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The Canberra Times

E. Timor plays a waiting game over oil and gas Thursday, 2 December 2004

HOPES that Australia and East Timor might end their dispute over continental shelf rights in the Timor Sea by the end of this year have all but vanished.

The last round of negotiations, held in Dili in October, ended in deadlock.

This was the third meeting that had been held in just five weeks to try and resolve the sensitive political issue.

The apparent frustration of both sides following the breakdown in talks stands in some contrast to the upbeat mood that followed informal discussions between Australia's Foreign Minister, Alexander Downer, and his East Timorese counterpart, Jose Ramos-Horta, last August.

It was reported then that Ramos-Horta and Downer had agreed, "in principle" to a framework for resolving the dispute.

The basic parameters of the agreement, dubbed the "Hong Kong solution", involved the following exchange: East Timor would agree to put the issue of permanent maritime boundary delimitation on hold for the next 100 years and in return Australia would accept changes to the current system of revenue sharing from offshore oil and gas development, in East Timor's favour.

This proposal makes a lot of sense.

Fixing maritime boundaries creates problems for Australia as it could potentially unsettle the existing configuration of boundaries shared with East Timor in the current Joint Petroleum Development Area (JPDA).

It might also affect the adjacent sections shared with Indonesia.

East Timor, on the other hand, seems less concerned with having a permanent boundary as it is in being able to access desperately needed revenues from energy related developments.

Whilst the parties' continental shelf claims may be in conflict, their underlying goals may not.

From this standpoint, negotiations can deliver joint gains.

Yet the two sides have stumbled badly over the details of this framework agreement.

Last Monday, Ramos-Horta publicly admonished Australia for abruptly ending their diplomatic talks with a "take it or leave it" offer.

To gain an insight into the power dynamics of this political process, it is worth comparing the circumstances now to the situation faced in February/March 2003.

It was then that Australia and East Timor entered the final stages of their negotiations on an international unitisation agreement (IUA) for the development of the Timor Sea's massive Sunrise and Troubadour natural gas reserves (known collectively as Greater Sunrise).

These fields straddle the eastern perimeter of the JPDA and therefore cover two separate jurisdictional areas.

In order to conclude the agreement, Australia and East Timor had to agree on a formula for sharing the resource.

Australia wanted to treat the eastern perimeter of the JPDA as if it were an international boundary, which would place the largest portion of the field in Australia's jurisdiction.

East Timor felt that this was unfair, given that the lines defining the JPDA are not international boundaries but temporary jurisdictional lines, originally drawn up by Australia and Indonesia in the 1980s.

During the negotiations, Australia took the controversial decision to link the IUA to ratification of the Timor Sea Treaty, signed in May 2002, which governs the development of the Timor Sea's other major petroleum resource project, Bayu- Undan.

Unless East Timor signed the IUA, Australia threatened to pull out of the Timor Sea Treaty, which would have stalled project development and deprived East Timor of certain revenues from the Bayu-Undan development.

With its future economic viability being so dependent upon these revenues, East Timor was left with little choice but to yield to the ultimatum and sign the unitisation agreement on Australia's terms.

The revenue-sharing formula that was agreed to allocated 82 per cent of Greater Sunrise to Australia and 18 per cent to East Timor.

Shortly afterwards, Australia ratified the Timor Sea Treaty and royalties from production of the $40 billion Bayu-Undan gas-condensate fields have now started flowing to both countries.

Yet East Timor has steadfastly refused to ratify the IUA and unless it does so, development of the Greater Sunrise reserves, estimated to be worth more than $60 billion, will not proceed.

In the latest round of negotiations, East Timor expressed a preference for bringing natural gas from these fields to an onshore, liquefied natural gas (LNG) plant based in East Timor.

Although this proposal involves the greater engineering challenge of laying a pipeline across the deepwater Timor Trough, it gives East Timor a chance to capture more of the downstream value of the resource and other "value-added" opportunities in related industrial developments.

The fact that East Timor is openly discussing these ideas with both Australia and the companies involved, Woodside Energy and ConocoPhillips, is indicative of how much the bargaining circumstances have changed.

Now that Bayu-Undan is on stream, Australia has lost the crucial source of leverage that it possessed in the IUA negotiations last year and is unable to so easily coerce East Timor into acting against its own interests.

Ramos-Horta has suggested that his government is prepared to wait several years in order to achieve a fair outcome; and may even ask the United Nations General Assembly to request an advisory opinion from the International Court of Justice on the question of East Timor's legal rights in the Timor Sea.

With global demand for LNG on the increase, East Timor's long-term approach looks to be a wise move.

Alex Munton is a Ph.D student at the Research School of Pacific and Asian Studies,Australian National University