Subject: DJ: E Timor Loses On Boundary, Gas Devts to Australia: Former Unocal President

Received from Joyo Indonesia News

E Timor Loses On Boundary, Gas Devts: Oilman

By RAY BRINDAL of DOW JONES NEWSWIRES

CANBERRA, Sept. 25 (Dow Jones) - East Timor has been poorly dealt with by Australia and companies wanting to develop vast natural gas resources in the Timor Sea, John Imle, a former president and former vice president of U.S.- based energy company Unocal Corp. (UCL), said this week.

"I'm appalled at what Australia has done to East Timor on two counts," he told Dow Jones Newswires in an interview Tuesday, honing a message he will reiterate at a conference later in the week.

One count is the controversial issue of the yet-to-be-settled disputed maritime boundary between the two nations, he said.

At stake are potentially huge royalties from energy production in the area.

The other is a "total lack of any consideration" of East Timor's needs as a destination for the Timor Sea's vast natural gas resources and processing of the gas before it is exported, he said.

"This is a huge injustice to East Timor," he said.

Imle is in Australia to address a conference Friday focusing on the Joint Petroleum Development Area, an area in the Timor Sea jointly administered by Australia and East Timor.

He is speaking at the conference in his role as a consultant to PetroTimor Comphanhia de Petroleos SARL, a Portuguese-registered concern owned by Oceanic Exploration Co. of Denver.

Portugal granted oil concessions to PetroTimor before Indonesia's 1975 invasion of East Timor.

The company is now trying to secure its lost property rights through Australian courts, he said.

East Timor formally became an independent nation May 20, and immediately signed the Timor Sea Treaty with Australia.

The treaty is the fundamental document setting out how the economic benefits of energy developments in the Joint Petroleum Development Area in the Timor Sea are shared between the two.

The treaty, which hasn't yet been ratified, was established without the setting of maritime boundaries between the two nations.

East Timor didn't establish maritime boundaries with Australia or any other nation and it didn't inherit any boundaries that existed prior to May 20.

Australia Will Negotiate, But Won't Arbitrate Boundary

Imle criticized Australia for agreeing to negotiate the boundary issue, yet withdrawing in March from the International Court of Justice, a body that could arbitrate the boundary issue.

East Timor wants the boundary at the midpoint between the two nations, but Australia wants the boundary at the edge of its continental shelf, which would put it considerably closer to East Timor.

If the boundary is set at the midpoint, East Timor stands to reap a considerably larger flow of royalties from current and planned oil and gas production in the area.

But if the midpoint boundary is accepted, Australia could lose billions of dollars in potential revenue from royalties from the proposed Greater Sunrise project on the eastern edge of the Joint Petroleum Development Area.

The Greater Sunrise gas field falls 20.1% within the Joint Petroleum Development Area, while 79.9% falls in Australian territory.

Imle would also like to see some proposed natural gas pipelines from the Bayu-Undan and Greater Sunrise projects haul gas to East Timor for processing and re-export there.

Bayu-Undan is operated by Phillips Petroleum Co. (P), while Greater Sunrise partners are Phillips, Royal Dutch/Shell Group (RD), Woodside Petroleum Ltd. (A.WPL) and Osaka Gas Co. Ltd. (J.OSG).

At this stage, the proposed pipelines from these projects will run a much further distance undersea to Darwin in northern Australia, based on assertions the 3,000-meter Timor Trench offshore East Timor's southeast coast is too deep for such a gas pipeline to cross.

But Oceanic paid for studies that show a pipeline from Bayu-Undan to East Timor isn't only technically feasible, but also economically better than a pipeline to Darwin, Imle said.

The risk factors on such investments must have been much higher several years ago, when East Timor "looked like a very dicey place," he said.

These risks would have stopped project financing, insurance and indeed, any projects from proceeding, he said.

But conditions in East Timor have changed, he added.

The new nation now is peaceful, broke, desperately in need of government revenue, jobs, education and foreign investment, he said.

