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Oil Revenue Law Implementation

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  1. 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

  2. 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)

  3. Petroleum Oversight Commissionoversees compliance with Oil Revenue Law regarding:

  4. 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))

  5. 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.

  6. 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.

  7. 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)

  8. 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).

  9. Annual Funding Amount from 2006 → one year after Production Commencement $40 million signature bonus arrives (production date unknown)

  10. 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)

  11. Annual Funding Amount from 2006 → one year after Production Commencement Second $40 million signature bonus arrives in 2009 (production date unknown)

  12. 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)

  13. 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)

  14. Annual Funding Amount from 2006 → one year after Production Commencement Second $40 million signature bonus arrives in 2009 (production date announced to be 2012)

  15. 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)

  16. 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)).

  17. 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.

  18. Annual Funding Amount Beginning the second year after production commencement This is the Expected Present Value of Future Oil Revenues in 2013.

  19. 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)

  20. 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.

  21. 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)).

  22. 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)).

  23. 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)).

  24. 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)).

  25. 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)).

  26. 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)).

  27. 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)).

  28. 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.

  29. 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.

  30. 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.

  31. 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.

  32. 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)

  33. 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)

  34. 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.

  35. 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))

  36. Petroleum Oversight Commissionoversees compliance with Oil Revenue Law regarding: