Oil money begins to flow in: after years of discussion and delay, the tiny Gulf of Guinea state of Sao Tome and Principe is to receive the first, very substantial income from its nascent oil industry. Neil Ford reports on the likely impact

African Business, June, 2005 by Neil Ford

Although exploration drilling has not yet begun and any actual production remains years away, a consortium led by ChevronTexaco and ExxonMobil has paid a $123m signature bonus on the production sharing agreement (PSA) for Block 1 in the joint development zone (JDZ) between Nigeria and Sao Tome and Principe.

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Sao Tome's $49.4m share of the bonus, which is being paid during the course of this year, will have a massive impact in a country with GDP of just $40m.

Such an injection of money has the potential to have either a dramatic positive or negative effect on the tiny country.

Sao Tome is currently coping with a poorly performing economy and is struggling with a debt of over $300m--a huge amount for such a small economy and one of the highest debt per capita ratios in Africa.

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The economy is dominated by agriculture and, as in many small tropical countries, fluctuating commodity prices translate into an unstable economy. At the same time, land exhaustion is resulting in falling yields and, together with a lack of job prospects in the country as a whole, has led to large scale emigration. Aside from the oil sector, there seems little potential for other engines of growth to emerge.

On the other hand, the injection of large revenues into a micro state like Sao Tome and Principe could have a hugely destabilising effect upon almost all aspects of life in the country.

Political life on the islands is dominated by a network of allegiances centred on individuals or particular families. The struggle for control has led to unstable government since independence with presidents vying for control with parliament and cabinets being dismissed on a regular basis. Adding millions of dollars of oil income to the mix, with the prospect of much more to come, is almost bound to intensify the struggle for power, as few politicians will wish to miss out on what are being perceived as Sao Tome's boom years.

As in neighbouring Equatorial Guinea, the prospect of large oil revenues triggered a coup attempt. In July 2003, a section of the army led by the head of the military training school, Fernando Pereira, seized control while President Fradique de Menezes was in Nigeria.

The coup was short lived and de Menezes returned to power just a week later, as a result of international pressure for the coup leaders to back down. However, the incident was symptomatic of the wider instability afflicting Sao Tome's political life.

Former president Miguel Trovoada went through six prime ministers in eight years, while current President de Menezes has sacked five since his election in July 2001, as rival factions have vied for power. The most recent government was formed in September 2004.

Most recently, many leading politicians, including former prime ministers Guilherme Posser da Costa and Maria das Neves de Sousa have been called in for questioning by the Auditoria e Inspeccao das Financas (AIF).

The organisation is investigating claims that irregular payments have been made to hundreds of people by the body in charge of distributing development money in the country, Gabinete de Gestao da Ajuda (GGA).

It is difficult to assess whether there is any substance to the claims, or whether the allegations have been made by rivals for political advantage.

Limits of reserves remain unknown

Sao Tome's deepwater acreage has long been considered prospective but little exploration work was carried out because of a combination of uncertain sovereignty and the expense of deepwater drilling and production.

However, improved production techniques have led to a huge fall in the cost of deepwater drilling over the past decade and so deepwater production costs have become manageable.

At the same time, long-term oil price forecasts have risen and global oil reserves are being eroded more quickly than they are being replaced by new discoveries. As a result, interest has grown in relatively unexplored deepwater areas.

Despite a diplomatic offensive by President Olusegun Obasanjo of Nigeria to resolve the many boundary disputes that were holding back oil exploration in the Gulf of Guinea when he came to power, Lagos and Sao Tome were unable to delimit their common maritime boundary.

As an interim measure, however, the two governments agreed to set up the JDZ over the central part of their maritime borderlands in order to allow exploration to begin.

Any oil or gas revenues from the zone are to be divided 60:40 in favour of Nigeria over the lifespan of the JDZ. Under the current agreement, the zone is to be managed by the Lagos-based JDZ authority for the next 45 years.

As a result of the lack of exploration work, it is almost impossible to put a figure on the size of likely discoveries. US giant ExxonMobil has undertaken a preliminary assessment of the area in the past and estimated probable reserves at 8bn barrels, but the eventual figure could be a great deal higher than that, or, indeed, there could be nothing at all. Norwegian firm Petroleum GeoServices (PGS) carried out a 3-D seismic survey of large parts of the zone and a licensing round was launched.