Proposed gas projects could mean billions of dollars of direct foreign investment flowing to either Darwin or East Timor, he said.

"There's no question about who needs it more," he said.

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

---------

An "bullet outline" of Mr John Imle's talk at the JPDA conference in Melbourne, September 27, 2002 follows. --

"Gas to East Timor - Why Not?"

John F. Imle

International Energy Consultant

Topics for this JPDA Discussion ---------------------------------------

*Resource ownership

*Possible development plans

*LNG plant location

*Agreements that endure

Possible Development Plans ----------------------------------

*Bayu Gas to Darwin (Phillips)

*Sunrise Floating LNG (Woodside/Shell)

*Gas to East Timor, LNG Plants in East Timor

Floating LNG Option --------------------------

*Some say it costs less - but no one knows; It hasn't been done.anywhere

*The capital investment would most likely go to East Asian shipyards

*Who will "give up" the FDI opportunity, construction employment?

*Who will be the real winners? - Not East Timor, not Australia

National Interest Option for East Timor ------------------------------------------------

*Bring the gas to East Timor

*Build LNG plant in East Timor

*Export LNG from East Timor

*Jobs, education, economic opportunity, prosperity go to East Timor (bottom-up)

*VERSUS only tax revenues for the Government (top-down)

Why NOT Pipelines to East Timor?

------------------------------------------

- The Public Reasons.

"Water depth too great" Not true!

"It would cost more"

No, it would cost less for same throughput!

"Tectonic instability"

Overstated, applies to entire JPDA area.

What about cyclone risk at Darwin ?

North Coast of Timor is more protected

Crossing Timor Trench.

Impossible to Lay Pipelines? -----------------------------------

*Even in 1996, it was technically feasible -- now, even more so

*Cost of pipeline to Timor is BELOW cost to Darwin for same capacity (half the distance)

*Confirmed by engineers and offshore contractors

*It appears the governments of East Timor and Australia were misinformed on this issue

From Website of J P Kenny

Pipeline Consultants

--------------------------------

http://www.jpkenny.com/DeepwaterExp.htm

THE (Latest) ENGINEERING STUDY

by INTEC Eng.Pty.Ltd. Perth

-------------------------------------

Commissioned by Oceanic Exploration and donated to the people of East Timor www.gat.com/Timor_Site/feasibility/map.jpg

INTEC Conclusions

Bayu Undan to East Timor ---------------------------------

*Maximum water depth Bayu-Suai is 2500 meters

*Bayu-Suai = 230 km; Bayu-Darwin = 500 km

*28-inch pipeline required for 1 bscf/d (supply for 6 mtpa plant; Phillips plans 3 mtpa)

*If single 3 mtpa train, smaller pipe required

*Pipeline of 28 inches in 2500 meters is practical with existing equipment (3 contractors can do)

*Required size and grades of pipe are available from multiple sources

*Cost Bayu-to-Suai is US$ 317 million (approx.)

INTEC Conclusions

Bayu Undan to Darwin ---------------------------

*Pipeline Bayu-Darwin requires 32-inch pipe for 1 bscf/d flow rate

*INTEC estimate for 500 km of 32-inch pipeline to Darwin is US$ 570 million

*Phillips public estimate is US$ 730 million, size and flow rate unknown (36 inch?)

*For any given flow rate, a pipeline to East Timor is LOWER COST

Conclusions Applied to Sunrise --------------------------------------

*Sunrise to nearest East Timor landfall is 170 km (water depth could be 3000 meters)

*28-inch pipeline in 3000 meter water is practical

*28-inch pipe could supply 2 trains, enough for 6 mtpa LNG plant on East Timor (1 bscf/d)

*Sunrise-to-Darwin is at least 440 km (Shell says 500km)

**For any given flow rate, pipeline to East Timor is LOWER COST

Tectonic Stability of Timor Trough ------------------------------------------

*Relatively Few Earthquakes Recorded (INTEC - Earthquake map by Warren Hamilton )

