Sydney Morning Herald August 1, 2001

Phillips pulls plug on Timor pipeline

By Mark Dodd in Dili

In a surprise move, American company Phillips Petroleum and its joint venture partners have deferred indefinitely plans to build a $1.5 billion Timor Sea to Darwin natural gas pipeline.

In a letter sent to United Nations Secretary-General Mr Kofi Annan on July 26, Phillips cited "critical legal and fiscal issues" as the reason for the deferment.

The decision comes as partners in the project remain at odds with the East Timor Administration over the effective rate of corporate tax which would apply to the project. The corporate tax rate in East Timor is well over 40 per cent, compared with 30 per cent in Australia.

Phillips and its North-West Shelf partner Woodside remain locked in talks with the East Timor Administration on this issue, although little progress has been made to date.

Phillips' move occurs against the backdrop of intense jockeying between backers of the East Timor Sea gas pipeline project and plans to pipe gas from Papua New Guinea to Australia.

The PNG project lost its early momentum because of concerns about civil unrest, as backers of the East Timor Sea projects gained the upper hand by winning a key contract with BHP Billiton's Yabulu nickel plant near Townsville, in northern Queensland.

In its letter to the UN, Phillips said: "Participants in the Bayu Undan project have unanimously decided to defer indefinitely investment in the sub-sea pipeline proposed to transport gas from the Timor field to Darwin.

"The deferral reflects the need to resolve certain critical legal and fiscal issues arising from the Timor Sea arrangement."

After a year of difficult and often acrimonious negotiations between a joint UN/East Timorese team and officials from the Department of Foreign Affairs and Trade, a memorandum of understanding on shared oil and gas revenue from the Timor Sea was finally signed in Dili on July 5.

Under the terms of the landmark agreement, East Timor would receive 90 per cent of revenue from a so-called joint petroleum development area worth $7 billion over 20 years.

The Northern Territory stood to benefit from the construction of a massive underwater pipeline to carry gas from the Timor Sea field to Darwin.

According to Phillips, which is the biggest private stakeholder in the Timor Sea, oil reserves in the development area total about 30 million barrels and natural gas reserves about 175 million barrels. They are estimated to be worth a total of $21.3 billion.

A deal to renegotiate proceeds from the oil and gas rich Timor Sea became necessary after East Timor voted to end 24 years of Indonesian rule following a violent UN-brokered referendum on August 30, 1999.

Analysts in Dili said that with East Timor now in the home stretch to full independence, it was likely that Phillips wanted to sort out its problems with a new sovereign East Timorese government and not the UN transitional administration.

The letter from Phillips suggests that the United Nations Transitional Administration in East Timor (UNTAET) had been dragging its heels in sorting out a proper tax and investment regime for the oil companies.

However, according to one senior UN official, Australia bears some of the blame for the latest problems because Foreign Minister Mr Downer announced as late as June 28 that current production sharing contracts would be retained.

"We [UNTAET] thought there would be a whole new fiscal regime. But Downer announced the old contracts would have to continue," said one UN official, who asked not to be named.

The official, who was a member of the UN negotiating team, said UNTAET was ready to co-operate with the oil companies in a bid to resolve the latest problems.

"We remain available to meet with the companies to nail down any outstanding issues. We are still waiting for them to get back to us," the official said.

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