Wednesday August 22, 12:12 am Eastern Time

Phillips lobbies Australia to rescue Timor gas

CANBERRA, Aug 22 (Reuters) - Phillips Petroleum Co (NYSE:P - news) said on Wednesday it would stress the need to Australia and East Timor to quickly resolve the tax and legal obstacles blocking a Timor Sea gas project or risk losing customers for the development.

Phillips and its partners in the Timor Sea's Bayu-Undan project earlier this month deferred indefinitely the construction of a US$500 million pipeline to carry Timor Sea gas to Darwin, citing onerous tax requirements as a disincentive.

Jim Mulva, chairman and chief executive of the U.S.'s fifth largest oil company, is lobbying politicians in Australia and East Timor this week to get the multi-billion dollar development that overlaps Australian and East Timor borders back on track.

``We'll be impressing on both governments the need to sort out these problems for us to move ahead. The solution lies with the governments,'' Jim Godlove, Phillips Darwin manager, told Reuters.

He said Mulva would meet Australia's Resources Minister Nick Minchin and Foreign Minister Alexander Downer late on Wednesday but did not expect details of the meetings to be released.

Mulva will travel to East Timor later this week for talks.

Godlove said the parties only had a matter of months to rescue the project, otherwise the customers Phillips had lined up for gas from the Timor Sea over the past two years would move on.

A breakthrough on the issue quickly is needed to meet a letter of intent to deliver liquefied natural gas to El Paso Corp (NYSE:ELG - news) for its West Coast U.S. customers from 2005.

``We have only a few months before our customers begin seeking gas from other suppliers. After that we may not have enough customers to make the investment,'' Godlove said.

FRAMEWORK ARRANGEMENT

Australia and East Timor last month reached a framework agreement based on a 90/10 revenue split in favour of East Timor for oil and gas recovered from the Timor Gap.

Phillips argues a new agreement between Australia and East Timor does not meet an East Timorese undertaking that it would be no more onerous than a previous Timor Gap pact with Indonesia, ruled void when East Timor voted to break from Jakarta in 1999.

Petroleum companies have suggested a 44 percent East Timorese tax rate had been proposed on 90 percent of income.

Under the former treaty, an Indonesian tax rate of around 40-41 percent applied to 50 percent of income. Australia's corporate tax rate is 30 percent.

Phillips is trying to convince East Timor to drop its legal entitlement under the new arrangement for 90 percent of the corporate profits from Timor Sea developments.

But a senior U.N. official in East Timor, Peter Galbraith, has said oil companies should not be surprised that East Timor will implement its own taxes on oil and gas production.

Phillips' plan is to build a pipeline to a 4.8 tonnes a year LNG plant in Darwin to carry gas from the 3.4 tcf Bayu-Undan field and the nearby Greater Sunrise which contains 9.16 tcf.

But earlier this month, Shell (quote from Yahoo! UK & Ireland: SHEL.L), which owns part of Greater Sunrise, muddied the waters further by proposing a floating LNG plant instead.

Phillips owns 50.3 percent of Bayu-Undan. Other shareholders are Santos Ltd (Australia:STO.AX - news) with 11.8 percent, Inpex Sahul Ltd 11.7 percent, Kerr McGee Corp (NYSE:KMG - news) 11.2 percent, Phillips unit Petroz NL (Australia:PTZ.AX - news) 8.3 percent and Eni 6.7 percent.

Phillips also has a 30 percent stake in Greater Sunrise which is operated by 33.44 percent stakeholder Woodside Petroleum Ltd (Australia:WPL.AX - news). Royal Dutch/Shell (quote from Yahoo! UK & Ireland: SHEL.L) has 26.56 percent and Osaka Gas Co Ltd 10 percent.

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