Seychelles - Extractive Industries Transparency Initiative Project : small RETF grant

 Document of The World Bank FOR OFFICIAL USE ONLY Report No: 93917-SC PROJECT PAPER FOR SMALL RETF GRANT IN THE AMOUNT OF US$290,000 EXTRACTIVE INDUSTRY TRNSPARENCY INITIATIVE MDTF TO THE REPUBLIC OF SEYCHELLES FOR AN IMPLEMENTATION OF THE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE PROJECT JANUARY 15, 2015 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2014) Currency Unit: Seychellois Rupee (SCR) USD 1.00 = 0.076 SCR USD 13.18 = 1 SCR FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS 2D/3D Two Dimensional/ Three Dimensional CPS Country Partnership Strategy EGPS Extractives Global Practice Support EEZ Exclusive Economic Zone EI TAF Extractive Industries Technical Advisory Facility EITI Extractive Industries Transparency Initiative FM Financial Management GDP Gross Domestic Product GoS Government of Seychelles IBRD International Bank for Reconstruction and Development IDA International Development Association IMF International Monetary Fund JOGMEC Japan Oil, Gas and Metals National Corporation Km Kilometer MOFTI The Ministry of Finance, Trade and Investment MSG Multi-Stakeholder Group Mtons Metric tons OPSF Office of the Principal Secretary for Finance OP/BP Operational Policy/ Bank Policy MPA Model Petroleum Agreement MSG Mutli-stakeholder group PAPT Petroleum Additional Profits Tax PDO Project development Objective PIT Petroleum Income Tax SCR Seychellois Rupee SEYPEC Seychelles petroleum Company SIDS Small Island Developing States SNOC Seychelles National Oil Company SoEs State-owned enterprises sq Square mile US$ United State Dollar Regional Vice President: Makhtar Diop Country Director: Mark R. Lundell Global Practice Senior Director: Anita Marangoly George Practice Manager: Paulo de Sa Task Team Leader: Ilhem Salamon  REPUBLIC OF SEYCHELLES Implementation of the Extractive Industries Transparency Initiative Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................7 A. Country Context ............................................................................................................ 7 B. Sectoral and Institutional Context ................................................................................. 7 C. Higher Level Objectives to which the Project Contributes ........................................ 10 II. PROJECT DEVELOPMENT OBJECTIVES ..............................................................11 A. PDO............................................................................................................................. 11 Project Beneficiaries ......................................................................................................... 11 PDO Level Results Indicators ........................................................................................... 11 III. PROJECT DESCRIPTION ............................................................................................11 A. Project Background ..................................................................................................... 11 B. Project Components .................................................................................................... 13 C. Project Cost and Financing ......................................................................................... 14 IV. IMPLEMENTATION .....................................................................................................15 A. Institutional and Implementation Arrangements ........................................................ 15 B. Results Monitoring and Evaluation ............................................................................ 17 V. KEY RISKS AND MITIGATION MEASURES ..........................................................17 A. Risk Ratings Summary Table ..................................................................................... 17 B. Overall Risk Rating Explanation ................................................................................ 18 VI. APPRAISAL SUMMARY ..............................................................................................18 A. Economic and Financial Analyses .............................................................................. 18 B. Technical Issues .......................................................................................................... 18 C. Financial Management ................................................................................................ 19 D. Procurement ................................................................................................................ 19 E. Environment and Social (including Safeguards) ........................................................ 