Estimating the Sustainable Income
Prudence and Sustainability
13 March 2009
The Estimated Sustainable Income (ESI) is a guideline for how much money Timor-Leste should spend from its Petroleum Fund each year. The 2005 Petroleum Fund Law defines it as "the maximum amount that can be appropriated from the Petroleum Fund in that Fiscal Year and leave sufficient resources in the Petroleum Fund for an amount of the equal real value to be appropriated in all later Fiscal Years." Follow these links for more information about:
According to the Petroleum Fund Law, Timor-Leste's annual withdrawal should be based on an Estimated Sustainable Income (ESI) calculated as three percent (3%) of the Petroleum Wealth -- that is, of the total of the money in the Petroleum Fund and the expected future revenues (after adjusting for inflation by calculating the Net Present Value) which will be received from oil and gas still in the ground. In theory, this enables the same number of dollars to be withdrawn from the fund every year for the indefinite future, even after Timor-Leste's oil and gas has all been extracted and sold.
In October 2008, the Ministry of Finance estimated this value for the 2009 State Budget based on Petroleum Fund (PF) opening balance of $4,215 million and expected future petroleum revenues of $9,379 million. Follow this link for the Government's explanation of these assumptions and how they calculate $13,595 as the Petroleum Wealth in the 2009 budget, 3% of which is $407.8 million.
ESI estimates depend on several assumptions (educated guesses), because nobody knows what oil prices on the world market will be in the future, exactly how much oil and gas will be extracted from underground and undersea reserves, or what future rates of inflation will be. The following table lists the assumptions the Government used to make their calculation, as well as some revised assumptions that La'o Hamutuk believes are more realistic and prudent than those used by the Government.
The four graphs below were generated by an Excel spreadsheet which you can download to try out your own assumptions. All of them are based on the 2009 State Budget, ConocoPhillips' production projections, and estimates of 3% as the real interest rate on PF investments and as the discount rate for calculating the net present value of future oil revenues. They all use newer (actual) data for the Petroleum Fund balance at the end of 2008, as well as the LH interpretation of the Prime Minister's promise to spend more than the ESI for the next few years.
In each diagram below, the assumptions are shown in the yellow area at upper left, and some key results in the blue area at lower left. The graph to their right shows how much money will be available in each of the next 100 years. The Petroleum Fund is intended to provide revenues for longer than that, but looking four generations ahead gives a picture of the long-term consequences of different policies. (Similar graphs produced by the Government show only through 2023, which fails to consider the Petroleum Fund Law's mandate for "wise management of the petroleum resources for the benefit of both current and future generations."
In each graph, the red line represents oil revenues received from taxes and royalties paid by the companies to Timor-Leste each year, in millions of dollars. For now, La'o Hamutuk and the Government both include only revenues from Bayu-Undan, as it is the only field currently in production or under contract. When all other known fields (Kitan, Sunrise, and some others) are developed and included in the ESI calculation, the total future petroleum revenues (and ESI) will approximately double.
The blue line is the ESI for each year, based on the assumptions and withdrawals discussed above. The green line (which sometimes covers up the blue line) represents the actual amount of money withdrawn from the PF each year and transferred to the State Budget.
The dotted line is the withdrawal (green line), divided by the number of people who will be living in Timor-Leste, based on Department of Statistics projections from the 2004 census. It shows how many oil dollars (not millions) the Government will be able to spend for each citizen. Since the cost of government services (education, health, etc.) grows approximately proportionately with population, this provides a more meaningful indication of the results of spending petroleum money than the green line does. Over time, the dotted line decreases, and revenues will have to be found from other sectors, such as by taxing agriculture or tourism, to continue to provide schools and hospitals for Timor-Leste's people. Extrapolated census projections indicate that Timor-Leste will have about eight million residents in year 2100.
The second graph assumes a starting oil price of $40/barrel (instead of $60), which is more realistic and prudent given the current world market. The long-term ESI has dropped from $392 million to $202 million.
The third graph uses the Government's unrealistic oil price of $60/barrel. However, it illustrates what would happen if the Petroleum Fund Law was revised to allow a "sustainable" income withdrawal of 5% of Petroleum Wealth every year.
The fourth graph uses the more realistic oil price of $40/barrel, as well as an annual withdrawal of 5%. The income available from the Petroleum Fund a hundred years from now will be only about $100 million per year, or $12 for each person. Without strong development of other sectors of our economy, we will be far worse off than we are today.
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)