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São Tomé Oil Revenue Law Implementation Earth Institute Oil Advisory Group Columbia University Mr. Joseph C. Bell, jcbell@hhlaw.com Ms. Teresa M. Faria, tmfaria@hhlaw.com Prof. Macartan Humphreys, mh2245@columbia.edu Prof. Peter Rosenblum, prosen@law.columbia.edu

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slide1

São Tomé

Oil Revenue Law Implementation

Earth Institute Oil Advisory Group

Columbia University

Mr. Joseph C. Bell, jcbell@hhlaw.com

Ms. Teresa M. Faria, tmfaria@hhlaw.com

Prof. Macartan Humphreys, mh2245@columbia.edu

Prof. Peter Rosenblum, prosen@law.columbia.edu

Dr. Martin E. Sandbu, ms2675@columbia.edu

Created by Ms. Marti Flacks, maf2103@columbia.edu

And Ms. Kim Lehmkuhl, kbl2102@columbia.edu

definitions
Definitions

National Oil Account: Account established by the Sãotomean Central Bank in an overseas custody bank to receive and hold all oil revenues. Art. 1.1(n)

Annual Funding Amount (AFA): Amount of oil revenue transferred from the National Oil Account to the public Treasury Account(s) in São Tomé pursuant to the state general budget every year. Art. 1.1(uu)

Treasury Account: Any account established by the Treasury Department in the Central Bank. Art. 1.1(m)

Permanent Fund: A sub-account of the National Oil Account containing funds not allocated to the Annual Funding Amount, used for investment. Art. 1.1(r)

Oil Accounts: The National Oil Account and the Permanent Fund. Art. 1.1(l)

public registration and information office keeps and makes publicly available all information on
Public Registration and Information Officekeeps and makes publicly available all information on:

Payments, receipts,

management, debit

and credit transactions,

and balances of Oil

Accounts (Art. 17.2(a))

National Petroleum

Agency forecast

of oil revenues

(Art. 17.2(e))

Petroleum

Oversight

Commission

annual report

(Art. 17.2(i))

Agreement between

Central Bank, Custody

Bank for opening

and managing Oil

Accounts (Art. 17.2(b))

Any liens and

encumbrances on

the Oil Accounts

permitted under

Article 2.4 (Art. 17.2(f))

State General Budget,

JDA Budget, and any

other budgets receiving

funds from Annual

Funding Amount

(Art. 17.2(j))

Distribution of

revenues from oil

activity in JDZ

(Art. 17.2(c))

Auditor General’s

and auditing

firm’s reports and

related documents

(Art. 17.2(g))

All contracts

concerning

activities related

to oil resources or

revenues (Art. 17.2(k))

Operation Rules of

Oil Accounts and

any amendments

(Art. 17.2(d))

Investment Policy

concerning the

Oil Accounts

(Art. 17.2(h))

Article 30 conflict

matters and any related

lawsuits and sanctions

(Art. 17.2(l))

national oil account and permanent fund oil accounts are created by
National Oil Account and Permanent Fund (“Oil Accounts”) are created by:

Government

selects

Custody Bank

according to

criteria in

the ORL

(Art. 3.1,

1.1(h))

Central Bank

reaches

agreement

with Custody

Bank to

establish

Oil Accounts

(Art. 3.1)

Central Bank

prepares

Operation

Rules for

Oil Accounts

for the Gov’t

(Art. 5.2)

Gov’t submits

proposed

Rules to

National

Assembly

for approval

by statute

(Art. 5.2)

Central Bank

sends

approved

Rules to

Custody

Bank

(Art. 3.2)

National

Oil

Account

operational

blue outline = information that must be turned

over to the Information Office

The Government is responsible for selecting an overseas Custody Bank that meets the criteria in the ORL. The Central Bank is responsible for setting up the Oil Accounts in the Custody Bank and drafting Operation Rules for those Accounts, which must be approved by the Government and then the National Assembly. Once the Custody Bank receives the Operation Rules, the National Oil Account and Permanent Fund sub-account are created.

oil contracts are approved signed and executed
Oil Contractsare approved, signed and executed:

Public competitive

tender pursuant to

general law (Art. 22.1)

Potential oil

contract under

consideration

Oil contract

made public

(Art. 22.3)

After 10 or

more days,

oil contract

is executed

(Art. 22.3)