20  DATA SHEET Republic of Seychelles Implementation of the Extractive Industries Transparency Initiative Project Small RETF Grant Project Paper Africa Region GEEDR Basic Information Date: January 15, 2015 Sectors: Energy and Extractive Industries Country Director: Mark R. Lundell Themes: Transparency and Accountability Practice Manager/Global Paulo de Sa / Anita Marangoly EA Category: C Practice Senior Director: George Project ID: P150595 Instrument: Grant Team Leader(s): Ilhem Salamon Recipient: Ministry of Finance, Trade and Investment of the Republic of Seychelles Executing Agency: Ministry of Finance, Trade and Investment of the Republic of Seychelles Contact: Mr. Patrick Payet Title: Principal Secretary of Finance Telephone No.: 248-2723766 Email: psf@finance.gov.sc Project Implementation Period: Start Date: February 15, 2015 End Date: December 31, 2015 Expected Effectiveness Date: February 15, 2015 Expected Closing Date: December 31, 2015 Project Financing Data(US$M) Total Project Cost : US$290,000 Total Financing : US$290,000 Financing Gap : None Financing Source Amount(US$M) BORROWER/RECIPIENT (parallel co-financing) US$75,000 Others (EITI) US$290,000 Financing Gap US$0 Total US$365,000 Expected Disbursements of the MDTF / SRETF (in USD) Fiscal Year FY15 FY16 Annual 50,000 240,000 Cumulative 50,000 290,000 1. Project Development Objective(s): The project development objective is to help Government of Seychelles establish the principles of a sustainable petroleum revenue management and enhance transparency in the oil sector. Components Component Name Cost (USD Millions) Component 1 - Options for Petroleum revenue management in Seychelles USD 100K Component 2 - Institutionalization of EITI in Seychelles USD 40K Component 3 – Build MSG capacity in oil sector and petroleum revenue USD 150K management Compliance Policy Does the project depart from the CAS /CPS/CPF in content or in other significant respects? Yes [ ] No [X] Does the project require any exceptions from Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy exception sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ] Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 [ ] [X] Natural Habitats OP/BP 4.04 [ ] [X] Forests OP/BP 4.36 [ ] [X] Pest Management OP 4.09 [ ] [X] Physical Cultural Resources OP/BP 4.11 [ ] [X] Indigenous Peoples OP/BP 4.10 [ ] [X] Involuntary Resettlement OP/BP 4.12 [ ] [X] Safety of Dams OP/BP 4.37 [ ] [X] Projects on International Waters OP/BP 7.50 [ ] [X] Projects in Disputed Areas OP/BP 7.60 [ ] [X] Legal Covenants Name Recurrent Due Date Frequency Description of Covenant Team Composition Bank Staff Name Title Specialization Unit UPI Ilhem Salamon Senior Energy Economist Oil and Gas GEEDR 234880 Lova Niaina Ravaoarimino Senior Procurement Specialist Procurement GGODR 293987 Patrick Kabuya Sr Financial Management Financial Management GGODR 348898 Specialist Nathalie S. Munzberg Senior Counsel Safeguards LEGEN 132625 Andrew Michael Losos Environmental Specialist Environmental Safeguards GTIDR 36169 Fowzia Hassan Energy Specialist Energy GEEDR 35889 Bourama Diaite Senior Procurement Specialist Procurement GGODR 76111 Non Bank Staff Name Title Office Phone City Hilda L. Yumiseva Consultant Mclean, Virginia Locations Country First Administrative Location Planned Actual Comments Division Republic of Seychelles I. STRATEGIC CONTEXT A. Country Context 1. The Republic of Seychelles is an island-state with middle income country characteristics and an estimated population of 90,846 (2013). The economy is small (US$1,031 million gross domestic product in 2012) and per capita income (US$11,350 in 2012) is among the highest of the Middle Income Countries. Seychelles comprises 115 tropical islands spread over 1.374 million square kilometers (sq. km.) in the western Indian Ocean, covering 455.3 sq. km. in land area. Ten of the islands are inhabited, and approximately 90% of the population live on the largest island, Mahe (60% urbanized), where the capital, Victoria, and the main port is located. 2. Seychelles has been recovering strongly from a 2008 debt crisis and is transitioning to market-based economic policies. After high external indebtedness and loss of competitiveness which precipitated a depletion of foreign exchange reserves and a payment default in 2008, Seychelles energetically pursued a restructuring program focused on liberalization of the exchange regime, significant and sustained tightening of fiscal policy, and a reduction in the state’s role in the economy to boost private sector development. Seychelles has managed to secure generous debt relief, which together with fiscal consolidation has led to a path for fiscal and external sustainability. 