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RDTL State Budget for 2009 as proposed to Parliament

Part 6: Revenue

Based on English version of RDTL Ministry of Finance draft budget document dated 9 December.
Formatted, links and comments added, and typos corrected by La'o Hamutuk.

9 December 2008

La'o Hamutuk reference page on 2009 State Budget

La'o Hamutuk submission on 2009 State Budget

La'o Hamutuk Bulletin on the 2008 mid-year budget and its implications for the future

Letter from Prime Minister explaining why the Estimated Sustainable Income is not enough (also Portuguese)

Letter from auditor Deloitte attesting to ESI calculation and describing future implications (also Portuguese)

La'o Hamutuk analysis of the prudence and sustainability of the calculation of the Estimated Sustainable Income (also Tetum)

Total Revenue

Total revenue in 2009 is estimated to be $1.35 billion, and is comprised of:

  • petroleum revenues (including interest from the petroleum fund)
  • domestic taxes;
  • user fees and charges;
  • interest earned on cash balances of the State;
  • fees charged by the autonomous agencies.

2008 is expected to be a very good year in terms of total revenue due to the unexpected increase in oil revenues resulting from the increased price of oil. Given the recent sharp decline in oil price, total revenue for 2009 is expected to fall by $1.21 billion relative to the high levels of estimated revenue collections in 2008 Total petroleum revenue is estimated to fall from an estimated total of $2.51 billion in 2008 to 1.25 billion in 2009. Non petroleum revenue is estimated to increase from an estimated total of $59 million in 2008 to $90 million in 2009.

Table 6.1
Total Revenue 2007 to 2012 ($m)

 

2008 Estimate

2009 Budget

2010 Projection

2011 Projection

2012 Projection

Total 4 Years

Total Revenue

2,568.9

1,349.1

1,314.3

1,492.2

1,465.9

5,621.5

Petroleum Revenue

2,510.4

1,253.1

1,260.2

1,427.8

1,387.5

5,328.6

Domestic Taxes

36.3

49.2

34.5

40.7

48.0

172.4

User Fees and Charges

11.1

36.5

6.9

7.5

8.0

58.9

Interest

4.0

3.5

3.5

3.5

3.5

14.0

Autonomous Agencies

7.1

6.9

9.2

12.8

18.8

47.7

Direct Budget Support

-

-

-

-

-

-

Petroleum Revenue

Currently there is only one field in operation in the Joint Petroleum Development Area (JPDA), Bayu-Undan. This field is still in its early stage of production. It is expected that it will continue to generate revenue for the State of Timor-Leste until 2023.

Actual production in 2007 was 58.2 million barrels of oil equivalents, while production in 2008 is expected to be 64.3 million barrels of oil equivalents. Peak production is expected to occur in 2008. The latest estimated production schedules are provided in Table 6.6. Since Bayu-Undan is the only field currently in operation, production volume is based on the Operator's Low Production Case, in order to take into account the significant risk related to the petroleum sector. The Low Production Case is similar to projections provided in Budget 2008 and Budget Review 2008.

The production schedules will be reviewed when development plans for other fields are approved and final investment decisions made. Estimation of budget revenue flows will then be revised accordingly. Chart 6.1 shows the historical nominal oil price. The straighter line illustrates the oil price projection used in the calculation of Petroleum Wealth and Estimated Sustainable Income for the Financial Year 2009.

Chart 6.1
Historical Changes in World Oil Price WTI Basis ($ Per Barrel)

The daily average oil price of West Texas Intermediate (WTI) in 2008 for the period from 1 January to 31 October 2008 was $110 per barrel. The average daily oil price in 2006 and 2007 was $66 and $72 per barrel respectively. The daily oil price peaked at $145 per barrel in July 2008, but has since dropped to under $60 per barrel at the time of writing (LH: late October). This corresponds to a decline of more than 50%. The higher oil price volatility increases uncertainty about the future oil price level. Chart 6.2 illustrates the volatility in the oil price during 2008.

