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Tuesday 21 February 2006
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SAO TOME AND PRINCIPE: Waiting for the oil boom

[ This report does not necessarily reflect the views of the United Nations]

©  Robert Powell/IRIN

When the oil money comes, we will build a bridge

SAO TOME, 13 Dec 2005 (IRIN) - Beatriz Azevedo points to a woman carrying a plastic bowl of fish on her head as she wades chest deep through a river where it flows into the sea.

This river separates the coastal village of Sao Joao dos Angolares from a nearby beach where fishermen beach their canoes.

“Two men were drowned in recent months while trying to carry their outboard motors across this river, says Azevedo, the head of the local women’s association.

“When the oil money comes in we are going to build a bridge here.”

Everyone in Sao Tome and Principe is convinced that this small island state tucked away in the Gulf of Guinea is on the verge of an oil boom.

The US oil major Chevron has announced that it will start drilling its first offshore exploration well in block one of a Joint Development Zone (JDZ) shared with Nigeria during the first half of January.

The seismic data already gathered there is very encouraging and Total, the French oil company, has discovered a major oil and gas field just 15 km to the north inside Nigerian territorial waters.

Total’s Akpo field will produce 225,000 barrels per day of oil equivalent when it comes on stream in 2008.

There are high hopes that Chevron will find a gusher of equally impressive proportions nearby.

A former cocoa plantation

Billions of dollars in the pipeline

Afonso Varela, the Legal Director of Sao Tome and Principe’s National Petroleum Agency (ANP), can scarcely contain his enthusiasm.

“If we are lucky enough to find an oilfield with 1.5 billion barrels of recoverable reserves (similar in size to Akpo), even after sharing its revenue with Nigeria, we stand to receive about US $9 billion over a period of 25 to 30 years,” he said.

That is a mind-boggling sum for this twin-island state of 140,000 people.

Sao Tome presently scrapes by on $5 million a year from cocoa exports and around $25 million a year of foreign aid.

Most of the inhabitants of this former Portuguese colony are fishermen, who brave the Atlantic waters in dugout canoes, and subsistence farmers, who slash out plots in the jungle to grow plantains, cassava and a few vegetables.

But young people are drifting away from the villages to Sao Tome city where youth unemployment is estimated to be around 50 percent and expectations that oil will provide an instant solution to poverty are running high.

Dozens of new four-wheel drive cars in the sleepy capital and a crop of luxury houses mushrooming in the posh new suburb of Campo de Milho, have convinced ordinary people that money from oil-related activities is already flowing into the pockets of the ruling elite.

Many live in conditions of extreme poverty

Corruption could soak up the money

“I don’t see how buying flash new cars can do much for the good of the people,” said Olavo Vingar, who exchanges wads of grubby Sao Tome dobras for dollars and euros in Sao Tome’s central market.

Carrying a calculator in one hand and a bag of local currency in the other, Vingar says he would prefer to get a proper job.

But with the minimum wage set at $40 a month, this 34-year-old man can’t find anything else to do that would allow him to feed his seven children.

Lucretio Goncalves, who wanders the streets with his camera, offering to take photos of people for a dollar a picture, is equally sceptical that the politicians will spend Sao Tome’s oil revenues on improving the lives of ordinary people.

“Some oil money is already coming in, but it is just benefiting half a dozen people who run the country. It doesn’t reach ordinary people, just those who govern us,” Goncalves said.

“I am absolutely certain that in this country, the oil money is not going to be well used,” said Goncalves, who walks the streets with his camera because he is unable to find work as a stone mason.

With the World Bank’s encouragement, parliament last year voted through a new law drafted by US lawyers that is supposed to ring-fence Sao Tome’s oil revenues and prevent greedy politicians from diverting the money into their own pockets.

This oil revenue law is designed to ensure that all the money is spent on priority development projects such as improving the country’s roads, schools and hospitals and its erratic electricity and water supply, while making sure some of it is set aside for the future in a Permanent Fund.

But legal experts say the new law will only work if the government and the courts are willing to enforce it. And some respected voices are already predicting that many of its provisions will be quietly ignored.

“Sao Tome is a state that simply doesn’t function,” said Pascoal Daio, an independent lawyer who is one of the pessimists. “This law is very pretty, but it is not being applied.”

Daio pointed out that Patrice Trovoada, the son of former President Miguel Trovoada who has frequently served as a cabinet minister and government adviser, has accumulated huge personal wealth without having to explain the source of his riches.

And he noted that several top government officials owned shares in ERHC, a company controlled by Nigerian millionaire Sir Emeka Offor, which has been granted generous pre-emption rights in several offshore blocks in the JDZ.

“I don’t understand how any government could give away such privileged rights to a company,” Daio said.

Praia Banana - the government hopes to develop tourism in the twin-island state

Signature bonuses

As the public debate smoulders on about oil-fuelled corruption, some legitimate oil money is already entering government coffers in the form of “signature bonuses.”

These front-end payments are trickling in as Sao Tome signs a series of production sharing agreements with companies keen to drill for oil in deep-sea waters that Sao Tome agreed in 2001 to share with Nigeria.

Earlier this year, Sao Tome received US $49.2 million as its share of the $123 million signature bonus paid by Chevron and its partners for the right to explore block one of the JDZ.

Nigeria receives 60 percent of all oil-related revenues from the formerly disputed JDZ, while Sao Tome receives 40 percent.

In the coming weeks, the two governments expect to sign production-sharing agreements with other oil companies covering a further five blocks in this broad swathe of ocean 200 km south of the Niger delta.

