Gabon’s national development strategy seeks to generate sustained growth for poverty reduction. It has undertaken the preparation of a Growth and Poverty Reduction Strategy paper during 2005 that will form the basis of its future development strategy. Oil is Gabon’s key economic sector and a significant contributor to its GDP, budget revenues and exports. Declining oil production in the country poses a challenge to sustaining growth in the medium term. The World Bank Group (WBG) seeks to support Gabon via:
- helping improve the management of public resources, both natural and financial, for poverty reduction, and
- helping foster sector diversification through private sector-led growth by improving the environment for investment and building local capacity in the private sector.
IFC’s continued support to VAALCO Gabon, a small independent oil company, at this time is key considering the project’s importance in helping sustain oil production in the country and the relatively limited financing interest in this market. The provision of a revolving credit facility will provide the company with the financial flexibility it needs for its next phase of growth and to implement a portfolio of developments and exploration/appraisal programs within its project. IFC has also earlier assisted the company in enhancing its capacity for the environmental management of its project.
The project’s key development impact will be to help sustain oil production from the Etame Block as well as in making investments to explore for new reserves. Smaller companies like VAALCO play an important role in Gabon helping develop production and reserves from relatively smaller fields. Their investments are critical for the Gabonese oil sector where oil production has declined from a high of about 360,000 barrels/day in 1997 to about 271,000 barrels/day in 2004.
IFC will track the development benefits of this project based on information provided by the Company annually in respect of:
- local employment, use of local services, as well as social development programs implemented by the Company, and
- payments made to the government and its agencies.
- Environmental and Social Management
The World Bank Group (WBG) Management Response to the Extractive Industries Review (EIR) emphasizes the importance of mitigating environmental and social risk. IFC’s past and current involvement in this project is aligned with this objective and has supported the company’s efforts towards sound environmental management of its projects. This includes preparation of specific EIAs and broader Environmental Management and Emergency Response Plans that are updated as appropriate.
- Community Benefits
The project’s community footprint is limited given its remote offshore location. The project nevertheless makes its contribution via creating local employment, providing training, utilizing local services where feasible and in implementing small voluntary social development programs. VAALCO Gabon directly employs 17 local persons in its Port-Gentil office. Local staff also account for about half of VAALCO’s contractor staff of about 70 persons working aboard the Project’s FPSO on a rotation basis. The Project provides on-the-job training to local employees as well as contributes up to $150,000 per year (gross) for training of Gabonese nationals in higher-level schools and universities. Additional indirect employment is generated through use of local services e.g. via leased helicopter operated by local pilots, use of onshore warehouse and dock services. The company also provides voluntary community support through preparation and delivery of small development projects every year, e.g. support to schools and sanitation in Mayumba.
- Contribution to the Government
The project’s benefits to Gabon include revenues that accrue to the government in the form of royalties and production sharing. Since commencement of project operations in 2002, such contributions have amounted to about $119 million through December 31, 2004. Based on IFC’s estimates, using the project’s proved reserves as of December 31, 2004 and World Bank forecast oil prices, the project can be expected to generate incremental revenues to the government of approximately $300 million, on a present value basis, over the life of these reserves, although this depends on actual oil prices and crude oil recovery.
The project also contributes an amount of $75,000 per annum plus $0.05/barrel to the Hydrocarbon Research Fund created for the purpose of developing petroleum research in Gabon. Based on the project’s proved reserves at December 31, 2004, IFC expects this to amount to about $3 million over the life of these reserves.
Another contribution is in the form of a 25% price discount on the project’s share of Gabon’s domestic crude consumption. Based on IFC’s estimate this currently amount to savings to the local economy of about $2 million annually.
- Governance Context
Oil sector revenue forms an important part of overall government revenues and is central in the government’s management of its fiscal revenues. In view of declining oil production and slower GDP growth in recent years, the government has placed strong emphasis on fiscal management; this, including governance and sound management of resources are also important elements of the IMF and WBG programs in the country. Strong revenue generation resulting from higher than anticipated current oil prices is also being applied towards the management of domestic and external debt and to accumulate deposits in Gabon’s Fund for Future Generations (FFG). The government is also taking steps to enhance governance through improved transparency and efficiency of budget management. Pursuant to the above, the Government of Gabon has joined the Extractive Industries Transparency Initiative (EITI) in May 2004, adopting principles that should serve to increase transparency in extractive industry revenue payments to the government. At the government’s request, the WBG has also engaged in discussions with the authorities with a view to providing technical assistance in this area.
The company will also disclose its share of revenues paid to the government in respect of its operations in its annual report which is publicly available.
Given IFC’s potential contribution, the project’s development impact and benefits from the project, and given the overall framework of governance, IFC believes this is a project it should support.