Chart 6.2
Changes in World Oil Price WTI Basis ($ Per Barrel) in 2008

 

 

La'o Hamutuk comment

By early 2009, world market prices for oil had dropped below $40/barrel and were continuing to fall. Click here for a graph of recent price changes.

Petroleum Fund

Petroleum revenue in 2008, excluding the return on Petroleum Fund investments, is estimated to be $2,361 million. The forecast is based on a combination of actual revenue received into the Petroleum Fund up to the end of October, plus a forecast for the remaining months of 2008. The revenue forecast for 2009 is $1,163 million. This substantial reduction is due to the reduction in both prices and volume compared to 2008.

The total return on Petroleum Fund investments in 2008 is estimated to be $164.2 million, of this amount an estimated $148.9 million will be in the form of interest payments, and $15.3 million is the change in value of the Fund. The net return from 1 January to 30 September 2008 was $93.8 million. Table 6.2 shows the petroleum revenues and interest deposited into the Petroleum Fund.

Table 6.2
Estimated Petroleum Revenue 2007 to 2012 ($m)

 

2008 Estimate

2009
Budget

2010 Projection

2011 Projection

2012 Projection

Total 4 Years

Total Petroleum Revenue

2,510

1,253

1,260

1,428

1,388

5,329

Royalties

171

106

94

95

89

384

Profit oil

1,239

635

530

658

630

2,454

Income Tax

378

179

233

201

186

799

Additional Profit Tax

549

218

218

265

244

945

Value Added Tax

6

6

8

5

5

25

Wages Tax

5

5

5

5

5

20

Pipeline Payments

5

5

5

5

5

21

Other Payments

0

0

0

0

0

1

Withholding Tax

8

8

11

8

8

34

Petroleum Fund Interest

149

90

157

185

215

664

The annual return for the 12 months to September 2008 on Petroleum Fund investments was 6.3%. 2008 witnessed a global financial crisis. The US interest rates declined during 2007 and 2008, which raised bond prices and hence the value of the Petroleum Fund's assets. As a result US Government bonds have therefore been a safe haven for investments during the last year of extremely turbulent markets. This led to a relatively high return on the investments for Timor-Leste Petroleum Fund. The return on the investments since the inception of the Fund has been 5.2%. Chart 6.3 shows the recent changes in the 0-5 years US Government yield curve.

Chart 6.3
US Government 0-5 years yield curves3


3 Source: Federal Reserve (http://www.federalreserve.gov)

 

La'o Hamutuk comment

In mid January, the Banking and Payments Authority published its balance sheet for 31 December 2008, showing an end-of-year balance in the Petroleum Fund of $4,196,971,733, $18 million less than the budget document anticipated. This reduces the Estimated Sustainable Income for 2009 by $540,000.

The balance of the Petroleum Fund as at 30 September 2008 was $3,738.4 million. This is an increase of $1,652.2 million during the financial year. By the end of 2008 the balance is expected to be $4,215 million, after a total withdrawal from the Petroleum Fund in 2008 of $396 million, opposed to the originally estimated figure of $3,116 in Budget 2008. The withdrawal is equivalent to the Estimated Sustainable Income for 2008. The Fund is expected to increase steadily in the medium term. The current forecast, as shown in Table 6.3, shows the total value of the Fund to be $4,876 million by the end of 2009 and $7,743 million by the end of 2012.

Table 6.3
Estimated Petroleum Fund Savings 2007 to 2012 ($m)

 

2007 Actual

2008 Estimate

2009 Budget

2010 Projection

2011 Projection

2012 Projection

Opening Balance

1,394

2,086

4,215

4,876

5,733

6,758

Petroleum Revenue

640

2,361

1,163

1,103

1,243

1,173

Interest

33

149

90

157

185

215

Change in Value of the Fund

60

15

-

-

-

-

BPA Management Fee

1

1

2

2

2

2

Withdrawal

40

396

589

401

401

400

Closing Balance

2,086

4,215

4,876

5,733

6,758

7,743

Petroleum Revenues, Wealth and Sustainable Income

Total Petroleum Wealth, which comprises the balance of the Fund plus the net present value of future petroleum revenue, is estimated to be $13,595 million as of 1 January 2009. The estimated Petroleum Wealth has increased by $3,784 million and $392 million compared to the calculations provided in the Budget 2008 and Mid Year Review 2008 respectively.