*Similar risks throughout JPDA offshore area

*Seabed slopes are not excessive ( INTEC - milder than Malampaya and Bluestream projects)

*For many years pipelines and plants have operated in more tectonically active areas (California, Alaska)

*Let's avoid "risk rhetoric" about cyclones and earthquakes

Let's not eliminate any options ( tectonics vs cyclones)

LNG PLANT LOCATION POSSIBILITIES In East Timor -------------------------------------------------- For Bayu-Undan and Greater Sunrise

LNG Sites in East Timor Key Considerations ----------------------------- *Access to protected deep water for port facilities *Shelter from cyclone wind and storm surge (Darwin is in cyclone track) *Reasonable access to existing port facilities and infrastructure *At first glance, the north coast looks best

NATIONAL INTEREST OPTIONS ------------------------------------------- www.gat.com/Timor_Site/feasibility/map.jpg

Pipelines to Reach North Shore of East Timor -------------------------------- *28-inch (or smaller) pipelines from both Bayu and Sunrise (or some other combination) *Onshore pipelines across island from each landfall *Connecting pipeline along north coast *VERSUS larger and longer pipelines from Bayu and Sunrise to Darwin (Gov't. of N.T. proposal)

Integrated Development ----------------------------- *LNG plant capacity of 10 mmtpa requires about 1.5 bcf/d of gas *This volume could be transported to East Timor plant sites for LESS than cost to Darwin ...based Upon INTEC cost factors and estimated onshore PL costs). *Advantages of integrated development would benefit both the operators and East Timor

THE BOTTOM LINE -------------------------- *Pipelines to East Timor ARE technically and economically feasible

*Cost to move some or all gas from Bayu and Sunrise to a common LNG plant in East Timor is LESS than cost to Darwin

*Building an LNG plant in East Timor is a one-time opportunity for "bottom-up" prosperity

***How, in good conscience, can this option be ignored?

What's at Stake for East Timor? Employment ----------------------------------------- *Construction Period -- high demand for unskilled and semi-skilled labor, plus opportunity to train in many trade skills *Operating/Maintenance Period -- direct employment will grow with education and training *Indirect employment -- small business would thrive in both phases, many times the "UN Effect" *Doubters should visit local officials in Balikpapan, where the Bontang LNG plant was built on a remote jungle site

Direct Foreign Investment -------------------------------- *Depending on Plant Size -US$ 1 to 3 billion could be spent in East Timor over project lifetime for plant and pipeline construction and operation *Plus port, road, power development * "Multiplier effect" - 3 or 4 times expenditures *Totals easily exceed US$ 3 billion of GDP *VERSUS < US$ 100 million expenditures in East Timor if plants built in Darwin ( Bayu Undan)

The Case for Integrated Plants -------------------------------------- *Partners disagree whether Floating LNG is best economic opportunity for Sunrise *As separate Darwin based LNG projects, Bayu Undan and Sunrise may be marginal *A single LNG plant would improve economics of both fields as well as the development of smaller gas discoveries

The Case for Gas to East Timor -------------------------------------- *JPDA Gas MUST be lowest cost to capture market *Pipelines to East Timor cost less *Plant construction costs in East Timor could be lower ( for example, Korean contractors) *East Timor should have more flexibility for tax holidays and other incentives than Australia *East Timor might obtain MLA Project loans for selected pipelines and infrastructure

How East Timor Can Compete ------------------------------------- First - Understand the Risks Then - Mitigate the Risks

Foreign Stakeholder Fears -------------------------------- *New Nation born of conflict - stability? *Rule of Law ensured? -Personal Safety - Contract & Tax Law *National Vision? *Government administrative effectiveness? *Competitiveness in world gas market?

