Subject: IHT: E.Timor Energy Reserves Are Sensitive Independence Issue

International Herald Tribune Tuesday, December 14, 1999

East Timor Energy Reserves Are a Sensitive Independence Issue

By Michael Richardson International Herald Tribune

DILI, East Timor - Mari Alkatiri is one of only four surviving independence leaders in East Timor from among the group that was active when Indonesia invaded and occupied the former Portuguese colony in 1975. The rest were killed, died in jail or defected to the Indonesian side.

So it is hardly surprising that Mr. Alkatiri insists that a controversial offshore petroleum development treaty negotiated by Indonesia and Australia in 1979 is now illegal.

Known as the Timor Gap Treaty, it established a governmental framework and regulations that encouraged international oil companies to spend hundreds of millions of dollars searching for oil and natural gas in the seabed between East Timor and northern Australia.

Mr. Alkatiri has emerged as the key East Timorese negotiator on the future of the treaty following East Timor's recent separation from Indonesia.

Although the United Nations is formally in charge of the territory until it becomes independent within two or three years, officials of the UN Transitional Administration in East Timor have undertaken to consult closely on all major decisions with Timorese leaders.

''We East Timorese always considered Indonesia's occupation of our country illegal,'' Mr. Alkatiri said in a recent interview. ''So did Portugal and the international community. The Timor Gap Treaty is therefore an illegal one for us, as the successor state to Indonesia.''

Yet as a result of the secure tenure promised by the treaty, oil and gas production projects worth billions of dollars have either gone ahead, or are on the verge of doing so, in or near the 62,000 square kilometer (23,900 square mile) zone covered by the treaty.

Such projects, along with coffee and tourism, promise to be a vital source of revenue for East Timor. One of Southeast Asia's poorest areas, the territory was further impoverished by the destruction wreaked by departing Indonesian troops and the militia gangs they supported following the overwhelming vote for independence Aug. 30.

So Mr. Alkatiri, a vice president of the National Council of East Timorese Resistance in charge of legal affairs, is trying to tread a fine line between principle and pragmatism.

''We are not going to do anything to upset the oil and gas projects in the Timor Gap zone because it is in our interests to keep them going,'' he said. ''We must create a provisional framework to assure investors that renegotiation of the treaty will not prejudice their position.''

On the basis of assurances that existing administrative and tax arrangements will be maintained even if the treaty is renegotiated between an independent East Timor and Australia, an international consortium headed by Phillips Australia, a unit of Phillips Petroleum Co. of the United States, last month agreed to invest $1.4 billion on the first phase of a project planned to last more than 20 years to exploit a large reserve of gas and condensate in the Timor Sea, 500 kilometers (310 miles) northwest of Darwin.

Known as the Bayu-Undan field, it contains proven reserves of 102 billion cubic meters (3.6 trillion cubic feet) of gas and associated hydrocarbon liquids, the equivalent of about a billion barrels of oil.

Production and sale of the liquids is due to start in late 2003 or early 2004. In phase two of the project, the group plans to pipe the gas onshore for sale in Australia and export it to Asian markets in the form of LNG, liquefied natural gas.

''The negotiations between East Timor and Australia on fixing the seabed boundary are between them,'' said Jim Godlove, Phillips' manager in Darwin. ''But we want to make sure that our existing legal rights, and the fiscal and administrative arrangements, are unchanged for the life of our project.''

Other oil companies say they want to explore or develop discoveries in the zone, provided the operating terms do not change.

The zone is divided into three areas. Area C, at the northern end, was administered by Indonesia but is now being taken over by the UN on behalf of East Timor. Area B, at the southern end, will remain under Australian control. Each government is entitled to a 10 percent share of taxes collected from any oil or gas production in the other's domain.

Area A, in the middle of the zone and accounting for about half its area, was administered by a joint Australian-Indonesian authority, which is now becoming a joint Australian-UN authority, with the UN acting for East Timor.

Taxes are split 50-50, after producing firms have recovered their costs.

The Bayu-Undan field is in Area A. So is a relatively small oil field operated by Phillips and several joint venture partners, as well as two other potential commercial fields - one oil and the other gas.

The Timor Gap currently produces revenue of up to 5 million Australian dollars ($3.17 million) a year, which was divided equally between Australia and Indonesia and will now be shared on the same basis between Australia and East Timor, Australian officials said.

Revenue is expected to rise to several tens of millions of Australian dollars by 2005 when the Bayu-Undan field reaches full production.

''For Australia, the royalties that come from the Timor Gap are never going to be very significant in terms of our budget,'' said Foreign Minister Alexander Downer of Australia. ''But for East Timor, it has the potential to be a nice little earner.''

The problem for Australia and for international companies with oil and gas fields on either side of the Timor Gap zone is that East Timor wants to fix the seabed boundary halfway between its shoreline and the Australian coast so that it will gain a bigger share of oil and gas revenue, while Australia gets less.

If Australia concedes, that could prompt Jakarta to reopen negotiations as well, analysts say, and cloud the entire project in investment uncertainty.

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