Several factors have affected the estimation of Petroleum Wealth, which has increased since the mid year review of the 2008 budget. These include:

  • changes to assumptions underlying the renegotiation of the contract between the Operator of the Bayu-Undan field (ConocoPhillips) and the Buyer of Liquefied Natural Gas (LNG) (Tokyo Gas/Tokyo Electrics) which have resulted in greater than expected revenues;

  • increased operational and capital costs associated with the Bayu-Undan project, as a result of global cost increases in the petroleum industry; and

  • the oil price projection for 2009 and onward is lower than forecast in the Mid Year Review 2008 resulting in lower expected revenues, this however has been offset by the actually higher than expected oil price in 2008 and a reduction in the discount rate and other minor technical adjustments.

The magnitude of various factors affecting the Estimated Sustainable Income is illustrated in Chart 6.4.

Chart 6.4
Changes in the Estimated Sustainable Income (from MY 2008 to Budget 2009)

According to the Petroleum Fund Law the Estimated Sustainable Income (ESI) shall be 3% of the Petroleum Wealth. Correspondingly, the Estimated Sustainable Income for the Fiscal Year 2009 is estimated at $408 million as shown in Table 6.4. This is an increase of $114 million and $12 million compared to the ESI for 2008 provided in the Budget 2008 and Mid Term Review 2008 respectively.

Table 6.4
Estimated Sustainable Income as of 1 January 2009 ($m)

Petroleum Fund balance
    + Net Present Value of future revenues

4,215
9,379

Total Petroleum Wealth (PW)13,595
Estimated Sustainable Income (PWx3%)407.8
 

La'o Hamutuk comment

Click here for a graph showing oil prices from June 2002 to early March 2009. They are below $40/barrel, far less than the $60/barrel used to calculate the ESI.

Estimates of future oil prices used in the calculation of total petroleum wealth are lower than current market prices. It should be noted, however, that calculations are based on prices that are significantly higher than seen only a few years ago, and that oil prices have displayed considerable volatility over time.

Chart 6.5 and Table 6.5 illustrate the long term level of Estimated Sustainable Income and petroleum revenue to be received up until 2023 and withdrawals from the Petroleum Fund from 2007 to 2012.

Chart 6.5
Timor-Leste Petroleum Revenue and Sustainable Income 2002 to 2023 (nominal prices)

Table 6.5
Sustainable Income from the Petroleum Fund 2007 to 2012 ($m)

 

2007 Actual

2008 Estimate

2009 Budget

2010 Projection

2011 Projection

2012 Projection

Sustainable Revenue

133.0

396.0

407.8

401

401

400

Actual Withdrawal from Petroleum Fund

40.0

396.0

589.0

401

401

400

Financing Requirement of the Budget

5.4

81.0

643.2

704.3

660.6

485.0

Review of Methodology

 

La'o Hamutuk comment

The ESI is not literally "sustainable" given Timor-Leste's rapidly growing population. It also depends heavily on assumptions about future oil production, oil prices, and interest rates. Click here to see the effects of some alternative assumptions.

The ESI is, according to the Petroleum Fund Law, the maximum amount that can be appropriated from the Petroleum Fund in a financial year while leaving sufficient resources to appropriate an amount of equal real value in subsequent years. This means that the ESI is a benchmark indicating the sustainable level of withdrawal from the Petroleum Fund that does not reduce the real value of Timor-Leste's total petroleum wealth in the long-term.

The Petroleum Fund Law requires that all assumptions underlying the calculation of the ESI be prudent, reflecting international best practice and be based upon internationally recognized standards. As the petroleum wealth calculation includes expected future revenue from petroleum resources still under the seabed in Timor Sea, projections of future production and prices have to be made and the revenues discounted back to 2008 prices.

 

La'o Hamutuk comment

ENI estimates that Kitan contains 30-40 million recoverable barrels of oil, approximately one-thirtieth as much petroleum as was in the Bayu-Undan reserve before production started. If these estimates are correct, Kitan will increase the ESI by less than $15 million/year.

