Subject: ABC: East Timor pipeline on hold

Australian Broadcasting Corp

East Timor pipeline on hold 2/08/01 14:47:40 | PM

Audio: http://www.abc.net.au/pm/2001/08/01/20010801pm01.asx

With the agreement on the pipeline less than a month old it seems the $1.5 billion pipeline is suddenly on hold. The company financing its construction says East Timor and the United Nations demanded an extra $500 million in tax, creating an unaffordable investment proposal. Phillips Petroleum has reacted by putting the project on hold indefinitely. It's a financial blow to East Timor, a country desperate to rebuild its economic independence. The United Nations chief negotiator is denying he's to blame for the early collapse and he's been quick to point the finger at Australia for the breakdown in negotiations.

Transcript:

MARK COLVIN: If the rest of Australia was a little puzzled yesterday at Northern Territory Chief Minister Denis Burke's focus on the East Timor gas pipeline as an election issue, today the puzzlement was dispelled.

With the agreement on the pipeline less than a month old it seems the $1.5 billion project is suddenly on hold.

The company financing its construction says East Timor and the United Nations demanded an extra $500 million in tax, creating an unaffordable investment proposal. Phillips Petroleum has reacted by putting the project on hold indefinitely.

It's a financial blow to East Timor, a country desperate to rebuild its economic independence. The United Nations chief negotiator is denying he's to blame for the early collapse, and has been quick to point the finger at Australia for the breakdown in negotiations.

But is it a breakdown or just a hiccup? Sarah Clarke reports.

SARAH CLARKE: It was a deal months in the making and hailed by East Timor and Australia as an agreement that would change the face of the relationship.

The fledgling nation was set to receive 90 per cent of the royalties from the Timor Sea oil and gas reserves, worth $7 billion over 20 years. But all that's now been put on hold.

The company behind the project, Phillips Petroleum, says tax and legal hurdles tampered with its go ahead and a decision had to be made by yesterday. Spokesman Jim Godlove.

JIM GODLOVE: Because there were outstanding legal fiscal and taxation issues, that adversely effected the, the investment environment we were not in the position to approve that investment at this time.

SARAH CLARKE: The project's deferral is a blow to the economic prospects of both Australia and East Timor. The royalties were set to finance East Timor's revival and wean it off its dependency on aid.

But it appears the country's corporate tax laws were too big a deterrent. Phillips Petroleum says to its surprise extra financial demands in the order of $500 million were placed on the company on the day of the signing, immediately putting the project's future in jeopardy.

JIM GODLOVE: Basically the, the tax liability that, that is being sought to be imposed on the project, on the contractors if you will, being significantly more onerous than the regime that has been in place, and a regime that we had every expectation would be continued as a result of these negotiations.

SARAH CLARKE: The UN's chief negotiator for the project, Peter Galbraith, denies he's responsible for the company's decision, but says he's not surprised. He says the timeframe was simply too demanding.

PETER GALBRAITH: The fact is that the treaty was only initialled on July 5th. It left many questions to be resolved by East Timor and by Australia separately. One of the provisions of the treaty provides that East Timor will impose taxes on 90 per cent of the production of oil and gas.

And so it's natural that we would be having discussions with companies about the nature of those taxes. And it's I think rather unrealistic to have expected that those discussions could have been concluded in the couple of weeks between the initialling of the treaty and the 31st of July.

SARAH CLARKE: But as the chief negotiator he's putting a positive spin on the decision. While the company is publicly saying the plans are on hold indefinitely, Peter Galbraith says the project hasn't been completely derailed and he expects it to be back on track within months.

PETER GALBRAITH: The English word indefinitely is sometimes interpreted to mean never, but it just means that there's no definite time, and in fact the pipeline is profitable. In the end they're there to make money and they will make money from making that pipeline.

SARAH CLARKE: So do you think too much money's been invested to abandon the project?

PETER GALBRAITH: To abandon the project or to limit it to the liquids phase only.

SARAH CLARKE: Foreign Minister Alexander Downer is not so forgiving. He's been quick to lay blame. He claims it's unfortunate that on the day when champagne corks were popping, and the ink was barely dry on the agreement, Peter Galbraith threw in extra demands.

ALEXANDER DOWNER: I honestly think Mr Galbraith should get out of public debate which he is a great enthusiast for. You know if Mr Galbraith wants, on behalf of the East Timorese, to extract a further $500 million from, from oil and gas companies through company tax, he knows that that is beyond our jurisdiction but that is also contrary to the commitment the East Timorese made in October 1999, and obviously to hit the companies with an additional bill of $500 million is something that's not going to be well received by those companies.

SARAH CLARKE: A position echoed by the Northern Territory's Chief Minister, Denis Burke.

DENIS BURKE: Well I've known since July the 5th, the day of the signing, the day that Peter Galbraith reinterpreted the agreement, that the producers themselves had a lot of difficulty in trying to understand what exactly was meant. Where they thought they had certainty they were immediately thrown into a series of, position of uncertainty, and that has continued right up till this day.

SARAH CLARKE: But the UN's chief negotiator says it was Australia that threw a spanner in the works, and all deal makers should now go back to the table.

PETER GALBRAITH: This is a ongoing process and there are issues that have to be worked out, incidentally not just issues with East Timor but the companies also have issues with Australia. Apparently the Australian tax office is changing the depreciation schedule on pipelines in a way that could make them much less profitable, and that too is a factor in this whole process.

MARK COLVIN: Peter Galbraith the UN's chief negotiator for the pipeline project speaking to Sarah Clarke.

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