Oil and gas pays for more than 95% of Timor-Leste state revenues and comprises nearly four-fifths of the country's GDP, although the share is declining as oil revenues drop. Income from exporting non-renewable petroleum wealth is channeled through a Petroleum Fund which contains nearly US$17 billion. Many expect that the Fund’s balance and investment earnings will pay for state activities after the oil and gas fields are exhausted, which could be by 2020 if the Greater Sunrise project remains stalled. Unfortunately, the Petroleum Fund may be empty five years after that.
This paper describes a model to estimate how long the Petroleum Fund will be able to finance state activities. The model incorporates historical and projected data, including recurrent and capital spending, domestic revenue, loans and repayments, petroleum income and return on Petroleum Fund investments. It allows changes to these parameters as well as to anticipated oil market prices, interest rates and Sunrise development options.
La’o Hamutuk has developed a model to estimate how long the Petroleum Fund can finance state activities. The model incorporates historical and projected data, including recurrent and capital spending, domestic revenues, loans and repayment, petroleum income, and return on Petroleum Fund investment. It allows changes to these parameters as well as to anticipated oil market prices, interest rates and Sunrise development options.
The model was developed in July 2013, based on the approved 2013 General State Budget, and revised in January 2014 based on lower Bayu-Undan revenue forecasts and the slower growth of the 2014 State Budget. The 2014 budget also removes funding for the South Coast Highway, reduces outlays for the Suai Supply base and adds spending to build Dili airport and Tibar port. The new information shows that Timor-Leste will run out of money three years sooner than the earlier version predicted. The latest version, done in May 2015, includes updated oil price and 2015 budget information, the results are unchanged. During the last fifteen months, the slower escalation of state spending has helped, but the drop in expected oil revenues from lower global oil prices and production has cancelled out the benefits.
The prospect that the Petroleum Fund could be gone in a decade underscores the urgency to develop Timor-Leste’s non-oil economy, increase domestic revenue and use public funds wisely.
The three graphs below describe a Base Case scenario which continues recent history with a few plausible improvements. It is not prudent enough for planning purposes, but is an optimistic reference to compare with other scenarios.
Click any image to see it larger
|The graph at left is a "Prudent scenario," using assumptions which are conservative enough to serve as a basis for planning, similar to those the Ministry of Finance uses to calculate the Estimated Sustainable Income. It assumes that the Sunrise project remains stalled, that the Petroleum Fund earns 4% annual interest, and that several megaprojects are scaled back.|
In this case, the Petroleum Fund runs out in 2024, and from 2025 on Timor-Leste can afford to pay for only 7% of budgeted state expenditures, resulting in drastic cuts.
|The graph at left summarizes an updated version of the "Almost Sustainable" scenario described in the 2014 paper (also Tetum), which could allow enough time to develop the non-oil economy and for domestic revenues to replace oil income. It will require wise budgeting and stringent discipline.|
That paper also discusses Prudent and Foolhardy scenarios, and explores the effects of changes in the oil market, Sunrise development, state expenditures and revenues, and other options. You can download the spreadsheet from the 2014 version of this model and try your own assumptions on the "assume" worksheet. Most cells are locked to prevent accidental changes, but no password is required. We will upload a more recent version of the spreadsheet in coming months.