The future prospect looks bright for Timor-Leste. Bayu-Undan field continues to produce as projected, and new and potential discoveries have been identified in the JPDA and in the Timor-Leste sovereign off-shore area. The recently discovered Kitan has been declared commercial viable by ENI and is expected to come on stream by 2010.

In fact, Timor-Leste is expecting to receive Kitan's first development plan sometime in March/April next year. Once the Plan is approved and ENI has made their final investment decision, revenues from such field can be included in the calculation of the Petroleum Wealth thus further increasing the estimated petroleum wealth.

On the Greater Sunrise field the Government is seriously pursuing the option of bringing the pipeline and LNG plant to Timor-Leste. Once this is realised additional revenues from downstream operations will flow into the Petroleum Fund in addition to revenues from upstream activities.

Discounting principles

The Petroleum Fund Law stipulates that the discount rate used for calculating the present value of the future cash flow from the petroleum sector be the nominal yield on a US Government security averaged over the years, in which the Petroleum Fund receipts are expected. At the time of writing, this equated to a discount rate of 3.0%, which is the value used in the present calculations.

Production projections

The yield on US Government securities may be considered risk-free. Using a risk free interest rate when calculating the present value of future revenue has implications for the assumptions used, when estimating cash flow. There should be a substantial likelihood that the cash flow will materialize. The operator, ConocoPhillips, has provided three production scenarios, "high", "expected" and "low" production, based on different assumptions of the total petroleum resources available at Bayu Undan. The State Budget estimates production on the basis of the operator's "low" estimate, which reflects a 90% likelihood that predicted production levels will be achieved. This is considered to be in accordance with the prudent requirements in the Petroleum Fund Law.

Oil price assumptions

 

La'o Hamutuk comment

The EIA Annual Energy Outlook is available at http://www.eia.doe.gov/oiaf/aeo/index.html

Previously, the methodology for projecting future oil prices has been based on the “Low Price Case" of imported crude oil prices forecast by the US Government's Energy Information Administration (EIA). In order to obtain the West Texas Intermediate (WTI) price, which is the benchmark oil price used as the basis for the calculation, the EIA's oil prices have been adjusted by the expected differential between these two benchmark prices as well as inflation. The EIA's forecasts have been included in the organisation's Annual Energy Outlook, which normally has been issued in February every year. Due to a change in legislation in the United States late 2007, the latest edition of the Annual Energy Outlook was delayed and not released until June 2008.

The current international financial crisis and the economic recession in many countries and regions in the world have lead to a substantial change in the world economic outlook. This has a major impact on energy markets, affecting both current and future supply and demand for oil products. The magnitude of this change in market conditions is visible in the more than 50 percent decline in international oil prices since mid-July 2008.

The EIA's latest Annual Energy Outlook was issued at the time when oil prices were at an all time high. Using this forecast as done previously would have given a projected WTI-price in 2009 that is more than $10 per barrel higher than the current spot price. The oil price projection for 2010 and 2011 would also have exceeded the current spot price. Such a projection cannot be considered to comply with the prudency requirements in the Petroleum Fund Law.

Given the current market turmoil and the absence of an up to date "low" estimate of future oil prices by a reputable institution, the Ministry of Finance has drawn the conclusion that the most appropriate approach is to assume a fixed low oil price in the short term and retain the EIA's projections for the long-term only. t is assumed that the long-term fundamentals in the oil market have not changed significantly.

Petroleum wealth and ESI-calculations are based on a fixed nominal oil price for the period 2009-2013 of $60 per barrel. For the following period 2014-2023 the projections are based on EIA's forecast which declines gradually in real terms as a result of increased world energy production capacity.

The projected oil price for 2009-2013 is $10 per barrel lower than the average futures price for December 2008­December 2013 at the New York Mercantile Exchange (NYMEX) at the time of writing. This approach should therefore offer sufficient assurance against overestimating future revenue and comply with the prudency requirements in the Petroleum Fund Law.

