Subject: FEER: Let the Oil Flow

Far Eastern Economic Review

EAST TIMOR

Let the Oil Flow

Oil firms will soon return to the Timor Sea, but the new nation may not be ready for the profits

By Mark Dodd/DARWIN

Issue cover-dated January 16, 2003

SOUTHEAST ASIA'S poorest country, East Timor, could get its first royalty payments from the oil- and gas-rich Timor Sea by 2004, money which experts say will mean the difference between aid dependency and economic self-sufficiency for the troubled half-island nation.

On December 17, East Timor's parliament ratified a long-debated treaty with Australia on production, profit sharing, and distribution of royalties and taxes from oil and gas reserves. The treaty will allow a handful of foreign oil companies to begin extracting oil from the Timor Gap, the 62,000-square-kilometre joint-development zone between Timor and the coast of Australia's Northern Territory.

But East Timor Foreign Minister Jose Ramos Horta says at least two or three years is needed for East Timor to strengthen its state institutions in order to ensure oil and gas revenue is properly disbursed.

East Timor would receive about $3 billion from a single Timor Gap field, Bayu-Undan, over 17 years, according to spokesman Blair Murphy of ConocoPhillips. The American firm is the major stakeholder in the field in a joint venture with American, Japanese and Italian concerns. The treaty grants 90% of proceeds from Bayu-Undan to East Timor and the rest to Australia. Australia is hoping that development and a possible pipeline to its Northern Territory will bring a major economic boost to the northern state's capital, Darwin.

Development will begin once the treaty is ratified by the Australian parliament, which it is expected to do some time after it reconvenes on February 4.

Australian and East Timorese government officials meeting in Darwin said they had "substantially narrowed" their differences on revenue sharing from what could be an even more lucrative field, Greater Sunrise, with an estimated 8 trillion cubic feet of gas worth some $22 billion. ConocoPhillips has a 30% stake in Greater Sunrise, along with Woodside, Royal Dutch/Shell and Osaka Gas. Oil companies have already completed exploration and surveys and are ready to begin extraction.

But for the young nation, money might start flowing too soon, and too quickly. First payments from Bayu-Undan will arrive in East Timor by 2004, says Murphy. Horta is concerned that his government isn't prepared. "The prime minister is very cautious about spending too much money. Our administration is generally very weak. If we were to have hundreds of millions in oil and gas money now, it does not necessarily mean it would be well-managed," he warned.

WEAK GOVERNANCE, STRONG INVESTMENT The United Nations had a crash programme to put East Timorese in charge of the new nation, which was officially founded on May 20, 2002. But in Horta's view, officials still lack real expertise in administration and governance.

Murphy said the rioting in December in the East Timor capital, Dili, that cost the lives of two people and left at least 20 injured would not interfere with ConocoPhillips's plans for Timor Sea oil and gas production. "We are constantly monitoring things over there and shall proceed forward," he says.

Horta was optimistic that the deadlock over revenue sharing from the Greater Sunrise field may finally be nearing resolution. East Timor believes it is entitled to 100% of revenues from Greater Sunrise but, in what could be a major concession, Horta suggests East Timor might agree to a 50-50 split with Australia. "East Timor is entitled to 100% of the rights so I hope Australia might agree to a 50% deal on Greater Sunrise," he says.

A spokesman for Foreign Minister Alexander Downer said that he expected full ratification by Canberra on both fields when parliament next sits.

Horta's appeal for more flexibility from Canberra on revenue sharing was given immediate support by Senator Bob Brown, the leader of Australian Greens Party. "East Timor is the poorest country in the region sitting next to the richest. The [Prime Minister John] Howard government is doing everything it can to keep the unjust seabed boundaries it has drawn," he told the REVIEW.

Brown said Australia had a moral debt to help East Timor out of its grinding poverty. "It's the one resource that can give East Timor the kick-start it needs," he says, promising to raise the issue in parliament early in 2003.


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