The economy of São Tomé and Príncipe, while traditionally dependent on cocoa, is experiencing considerable changes due to investment in the development of its oil industry its territorial waters in the oil-rich waters of the Gulf of Guinea. In 2003, the government agreed a Joint Development Zone over the area which gives Sao Tome 40% of revenues.
Massive oil reserves
Geologists estimate that the Gulf of Guinea zone (Niger Delta province) holds more than 10 billion barrels (1.6 km³) of oil, although no reserves have yet been proved. A joint oil project with Nigeria in 2005 is likely to contribute $50 million of revenues to the government from the exploration licence signing fees. This represents four times government revenues in 2004. São Tomé is optimistic that significant petroleum discoveries under the exploration licence are forthcoming.
Government corruption has been identified as a potential threat to the development of the economy and the prospect that the oil wealth will be distributed among a very poor community. In order to combat corruption, a revenue management law was enacted in 2004. It was drafted by a team of academics from the United States' Columbia University and establishes an oversight committee of oil revenues and mandates the priority of poverty reduction, health, education and infrastructure spending.
The Joint Development Authority administering the offshore oil zone itself was rocked by a corruption scandal in 2004. The government removed two of its appointees to the authority and insisted on replacing the Nigerian chair. Later the authority issued a statement saying that it would not tolerate bribery or attempted bribery of its officials. Nigeria's history of official corruption represents a significant challenge to the authority.
American involvement has attracted its critics, accusing US oil giants and government of corruption that exceeds the worst of local officials. Because countries like Gabon and Nigeria account for as much as 15% of US crude oil imports, US companies are believed to regard the area as highly prospective. Officials of the US Government and its largest oil transnational corporations and have funded feasibility studies for a deep-water harbor necessary for oil tankers.
After lengthy negotiations, on February 1, 2005, the Nigerian and Sao Tomé governments entered into an exploration and production sharing agreement over the first of six different exploration blocs with a US dominated consortium led by ChevronTexaco with 51 % of the equity, ExxonMobil with 40 % and Dangote Energy Equity Resources, a small Nigerian and Norwegian company with the remaining 9%. The contract allows a period of eight years for exploration and up to 20 years of production. The bloc is 190 miles (306 km) north of Sao Tomé in 5,700 ft (1.7 km) of water in the Gulf of Guinea.
In 2006, the first tests in the deep-water block struck oil, but not in commercially viable quantities.
Struggling agricultural economy
These revenues arrive at a critical time for the Sao Tome economy. Cocoa production has substantially declined because of drought and mismanagement. The resulting shortage of cocoa for export has created a persistent balance-of-payments problem. São Tomé has to import all fuels, most manufactured goods, consumer goods, and a significant amount of food. Over the years, it has been unable to service its external debt and has had to depend on concessional aid and debt rescheduling. Considerable potential exists for development of a tourist industry, and the government has taken steps to expand facilities in recent years. The government also has attempted to reduce price controls and subsidies, but economic growth has remained sluggish.
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