Mitigating the Risks ------------------------ *Demonstrate FIRM commitment to Rule of Law *Preserve or improve the present financial terms for foreign companies working in East Timor waters - regardless of changes in boundaries *Provide tax holiday for LNG plants *Develop Civil Service talent quickly *Engage experienced resource advisors (Thailand?) *Seek World Bank / Asia Dev. Bank loans for PROJECT infrastructure and pipelines

Mitigate Risk by Broadening the Stakeholder Groups ----------------------------- *Resource Investments by Australia, USA, European, Japanese Companies *PROJECT Loans for pipelines and infrastructure by MLA's (World Bank, ADB) *Plant finance by global private bank syndicates *US OPIC political risk insurance *Plant construction and equipment by Korea, Japan *Gas buyers in Japan, China, Taiwan, Korea

This Diversified "Stakeholder Profile".. ---------------------------------- Would ensure multinational commitment to the stability and security of East Timor

Political Risk - Final Comment -------------------------------------- *Political risk is a valid concern and has to be mitigated

BUT, *Did NOT keep China from signing the US$15 billion deal yesterday for LNG from Papua, scene of a separatist movement

How Can East Timor Become an Economic Winner? -------------------------------------- *Provide incentives for the companies to bring part or all the gas to East Timor

*Create an investment climate that will result in lowest cost LNG for East Asian markets

* Put East Timor's National Interest FIRST

In Conclusion ----------------- *These "30-year" agreements, with renewals, need to endure for 40 to 60 years

*Present leaders are appropriately preoccupied with start-up of the Nation

*Next generation may well want to revisit Timor Sea issues: terms and transparency

*Lopsided treaties and business decisions carry long-term political risk for all parties

*Equitable and transparent agreements endure

Don't Rush the Deal --------------------------

*Artificial deadlines create mistrust

*Ensure that East Timor has world-class advice (perhaps funded by donor nations, World Bank, ADB, or similar group)

*Give East Timor time to think, conduct informed study and public debate

*Building long-term trust takes time

<end of talk outline>

John F. Imle, Jr. ------------------

Mr. Imle has 40 years' experience in the internatonal energy businness. He retired two years ago from Unocal Corporation, a large US-based independent energy company with extensive internaitonal holdings, particulary natural gas in Asia. He served as president of the Corporation, then as vice chairman and for 10 years was a member of Unocal's Board of Directors. Trained as a petroleum engineer, Mr. Imle served as a project manager for major offshore design and construction project in Alaska and the North Sea. Later, he was the senior executive for all Unocal's worldwide oil, gas and geothermal exploration and development activities. His executive experience includes major natural gas development projects and commercial arrangements in the United States, Thailand, Myanmar and Indonesia (where Unocal's gas was processed by the giant Bontang LNG plant).

He has been directly responsible for the highest-level negotiations with host governments for long-term resource contracts and renewals in Thailand, Phillipines, Myanmar, China, Bangladesh, India, Turkmenistan, Pakistan, Vietnam and Azerbaijan. In Azerbaibaijan, he was the architect of the well-known international oil consortium that successfully negotiated a long-term highly successful production sharing agreement with the new nation. The consortium was crafted to spread political risk among as many nations as possible, thereby reducing the real risk significantly. Risk spreading and risk reduction for East Timor is certainly possible with appropriate commercial arrangements.

Mr. Imle is also a founding member of the Business Humanitarian Forum, a Geneva-based non-profit organisation created to help business and humanitarian groups work together for benefit of their host countries, especially in the developing world. His work with the Business Hunanitarian Forum reinforces manifest industry evidence that the stability of new nations - especially those emerging from conflict - can best be enhanced by private sector investment, which provides jobs, dignity and self-reliance. At this point in its history, there is nothing East Timor needs nore than foreign investment on a large scale. The processing of its own natural resources is the only feasible way for this to happen.


JPDA 2002 Joint Petroleum Development Area Summit 26-27 September, The Novotel on Collins, Melbourne

Note on conference attendance. Among the audience were representitives from Timor Sea joint venturer's Shell, Woodside, Santos, and Inpex. Also present were representitives from Australia's Northern Territory Government, the Federal Government's Department of Foreign Affairs and Trade, Department of Defense, Department of Industry, Tourism and Resources, and Attorney General's Department.

