Dow Jones Newswires July 13, 2000

Australia Says Revenue, Not Border, Focus Of Timor Talks

By RAY BRINDAL

CANBERRA -- The share of royalties from energy developments in the Timor Sea is more important than fixing a midway boundary between Australia and East Timor in future talks, a government spokesman said Thursday.

Of even greater importance, though, is maintaining the stability of the legal, fiscal and tax arrangements underpinning developments in the area, interested parties said.

The comments come ahead of formal talks, possibly in August or September, between Australia and East Timor on a new treaty covering the sharing of economic benefits from energy developments in the Timor Sea.

In late June, Mari Alkitiri, East Timor's spokesman on the issue, said a major point in negotiations will be to set a boundary midway between the two nations rather than at its current position, which he said grossly favors Australia.

Sharing the benefits of petroleum production in the Timor Sea, which to this point have been minor, was covered by the Timor Gap Treaty. But this lapsed after East Timor's August 1999 vote for independence from Indonesia.

The terms of the treaty were continued under a memorandum of understanding between Australia and the United Nations Transitional Administration for East Timor, or UTAET, which oversees the nation's transition to full independence.

An Australian gas industry participant, who declined to be named, this week said fixing the boundary isn't as important as the share of revenue each country receives.

That was confirmed Thursday by a spokesman for Australian Foreign Minister Alexander Downer.

Australia "understands the discussion or debate is about the share of revenue; it's not the actual delimitation of the seabed," the spokesman told Dow Jones Newswires.

Bayu-Undan Project In Focus Of immediate interest is the Bayu-Undan project, a gas and liquids development in the Timor Sea in an area known as the Zone of Cooperation area A.

Under existing arrangements, Australia and East Timor would share 50/50 royalty benefits from this project, which is located closer to East Timor than Australia.

East Timor leader Jose Ramos-Horta argued in May that East Timor should take 90% of royalties from the project and Australia 10%.

Royalty payments could run to hundreds of millions of dollars a year, potentially East Timor's major revenue source.

Downer's spokesman said Australia believes "it's basically too early to speculate on the redistribution of revenues."

Canberra still is developing its position, he said.

Whatever the outcome, Downer's spokesman said "both parties are fully aware of the commercial importance in particular of maintaining stability in the Timor Gap regime."

Jim Godlove, Darwin area manager for Phillips Petroleum Co. (P), which operates of Bayu-Undan, agrees.

"Whatever comes out of this treaty negotiation must maintain our legal rights in exactly the same manner as they are today," Godlove said in an interview with Dow Jones Newswires, adding that existing fiscal and tax arrangements also must be maintained.

"The legal status of our rights to develop within the zone must be maintained, that is an inviolate criteria," he said.

Australia, East Timor and UNTAET "have all acknowledged that and have indicated that will be maintained," Godlove said.

Beyond that, the share of royalty payments going to each country is "purely a matter for the two governments to sort out."

"It is our understanding that these negotiations only affect a distribution of the government shares," he said.

"The contractor's share isn't open to discussion, debate or change," he said.

Phillips Petroleum holds a 50.3% stake in the project.

Godlove said the Timor Gap treaty didn't cover gas developments in the area, which has emerged as a major global gas province.

New Treaty Will Cover Gas "We are very confident a fiscal regime on gas will be negotiated and in the near term," he said, saying this will underpin the monetization of this resource.

There hasn't been a need so far for an agreement covering gas, but with the development underway "we are finally at the point where there is an absolute need for an agreement," said Godlove.

The people involved in the talks are approaching the issue responsibly and share a common view that they want energy developments to continue, he said.

"With that in mind we feel confident an outcome will be positive," he added.

In October 1999 Phillips gave the go-ahead for a US$1.4 billion liquids-stripping-and-gas-recycle first stage of the Bayu-Undan project.

Production is scheduled to begin in early 2004 and is expected to peak at 100,000 barrels a day. The company also wants to pump natural gas to Darwin to supply north Australian markets but hasn't formally committed itself to this project.

Bayu-Undan is the first major gas development in the Timor Sea and the biggest project in the area to date.

-By Ray Brindal, Dow Jones Newswires; 612-6208-0902; ray.brindal@dowjones.com

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