These contracts should trigger the payment of a further $55 million of signature bonus payments to Sao Tome in 2006.

However, government officials warn that even if oil is discovered in commercial quantities, there will be a 10-year gap before Sao Tome starts to receive large-scale oil production revenues.

Rafael Branco, the Economic Director of the National Petroleum Agency, reckons production will only start in 2012 – although Chevron says that the fast track development of block one could produce first oil as early as 2010.

Branco also warns that even when the oil does start flowing, Sao Tome will have to wait a further three to five years before it starts to receive large-scale revenues.

That is because the oil companies involved will first have to recover the capital they have invested to bring the oilfield on steam. And that sum is likely to be $2 billion or more.

Once the big inflow of oil revenues to government coffers does start – probably sometime between 2015 and 2017 – Sao Tome may well receive several hundred million dollars per year.

That would turn it overnight into one of the richest countries in Africa, at least on the basis of gross domestic product (GDP) per capita.

Santo Antonio, capital of Principe island

Foreign aid still needed

However, until then, this tiny state– the second smallest in Africa after the Seychelles - will continue to need a large injection of foreign aid.

President Fradique de Meneses, with the backing of the World Bank, is therefore asking international donors to help Sao Tome prepare for a new era of oil wealth by financing an ambitious public investment plan.

This Poverty Reduction Strategy aims to reduce poverty by two thirds by 2015.

It also aims to modernise and reform the way in which government operates, improve the country’s decaying infrastructure, create a solid platform for private sector investment and stimulate economic growth of at least five percent a year.

A government study carried out in 2003 calculated that 54 percent of all Sao Tomeans live in poverty.

If implemented in full, the Poverty Reduction Strategy would lift over 50,000 people out of the poverty trap and reduce the social and political pressures that are currently building up as a result of high youth unemployment.

The government of Sao Tome asked donors at a round-table conference in Brussels on 6 December for US $169 million to finance the first three years of this ambitious plan and Prime Minister Maria do Carmo Silveira came away with immediate pledges of $60 million.

The economy has gone steadily downhill since independence in 1975 as the old cocoa estates have been broken up and abandoned and the country has run up a stifling external debt of $320 million.

That is equivalent to over $20,000 per capita, making Sao Tome one of the most heavily indebted countries in the world.

Living standards have fallen – a study by the United Nations Development Programme (UNDP) estimated in 1994 that only 40 percent of the population lived below the poverty line - and the country’s infrastructure has started to fall apart.

Narrow roads, once tarred and cobbled, are now full of potholes, and a third of the airport runway on the small island of Principe is unusable since the government has no money to resurface it, meaning only small planes can land there.

This year, the increasingly dilapidated state of the country’s water supply system and public latrines has led to a resurgence of cholera.

More than 700 people have fallen ill with this highly infectious disease since the latest outbreak began in October and over 20 have died.

The small airport on Principe needs resurfacing

Democracy provides hope

But with a new International Monetary Fund (IMF) agreement in place since August, Sao Tome is set to benefit from debt relief through the Highly Indebted Poor Countries (HIPC) initiative in 2006, and western donors appear well disposed to maintain and increase the current inflow of bilateral aid.

Diplomats say that a key factor in Sao Tome’s favour is that despite rampant corruption at all levels of government, the country is at least a functioning democracy.

Elections are held regularly and no one party dominates parliament, so the government depends on a series of shifting coalitions.

There have also been three changes of president through the ballot box since multiparty democracy was introduced in 1991.

There is a strong awareness amongst senior government officials that Sao Tome cannot afford to make the same mistakes with its oil as two of its close neighbours – Angola and Equatorial Guinea.

These two states have frittered away their oil revenues on self-enrichment by the ruling elite, while little has been done to use the money for the benefit of ordinary people.

“Oil is not a solution for us,” says Adelino Castelo David, the government economist charged with raising donor money for the Poverty Reduction Strategy. “It is simply a tool which can help us if we learn to use it well.”

He speaks of using it to develop agriculture, where pepper and vanilla are now being promoted as an alternative to cocoa, tourism, which is still in its infancy, and the development of Sao Tome as a regional trade centre with a deep water port serving as an entrepot for other states in the region.

Acacio Bonfim, a former finance minister who now heads Sao Tome’s largest commercial bank, Banco Internacional de Sao Tome e Principe, agrees.

“Oil revenues must be invested in priority areas in the fight against poverty,” he said.

“Oil, in my view, is not an alternative to agriculture. Neither is it an alternative to tourism or anything else,” he added.

 Theme(s) Democracy
Other recent SAO TOME AND PRINCIPE reports:

Foreign minister resigns over diversion of foreign aid,  18/Jan/06

Foreign Minister denies pocketing Moroccan aid money,  6/Jan/06

Attorney General finds ‘serious flaws’ in the award of oil exploration contracts,  15/Dec/05

Prime minister resigns after civil servant strike, oil controversy,  3/Jun/05

Oil minister resigns as controversy dogs award of second offshore block,  18/May/05

Other recent Democracy & Governance reports:

ZIMBABWE: Mugabe delivers broadside to neighbours, 21/Feb/06

SYRIA: US funding offer for NGOs draws mixed reactions, 21/Feb/06

UGANDA: Official campaigns end two days before polls, 21/Feb/06

SOUTH AFRICA: Govt adopts more focused approach to help orphans, 21/Feb/06

ANGOLA: Ready to play larger security role in Africa, 21/Feb/06

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