Keynote talks on the maritime boundary issue were given by Melbourne international law academic Professor Gillian Triggs and the respected Indonesian ambassador Dr. Hashim Djalal - himself a renown law of the sea expert - who explained Indonesia's complex problems with determining maritime boundary baselines and delimitation with northern neighbours and with East Timor.

Political geographer Professor Victor Prescott also discussed the maritime boundary issue. Talks on practical taxation and legal issues affecting the commercial operators were delivered by several senior partner's from Australian law firms.

There were no representitives or observers from the East Timorese government and civil society groups. This made the conference unfortunately "onesided" - as Mr. Imle observed to the audience.

He suggested that in future, the organisers might consider how such conferences might be made more accessible to interested East Timorese parties.

The conference's chairman was Mr Stuart Cave, former director of the Timor Gap Joint Authority.

Geoff Mckee --

Footnote ----------- Article 8 (b) of the Timor Sea Treaty includes the provision that "a pipeline landing in East Timor shall be under the jurisdiction of East Timor". The above provision can underpin an East Timorese LNG export industry. Such a potentially important vision to attract to East Timor foreign investment on a large scale was all but killed by misleading advice put out by the proponents of a pipeline to Darwin.

Excerpts from 8 Sept 1999 Senate hearing in Darwin Senator LIGHTFOOT:- Mr Godlove, you have said that your future planning is to put infrastructure - particularly with respect to the treatment of gas, LNG and other areas of petrochemicals - into the Northern Territory. It is around Darwin somewhere, one assumes, where you could have perhaps hundreds of millions of dollars - or perhaps billions, if the field were big enough. Notwithstanding the associated geological problems undersea, where most of the gas at least would come from, is there a possibility that infrastructure could be transferred to East Timor and away from the Northern Territory? Mr Godlove:- From an engineering standpoint, no; it is not possible for us to take gas by pipeline from the Bayu-Undan field to Timor. The trench is too deep and too seismically active, and the limits of technology simply prevent that. Phillips funded a very significant engineering study into this, and we presented those results to the Indonesian authorities as well as to the Australian authorities. It is acknowledged that indeed, for engineering reasons, it is just not possible to take the gas to the north. So the only logical destination for this gas would be the Northern Territory. From Reuters, 26 June 2000:- "Alkatiri said downstream projects requiring Timor Sea gas to be piped ashore could only be developed in Australia as a deep underwater trench prevented pipelines to East Timor." From GTNews, 25 July 2002:- Under the treaty, the oil will be piped to Australia, a decision Alkatiri defends as logical. "If I were an investor, I would want the pipeline to go to Australia for two reasons," he explains. "Firstly because Australia will buy gas - you could bathe Timor in gas but there is no market. Secondly, the sea to Australia is not so deep, but the sea to Timor is extremely deep. Technically it is possible to send a pipeline to Timor, but one metre of pipeline costs much more in deeper waters. An investor would lose money."

It is now understood that the "significant engineering study" referred to by Mr Godlove was performed by leading international pipeline consultants J P Kenny in 1996, when the Indonesians were interested in bringing Timor Sea gas north. It is further understood that JPKenny's 1996 conclusions were essentially the same as those of INTEC's study discussed above by Mr. Imle. Mr Godlove did not mention the most critical design parameter, this being pipeline diameter. According to engineering experts, it is true that a 36-inch diameter pipeline cannot at the present time be laid in water depths exceeding 1500 metres, due to excessive stress created by the pipelaying process. Therefore Mr Godloves comments would be accurate if they referred to such a large diameter pipeline. However, there is no such technical difficulties with 26" or 28" pipelines in water depths of 2,500 metres - on this both JP Kenny and INTEC agree. A such smaller diameter pipelines are sufficient to feed an LNG plant, according to Imle and the INTEC study.

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