3. These achievements aside, a number of challenges remain to be addressed. Having accomplished high–income standards, Seychelles confronts the challenges of a small and remote island state, highly dependent on tourism, overwhelming dependence on oil imports for energy production, and vulnerable to a range of global shocks and climate change. Limited land, capital, and human resources restrict its vulnerability to benefit from economies of scale in production. The investment climate needs to be strengthened to harness private sector growth. Bottlenecks in infrastructures remain critical constraints. Even though the Government of Seychelles has achieved remarkable results on the fiscal front, further progress are needed to achieve debt reduction targets. B. Sectoral and Institutional Context 4. Oil Sector Strategy. Seychelles’ oil sector strategy is to improve energy security and promote petroleum exploration in the Exclusive Economic Zone (EZZ) by putting in place fiscal and regulatory incentives that will attract oil companies, expedite exploration and allow an early commercial discovery. Seychelles depends overwhelmingly on rising petroleum imports for energy generation, while fiscal revenues are tights and the country is aiming to lower its debt ratios. The Government is therefore keen on expediting petroleum exploration in its EEZ. A discovery of oil will not only improve security of supply, but will also generate additional revenues to the Government. The legal and fiscal frameworks were revised with this objective. The resulting oil sector activity is expected to stimulate ancillary economic growth in the services and other sectors, generating employment and stimulating economic growth. 5. Hydrocarbons exploration. The results of hydrocarbon exploration in Seychelles are encouraging and a potential discovery may not be too far in the future. Hydrocarbon exploration in the Seychelles started in the early seventies following the discovery of the continental nature 7 of the underlying crust and thick sedimentary basins during the International Indian Ocean Expedition. Since then, several geophysical surveys have been conducted and four exploration wells have been drilled. Although no commercial hydrocarbon discovery has been made to date, all the pre-requisites for generation, migration and trapping have been identified, including traces of migrant oil and gas in three of the four wells drilled indicative of a working system. 6. Following a recent wave of discoveries in the East African region, interest in the Seychelles has been rekindled and several new geophysical surveys have been undertaken, both as proprietary surveys under petroleum agreement work programs and also as non-exclusive multi- client surveys. Two companies have petroleum agreements with the Government of Seychelles: the Australian based, WHL Energy Ltd and the London-based Afren Plc. WHL farmed out 75% of its interest to Ophir Energy Plc. Afren completed a 3D seismic survey of 2500 sq.km in early 2013 and Ophir completed the acquisition of 1528 sq.km of 3D seismic in the Junon prospect in July 2014. Data processing and interpretation is underway and drilling is planned for the first quarter of 2015. A third company, Japanese Oil Gas and Minerals Exploration Company, (JOGMEC) has an exploration license with the Government and they completed a 2D seismic survey and a geochemical survey in May 2014. 7. The results of the recent seismic work have firmed up the definition of several large prospects. Companies are now evaluating the data and expected to commence drilling in 2015. Government of Seychelles is also contemplating the possibility of undertaking a regional synthesis using all available data to allow PetroSeychelles to gain a better understanding of the overall prospectivity of the Seychelles EEZ thereby ensuring that petroleum licensing policy decisions are based on solid scientific insights. 8. Enabling Environment. The Government of Seychelles has revised its upstream oil and gas legal and regulatory framework to foster private investment in the sector, which could not only restore fiscal balance but potentially also fuel substantial economic growth and employment. The World Bank supported the government effort through a technical assistance financed by the Extractive Industries Technical Advisory Facility (EI TAF). This assistance helped the government of Seychelles: (i) review and amend the 1976 Petroleum Act, revised in 2008, and Model Petroleum Agreements, which provided the legal basis under which petroleum exploration, development and production were to be conducted; (ii) assess and enhance the tax and fiscal regime; (iii) undertake a successful promotional campaign. 9. The petroleum legal system has been enhanced. The Petroleum Taxation Act of 2008 has been updated and amended in May 2013 (c.f. box 1) for the purpose of the Licensing Initiatives under the amended Model Petroleum Agreement. The “open file licensing initiative