Nevertheless, it should not be ruled out that oil prices can fall below the price assumptions used in the calculations of the Petroleum Wealth and the Estimated Sustainable Income. Chart 6.6 shows the historical and projected oil price in real terms (2007-prices).

Chart 6.6
Historical and Projected Oil Prices in Real Terms (2007 Prices)

A comparison between oil price projections in the 2008 Budget, 2008 Mid Term Review, 2009 Budget, and those resulting from applying the EIA's latest Annual Energy Outlook are provided in Chart 6.7.

Chart 6.7
Oil price comparisons

 

LNG-price assumptions

There are several petroleum products (condensate, Liquefied Petroleum Gas (LPG) and Liquefied Natural Gas (LNG)) which come from the Bayu-Undan project. The historical differential between the WTI benchmark price and the various product prices have been used to forecast the product prices.

The LNG-price in the contract between Darwin LNG and LNG buyers is subject to renegotiation prior to 1 January 2009. It is expected that the contracted LNG-price will increase compared to the current price. It is also expected that there will be an upwards adjustment to the prices that were charged under the contract in 2007 and 2008.

However, the negotiations are not finished and the final outcome is highly uncertain. The expected outcome of the negotiations for 2007-08 is used as a basis for the future LNG-price. Even though prudent assumptions have been applied, the final outcome of the negotiations may be lower as well as higher than the current assumption used to estimate the ESI.

Table 6.6
Sustainable Income Calculations - Oil Price Assumptions ($ per Barrel), Production and Revenue Forecast
2002 to 2023

Timor-Leste Petroleum sector

 

Average WTI oil price

Production

Total Discounted Petroleum Revenues (Factor of 3.0%)

Total Undiscounted Petroleum Revenues

 

$/Barrel

million barrels oil equivalent

$ million

$ million

Total

 

 913

 

15,793

Total from 1 January 09

 

688

9,379

10,952

to 2002

 

 

 

15

2003

 

 

 

10

2004

44

17

 

169

2005

54

29

 

335

2006

65

57

 

752

2007

72

58

 

1,198

2008

103

64

 

2,361

2009

60

57

1,146

1,163

2010

60

59

1,055

1,103

2011

60

59

1,154

1,243

2012

60

56

1,058

1,173

2013

60

56

924

1,055

2014

59

52

718

845

2015

54

52

707

857

2016

49

50

535

668

2017

50

47

479

616

2018

51

45

446

591

2019

52

43

359

489

2020

53

40

332

466

2021

53

38

277

400

2022

54

35

161

239

2023

56

0

29

44

Sensitivity

There is a range of risks and uncertainties in any forecast of petroleum revenue. The most sensitive assumption is the oil price, as the forecast of petroleum revenues changes substantially for even a relatively small change in assumed oil prices.

Other uncertainties impacting in any forecast of petroleum revenue include LNG contract volume and pricing terms, condensate and LPG spot sales prices relative to oil prices, operating costs and outcome of the ongoing negotiations regarding the future LNG-price. The Ministry of Finance has endeavoured to adopt prudent assumptions in all cases.

Chart 6.8 shows the sensitivity of Estimated Sustainable Income to changes in the most relevant variables.

Chart 6.8
Sensitivity Analysis – Estimated Sustainable Income ($m)

Domestic Revenue

Domestic revenue consists of:

  • Direct and Indirect Taxes;
  • Non tax revenue (including dividends and interest); and
  • Fees from self funded autonomous agencies.

Domestic revenue is expected to increase in 2009 by $37.6 million as a result of:

  • increased economic growth producing more domestic tax payers;
  • increased sales of rice in 2009 which will be imported by the Government; and
  • large increases in duties and sales tax payable by the Government on imports related to the electricity generation project.

Table 6.7
Domestic Taxes 2008 to 2012 ($m)

Table 6.8
User fees, Payments and Other Revenues 2008 to 2012 ($m)

Table 6.9
Revenues to Autonomous Agencies between 2008 and 2012 ($m)

 

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua dos Martires da Patria, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
email: 
info@laohamutuk.org    Web: http://www.laohamutuk.org    Blog: laohamutuk.blogspot.com