The Economist issue cover dated December 2, 2000

Timor's troubled waters

CANBERRA

MORE than a year after emerging from the bloodshed surrounding its vote for independence, East Timor is now engaged in a ticklish dialogue with its southern neighbour, Australia, the outcome of which could spell the difference between economic life or death for the tiny soon-to-be nation. The question at issue is the riches from the plentiful oil and gas reserves under the stretch of ocean between the two countries.

Much of the Timor Sea's mineral wealth lies in the so-called 'Timor Gap', a coffin-shaped expanse of water facing East Timor that Indonesia and Australia left unassigned when they defined the seabed boundary between them in 1972. At that time East Timor was still a Portuguese colony. Three years later Indonesia invaded it.

Ignoring Portugal’s protests, Australia and Indonesia carved up the Timor Sea's wealth evenly between them in a treaty they signed in 1989. The treaty was deeply controversial in Australia and beyond, since it represented Australia’s acknowledgment of Indonesia's illegal occupation of East Timor, never accepted by anyone else. The Suharto regime gave Australia far more generous terms than they would have got under international law.

The Timor Gap treaty effectively died amid the turmoil that engulfed Australia’s relations with Indonesia last year, when Australia led an international force that brought peace to East Timor after its vote for independence. But that could be good for East Timor. In October, Australia and the UN Transitional Authority in East Timor embarked on talks to find a new formula for sharing the Timor Sea’s wealth.

UN officials believe there is a strong case for East Timor receiving as much as 90% of the revenue from the oil and gas reserves, leaving Australia with just 10%. Such a formula would depend on East Timor's establishing a seabed boundary halfway between itself and Australia - the normal practice under the UN’s Law of the Sea. In that case, the lion’s share of reserves now in the Gap, currently jointly exploited with the proceeds split 50-50, would come to lie inside East Timor’s economic zone.

Estimates of worth vary, but the three main oil reserves in the Timor Gap, Sunrise-Troubadour, Bayu-Undan and Elang-Kakatua, contain a projected total of 500m barrels of oil, worth $17 billion at today's prices. A new treaty will need to be in place well before East Timor’s formal independence, towards the end of next year. After October’s first round of talks, Peter Galbraith, a UN official, stood up for East Timor’s 'clear entitlement' to a bigger share.

Australia is in two minds. The conservative government in Canberra, led by John Howard, argues against a new treaty that would leave Australia with only a fraction of the mineral wealth it had before. But the government is also wary of appearing to bully a helpless new nation. Public opinion in Australia is highly sympathetic towards the East Timorese, whose only other economic resource is fish. Australia already has oil reserves four times the size of those in the Timor Gap.

Then there is the question of Australia's shattered relations with Indonesia, which have never recovered from the upheavals of East Timor's independence struggle, and Australia's role in organising the multi-national force that Indonesia was forced to accept under heavy diplomatic pressure.

As Australia prepared this week for a second round of talks on a new treaty, it also offered substantial money and aid towards the creation of an East Timor defence force. Both developments will harden Indonesia against efforts by Australia to repair their friendship. A visit to Australia by Abdurrahman Wahid, Indonesia's president, has already been postponed several times.

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