Payment deposited

directly into

National Oil

Account (Art. 6.2)

OR

If no applicable

law, POC approves

contract (Art. 22.2)

All oil contracts must be approved either via a public competitive tender process pursuant to general law or by the Petroleum Oversight Commission if no such law exists. Once the contract is approved and executed, payment from the company is made directly to the National Oil Account in the overseas Custody Bank. The oil contract itself must be made public at least 10 days before execution.

flow of revenues out of the national oil account
Flow of Revenuesout of the National Oil Account:

State General

Budget (including

Annual Funding Amt.)

approved by National

Assembly (Art. 8.2)

Four signatures

required to

withdraw funds

(Art. 5.3(a)-(d))

Money wired to public

Treasury Account(s) in

Sao Tome (established

by Treasury Dept.)

(Art. 5.4)

AND

Revenues held in

National Oil

Account (Art. 6.2)

Proposal for AFA

allocation (with

explanatory report)

approved (Art. 9.7)

AND

Balance after Annual

Funding Amount and

service fees transfers

to “Permanent Fund”

sub-account (Art. 10.2)

Once oil revenues are deposited into the National Oil Account, transfers are prohibited until the National Assembly passes a General State Budget specifying the Annual Funding Amount to be withdrawn for that year. Four signatures are required to transfer the funds, which must be sent directly and electronically to public Sãotomean Treasury Account(s). Revenues remaining in the National Oil Account are eventually consolidated in the Permanent Fund, and their subsequent investment is monitored by the Management and Investment Committee. The flow of funds to and from the Oil Accounts is audited annually by both the Auditor General and an international auditing firm selected by the Petroleum Oversight Commission.

Management and

Investment Committee

ensures prudent

management and

investment (Art. 11)

slide8

Annual Funding Amount

from 2006 → one year after Production Commencement

Can choose greatest of three:

  • 20% of balance of National Oil Account on December 31, 2005 (Art. 8.3(a)(I))
  • 20% of the total estimated balance of the National Oil Account at the end of previous year (Art. 8.3(a)(II))
  • After the announcement of commercial hydrocarbon discovery and assurance of production, an amount equal to the total forecast balance for the National Oil Account at the end of the immediately preceding year divided by the number of years remaining until the end of the first year after production commencement (Art. 8.3(a)(III).
slide9

Annual Funding Amount

from 2006 → one year after Production Commencement

$40 million signature bonus arrives (production date unknown)

slide10

Annual Funding Amount

from 2006 → one year after Production Commencement

$40 million signature bonus arrives (production date unknown)

?

Annual Funding Amount determined by:

Option 1 (20% of 2005 NOA balance)

slide11

Annual Funding Amount

from 2006 → one year after Production Commencement

Second $40 million signature bonus arrives in 2009 (production date unknown)

slide12

Annual Funding Amount

from 2006 → one year after Production Commencement

Second $40 million signature bonus arrives in 2009 (production date unknown)

This is more than 20% of the 2005 balance would be

Annual Funding Amount for 2010, 2011 determined by:

Option 2 (20% of previous year’s NOA balance)

slide13

Annual Funding Amount

from 2006 → one year after Production Commencement

Second $40 million signature bonus arrives in 2009 (production date unknown)

?

Annual Funding Amount for 2012-2014 determined by:

Option 1 (20% of 2005 NOA Balance)

slide14

Annual Funding Amount

from 2006 → one year after Production Commencement

Second $40 million signature bonus arrives in 2009 (production date announced to be 2012)

slide15

Annual Funding Amount

from 2006 → one year after Production Commencement

Second $40 million signature bonus arrives in 2009 (production date announced to be 2012)

These are more than 20% of any balance because production is less than 5 years away

Annual Funding Amount determined by:

Option 3 (balance of NOA divided by years before production commencement)

slide16

Annual Funding Amount

Beginning the second year after production commencement

Must choose lesser of two:

  • The sum of:
  • The Long Term Real Rate of Return multiplied by the balance of the Permanent Fund on June 30 of the previous year, and
  • The Long Term Real Rate of Return multiplied by the Expected Present Value of Future Oil Revenues on June 30 of the previous year (Art. 8.3(b)(I)).
  • 2. The sum of:
  • The Long Term Real Rate of Return multiplied by the balance of the Permanent Fund on June 30 of the previous year, and
  • The balance of the unrestricted part of the National Oil Account on June 30 of the previous year (Art. 8.3(b)(II)).
slide17

