SAO TOME, 5 January (IRIN) - These sleepy twin islands poking out from the depths of the Atlantic Ocean are among the most peaceful places on earth. Now, with geological surveys suggesting that the islands could be sitting on billions of barrels of oil and, with a population of less than 150,000, every man, women and child on the islands could, in theory, become millionaires.

Some of the world's biggest oil companies have already paid hundreds of millions of dollars for the right to drill oil in the surrounding waters. However, experts on the effects of sudden resource wealth in poor countries are sounding the alarm that Sao Tome and Principe could destabilise and even collapse.

"The production of natural resources is liable to give rise to various types of political frustrations within a country." That is the view of such leading economists as Jeffrey D. Sachs, and Nobel Prize winner Joseph E. Stiglitz, writing in the introduction to 'Escaping the Resource Curse' a book to be released by Columbia University Press in June 2007, which cites Principe and Sao Tome as one country at risk.

The authors warn that, "resource-rich countries grew less rapidly than resource-poor countries during the last quarter of the twentieth century." Plus, they said, "[research suggests] a strong association between resource wealth and the likelihood of weak democratic development, corruption, and civil war."

Yet researchers specialized on Sao Tome remain divided over whether it is going the same way. It does not have a history of social tensions and there has not been political bloodshed.

"I basically remain optimistic, said Gerhard Siebert, a researcher from the Lisbon-based Tropical Research Institute and author of a book on political and economic changes in the country since Portuguese rule ended in 1975. "I just don't think things will get as bad as in other oil-rich African countries."

Still, he and others express concerns about the corrupting influence of the nearby economic and military giant Nigeria, with which Sao Tome has agreed to share its oil wealth.

Theory or practice?

Crime remains low in the quaint seaside capital Sao Tome (which carries the same name as the island), and where everyone seems to know each other. "There is more money floating around," said Martin Sandbu, a specialist in the political economy of natural resource wealth at the University of Pennsylvania's Wharton School of Business, who recently returned from the islands, "Although the divide between the rich and poor is also increasing," he added.

"For the general population, the economy is stagnating and people don't seem hopeful that the government is going to be able to do anything about it," he said.

For Siebert, “the oil has clearly come with social, economic and political costs”. Competition over the wealth risks fracturing the government and exacerbating discontent within the country's tiny armed forces, he said. In January 2006, police revolted after the government failed to pay them their salaries, he noted. And in 2003, soldiers, led by Major Fernando Pereira, attempted a coup while President Fradique de Menezes was visiting Nigeria.

Pereira and his men stood down when Nigeria threatened to intervene.

Since then, there have been few other signs of trouble, even during three rounds of national elections in 2006, in which Nigeria provided campaign funds to many candidates, and there were widespread reports of vote buying.

The re-elected government has insisted that it has seen what has happened to other oil-rich African countries and it is not going to make the same mistakes. "Here, oil receipts will benefit the whole population," its spokesman, Adelino Lucas, told IRIN.

The government has been praised for a law passed in 2004 laying out how it must spend the revenue it gets from oil. The law’s stated aim: "the elimination of poverty and the improvement of the quality of life of the Sao Tomean people … to ensure a harmonious and integrated development of the country, and a fair sharing of the national wealth".

So where's the money?

So far, not a drop of the oil has been pumped out of Sao Tome's waters. In May 2006, ChevronTexaco announced for the first time that it had struck oil, though it also said it would need to do more drilling to determine whether the discovery is commercially viable, and that would not start until the end of 2007.

Oil companies have, however, already paid out some $237 million for the right to look for the oil, although only a fraction of the money has gone to Sao Tomeans.

One reason is that Sao Tome agreed to share the wealth with Nigeria, taking only 40 percent. As Nigeria bore the initial cost of setting up the joint arrangement - which many experts said Nigeria inflated - Sao Tome has had to use much of its oil money to pay Nigeria back.

Yet, even out of the estimated US $80 million that Sandbu reckons the government has received, less than US $30 million has gone into government coffers, with the rest being invested in New York on interest-bearing securities. This was what Sachs and his team, along with the World Bank and IMF, had called for. They said the government was not yet set up to use the money effectively, plus a sudden spike in spending in the country would exacerbate inflation which already stands 20 percent.

Meanwhile most Sao Tomeans want to see tangible benefits from the oil money, and that is one of the other many dilemmas for oil-rich countries, said Jenik Radon, the author of one of the chapters in 'Escaping the Resource Curse': "How can the challenge of rising expectations, desires, and demands be satisfied."

Radon also notes that when governments get revenue from oil companies, rather than by taxing their own citizens, they become less responsive to local concerns.

On the streets of Sao Tome people are expressing frustration. "Politicians are all bad," said one young man who requested anonymity. "They only look after themselves with good cars and big houses. For the rest of us, we will continue to be poor," he said.

Corruption or ineptitude?

Jose Cardoso works in Sao Tome for a coalition of NGOs called Publish-What-You-Pay. The coalition is pressing for transparency in the oil industry, although he said it is still too early to say whether the oil money is being misused. "We don't have access to data because the activities are very new," he said. But he added, "There is a possibility of irregularities, without a doubt."

For Sandbu, "The government is weak on laws and policies for awarding new contracts to oil companies, as well as on what to do about the bad agreements it made in the past," he said. Good laws on how the government spends its revenue are not much use if the revenue never gets into its coffers, he added.

The researchers have seen evidence of politicians making shady deals with oil companies for personal gain. Sandbu said the government has so far lost at least US $58 million because of bad oil deals, which he said is likely to be the tip of the iceberg.

But the question is whether the bad deals were a result of incompetence or corruption.

President de Menezes blames his predecessors for agreements made with questionable Nigerian and US-based companies, and he has since reneged on some of the deals. Yet in October, the Norwegian watchdog NGO Norwatch released an investigation of agreements between the Sao Tome government and a company called Geo-Services (PGS) which said, "Political contacts all the way inside Sao Tome's presidential family enabled the Norwegian seismic services company PGS to obtain two lucrative agreements in 2001."

The company and the president have denied any wrongdoing, but as people's frustrations grow, appearances are what count. The former coup leader, Major Pereira, who has since been reinstated into the army, told IRIN, "We have seen corruption and all we want is to stop it."

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