking tax write-offs. That strategy changed in 1984 when Alan Quasha, a lawyer and Harvard M.B.A., bought control and became chairman. Quasha proceeded to trade large chunks of Harken stock for sick oil companies, which owned not only wells but also pipelines and retail gas stations. Aiming to salvage or spin off the assets, Quasha generated a dizzying web of deals that would eventually push Harken's debt past $100 million and boost its revenues to more than $1.1 billion by the end of the decade.

/ Along the way Harken began to suffer from the collapse of oil prices, which depressed the value of assets it had acquired. Yet Quasha managed to attract a steady flow of investment capital from the likes of Harvard's endowment fund, Hungarian-born superinvestor George Soros and the South African liquor and tobacco barons, the Rupert family. Despite the company's sloppy bookkeeping and long-shot prospects, all except Soros continue to hold large blocks of stock. "Alan Quasha will charm your pants off," explains a former Harken executive. "You will take your wallet out and empty it into anything that he suggests."

George Bush Jr.'s affiliation with Harken began in the oil-bust year of 1986, when he and a group of partners received more than $2 million worth of Harken stock in exchange for his floundering 180-well Texas oil operation, Spectrum 7 Energy Corp., which had lost $400,000 in the six months before the sale. "His properties were pretty well encumbered," recalls director Watson. "The banks hadn't foreclosed, but that was in the wind." Not long after Bush joined Harken's board, he took charge of the Texas Rangers and shifted his attention largely to baseball. Yet he remains a Harken consultant, earning annual fees of $50,000 to $120,000.

The year after Bush came aboard, a reclusive Saudi named Abdullah Taha Bakhsh bought an 11% stake in Harken through a Netherlands Antilles shell company. The Saudi, a tycoon with global interests in oil, real estate and jewelry, hoped Harken could someday serve as a vehicle for moving Saudi crude into the U.S. But the strategy would never come to pass.

That year Quasha made one of his worst investments, paying $36 million (probably twice its real worth) for E-Z Serve, a stodgy owner of gas pumps at 900 rural service stations and convenience stores. It suffered every travail from management infighting to IRS audits to environmental disasters. Seven states have cited E-Z Serve for soil or groundwater contamination.

Harken's biggest flaw as a would-be Big Oil Company was its lack of a refinery. In 1989 Quasha made a $190 million bid for a publicly held refinery, Tesoro Petroleum. Tesoro never had any interest in merging -- its board wouldn't even respond directly to the offer -- nor did Quasha have any interest in carrying out a hostile bid. The debacle wound up costing Harken millions of dollars in expenses. The only party to make out handsomely was Quasha himself; his law firm has collected more than $1 million in fees since + 1988 by handling these and other Harken matters.

On several occasions Quasha's deals have been marked by apparent conflicts of interest. Last year he tried in vain to get Harken to buy a privately held refinery, Frontier Oil, in which he owned a sizable stake. In another instance Quasha sold Harken's Hawaiian retail unit to a company controlled by both his own family and the South African Ruperts. Harken booked an $8 million gain on the deal, only to write it all off later as a loss.

One of Harken's few profitable ventures was its high-flying commodities trading arm. But suddenly in 1989 the division racked up a $17 million loss, prompting Quasha to shut down the operation. Insiders say the oil traders never had careful supervision, systematic controls or enough money in the bank to ride out a downturn.

By the end of the 1980s, Harken was bloated and indebted, but it won a windfall. Bahrain, which produces a mere 42,000 bbl. of oil a day (Saudi Arabia's output: more than 8 million), decided to hunt for more crude. In 1989 Bahrain officials suddenly and mysteriously broke off promising talks with Amoco. One minister then telephoned an old friend, Michael Ameen, the respected former head of Mobil's Middle East operations. "They wanted a small American company," claims Ameen, who says he drew a blank. But 10 minutes later, Ameen got a call from an investment banking friend in Arkansas, who recommended Harken.

Yet Harken had almost no cash to carry out the job, so it brought in the billionaire Bass brothers to finance the drilling, which could ultimately cost $50 million. What remains inexplicable is why Ameen or the Bahrainis didn't go to the Basses or other experienced wildcatters in the first place.

With the Bahrain deal in hand, Quasha decided to dump almost everything else. The company owned 1,000 wells and 600 gas-station pumps, all of which helped produce more than $40 million in losses in 1990. Earlier this year, Quasha spun off Harken's debt-laden businesses into separate public companies and then retired as chairman. "I've yet to find a business that's had nothing but successes," says he. "We've obviously had disappointments."

George Bush Jr. was probably never a prime mover behind the Bahrain deal. In fact, board members say he voiced doubts about whether Harken had the means and expertise for such a distant oil play. Even so, he has already earned a handsome profit from it. In late June 1990, five months after the deal was ( sealed and about a month before Iraq invaded Kuwait, young Bush sold 66% of his Harken stake (or 212,140 shares) at the top of the market for nearly $850,000, which represented a 200% profit on his original stake. Yet he failed to report the transaction until last March, in apparent violation of Securities and Exchange Commission rules. Bush contended at the time that the SEC had misplaced the report. Responds SEC spokesman John Heine: "As far as I know, nobody ever found the 'lost' filing." Bush declined to comment on either the incident or his involvement with Harken.

Faulkner, Harken's current chairman, says his Bahraini partners won't let him discuss terms of the deal, "even with board members." Oil experts figure that Bahrain will keep about 75% of all potential profits, with the rest to be split between Harken and the Basses. Despite a breakup value of about 70 cents a share, Harken stock trades at $5 these days in anticipation of a big initial find on Jarim Reef. Says Houston oil analyst Charles Strain: "In a few years it's either going to be $30 stock or 30 cents, so it's a pretty easy choice for an investor. You either roll the dice or you don't." The last wildcat well, drilled in 1986 by the Kuwaitis, was a total dud. But the hard-luck Harken may be due for a break. If it does find crude, the President's son could be a multimillion-dollar winner.

With reporting by Jonathan Beaty/Dallas and Richard Woodbury/Houston