Annual Funding Amount

Beginning the second year after production commencement

The first part of the calculation is the same for both options (we will return to this in a moment)

To calculate and compare the second half of each option:

These are the Oil Revenues that come in every year once production starts.

slide18

Annual Funding Amount

Beginning the second year after production commencement

This is the Expected Present Value of Future Oil Revenues in 2013.

slide19

Annual Funding Amount

Beginning the second year after production commencement

This is the Expected Present Value of Future Oil Revenues in 2014. It is slightly less than in 2013 because some of the oil wealth in the ground has been removed (and turned into Oil Revenues)

slide20

Annual Funding Amount

Beginning the second year after production commencement

As the years go by and more oil is produced and turned into revenues, the Expected Present Value of Future Oil Revenues decreases.

slide21

Annual Funding Amount

Beginning the second year after production commencement

The Oil Revenue Law allows the equivalent of up to 5% of the Expected Present Value of Future Oil Revenues to be spent each year. This is the interest that accrues (Long Term Real Rate of Return) on the Expected Present Value (Art. 8.3(b)(I)).

slide22

Annual Funding Amount

Beginning the second year after production commencement

The Oil Revenue Law allows the equivalent of up to 5% of the Expected Present Value of Future Oil Revenues to be spent each year. This is the interest that accrues (Long Term Real Rate of Return) on the Expected Present Value (Art. 8.3(b)(I)).

slide23

Annual Funding Amount

Beginning the second year after production commencement

Year 2013: The 5% is more than the Oil Revenues for that particular year.

The full 5% cannot be spent, because the money has not come in yet. Only the balance of the National Oil Account (i.e., the Oil Revenues for that year) can be spent.

Annual Funding Amount determined by:

Option 2 (balance of National Oil Account) (Art. 8.3(b)(II)).

slide24

Annual Funding Amount

Beginning the second year after production commencement

Year 2014 and beyond: The 5% is less than the Oil Revenues for that particular year. Therefore up to 5% can be spent.

Annual Funding Amount determined by:

Option 1 (interest on Expected Present Value) (Art. 8.3(b)(I)).

slide25

Annual Funding Amount

Beginning the second year after production commencement

Year 2014 and beyond: The 5% is less than the Oil Revenues for that particular year. Therefore up to 5% can be spent.

The remainder is saved and transferred to the Permanent Fund.

Annual Funding Amount determined by:

Option 1 (interest on Expected Present Value) (Art. 8.3(b)(I)).

slide26

Annual Funding Amount

Beginning the second year after production commencement

Year 2014 and beyond: The 5% is less than the Oil Revenues for that particular year. Therefore up to 5% can be spent.

The remainder is saved and transferred to the Permanent Fund.

Annual Funding Amount determined by:

Option 1 (interest on Expected Present Value) (Art. 8.3(b)(I)).

slide27

Annual Funding Amount

Beginning the second year after production commencement

Year 2014 and beyond: The 5% is less than the Oil Revenues for that particular year. Therefore up to 5% can be spent.

The remainder is saved and transferred to the Permanent Fund.

Annual Funding Amount determined by:

Option 1 (interest on Expected Present Value) (Art. 8.3(b)(I)).

slide28

Annual Funding Amount

Beginning the second year after production commencement

As the years go by, the amount in the Permanent Fund increases because once money goes in each year, it is not spent. This shows the money accumulated in the Permanent Fund.

slide29

Annual Funding Amount

Beginning the second year after production commencement

In any scenario, up to 5% of the balance of the Permanent Fund can also be spent each year.

slide30

Annual Funding Amount

Beginning the second year after production commencement

In any scenario, up to 5% of the balance of the Permanent Fund can also be spent each year.

slide31

Annual Funding Amount

Beginning the second year after production commencement

Thus in any year, the Annual Funding Amount will be the total of 5% of the Permanent Fund + either 5% of the Expected Present Value or the balance of the National Oil Account, whichever is smaller.

slide32

Annual Funding Amount

Beginning the second year after production commencement

Because the balance of the Permanent Fund increases at the same rate that the Expected Present Value decreases, this allows for a consistent Annual Funding Amount for each year.

POC checks if

calculations were

done according

to ORL (Art. 7.3)

National Petroleum Agency calculates

and makes public expected average price

of oil, expected future sales of hydro-

carbons, and Expected Present Value of

Future Oil Revenues (Art. 7.1)

flow of revenues out of the national oil account33
Flow of Revenuesout of the National Oil Account:

Petroleum

Oversight

Commission

State General

Budget (including

Annual Funding Amt.)

approved by National

Assembly (Art. 8.2)

Four signatures

required to

withdraw funds

(Art. 5.3(a)-(d))

Money wired to public

Treasury Account(s) in

Sao Tome (established

by Treasury Dept.)

(Art. 5.4)

AND

Revenues held in

National Oil

Account (Art. 6.2)

Proposal for AFA

allocation (with

explanatory report)

approved (Art. 9.7)

AND

Balance after Annual

Funding Amount and

service fees transfers

to “Permanent Fund”

sub-account (Art. 10.2)

Petroleum

Oversight Commission

selects auditing firm

(Art. 15.1)

Once oil revenues are deposited into the National Oil Account, transfers are prohibited until the National Assembly passes a General State Budget specifying the Annual Funding Amount to be withdrawn for that year. Four signatures are required to transfer the funds, which must be sent directly and electronically to public Sãotomean Treasury Account(s). Revenues remaining in the National Oil Account are eventually consolidated in the Permanent Fund, and their subsequent investment is monitored by the Management and Investment Committee. The flow of funds to and from the Oil Accounts is audited annually by both the Auditor General and an international auditing firm selected by the Petroleum Oversight Commission.

International auditing firm

audits management, flow

of funds to and from Oil

Accounts (Art. 14.1)

Management and

Investment Committee

ensures prudent

management and

investment (Art. 11)

AND

Auditor General

audits management, flow

of funds to and from Oil

Accounts (Art. 14.1)

flow of revenues into and within s o tom
Flow of Revenuesinto and within São Tomé:

Allocation pursuant to

national, regional, or local

development plans and

a national poverty red-

uction strategy (Art. 9.2)

Not less than 7%

of Annual Funding

Amount for Príncipe

(Art. 9.4)

Annual Funding

Amount arrives in

Treasury Account(s)

in São Tomé

Central Bank (Art. 5.4)

Allocation

pursuant

to State General

Budget

OR

AND

Funds go to priority

sectors: education,

health, infrastructure,

rural development,

State institutional

capacity (Art. 9.3)

Not less than

10% of Annual

Funding Amount

for local govern-

ments (Art. 9.5)

Once the Annual Funding Amount is transferred to the public Treasury Account(s) in São Tomé, it must be used in accordance with national, regional, or local development plans and a national poverty reduction strategy. If neither is in place, the Government shall propose a distribution amongst the priority sectors listed in the ORL, which must be approved by the National Assembly. In any event, no less than 7% of the Annual Funding Amount must go to Príncipe, and no less than 10% to the State share of local budgets.

slide35

Public Registration and Information Officekeeps and makes publicly available all information on:

Petroleum

Oversight

Commission

Payments, receipts,

management, debit

and credit transactions,

and balances of Oil

Accounts (Art. 17.2(a))

National Petroleum

Agency forecast

of oil revenues

(Art. 17.2(e))

Petroleum

Oversight

Commission

annual report

(Art. 17.2(i))

Agreement between

Central Bank, Custody

Bank for opening

and managing Oil

Accounts (Art. 17.2(b))

Any liens and

encumbrances on

the Oil Accounts

permitted under

Article 2.4 (Art. 17.2(f))

State General Budget,

JDA Budget, and any

other budgets receiving

funds from Annual

Funding Amount

(Art. 17.2(j))

Distribution of

revenues from oil

activity in JDZ

(Art. 17.2(c))

Auditor General’s

and auditing

firm’s reports and

related documents

(Art. 17.2(g))

All contracts

concerning

activities related

to oil resources or

revenues (Art. 17.2(k))

Operation Rules of

Oil Accounts and

any amendments

(Art. 17.2(d))

Investment Policy

concerning the

Oil Accounts

(Art. 17.2(h))

Article 30 conflict

matters and any related

lawsuits and sanctions

(Art. 17.2(l))