The Age

Oil, gas and money: Tiny Timor talks tough By DENNIS SCHULZ and MARK FORBES Thursday 19 April 2001

It was a passionate speech, made by a tall, intense man whose father, the economist and writer John Kenneth Galbraith, was a towering figure of post-war American public life. Before a conference of resource industry leaders in Hobart last week, Peter Galbraith went through the numbers.

If the new nation of East Timor gained all royalties from current and planned resource projects in the Timor Gap, it would earn $515 million a year. Two oilfields alone, Galbraith continued, could generate $1 million a day for East Timor.

Imagine, Galbraith told his audience, what this means to a country that has an annual recurrent budget of $45 million, "where every building was burned to the ground, where there are 70 students for every teacher".

But if Galbraith came with pleas, he also came with demands. The 1989 Australia-Indonesia Timor Gap treaty was illegal because Indonesia's occupation of East Timor was illegal, he said. Therefore an entire new treaty must be negotiated, with East Timor receiving 100 per cent of Timor Gap royalties.

Galbraith then further rocked resource industry figures and even sent one of them, Jim Godlove of Phillips Liquid Natural Gas, hurrying from the room. The East Timorese were in no hurry to sign a new Timor Gap agreement, Galbraith said.

"I cannot say when it (the Timor Gap) will be open for business."

In the Northern Territory, the shock of those words are still being felt. Chief Minister Denis Burke yesterday flew to Canberra to protest to Foreign Minister Alexander Downer. Burke thinks the East Timorese hardline stand could endanger the largest single resource project in the territory's history. Burke told ABC radio in Darwin that unless investors could be reassured, "then frankly the whole Timor Sea project is in jeopardy".

The resource project on Burke's mind is the construction of a gas pipeline to Darwin from the Timor Sea, plus the building in Darwin of liquid natural gas and methanol plants - altogether valued at nearly $5 billion.

Until Galbraith's speech, the resource industry considered the project to be a certainty.

It had long been assumed that the 1989 Timor Gap Treaty, signed by Australia and Indonesia, would simply be rolled over with East Timor replacing Indonesia. That agreement set up a jointly administered zone of cooperation in the Timor Sea, with oil and gas royalties split half and half between the countries.

But in negotiations this month, Australia is understood to have offered East Timor 85 per cent of the revenue from the joint production zone. Part of Australia's generosity is driven by goodwill to East Timor, but it also recognises that the more revenue Timor gains from exploiting the oil and gas fields, the less aid Australia is likely to have to provide to the new nation. Australia also wants to avoid an international court challenge by East Timor to the treaty.

But Galbraith argued that Australia had to do much more. Royalties were not the issue, he said. In a new Timor Gap agreement, East Timor would seek to enlarge the boundaries of the zone of cooperation to include two existing oil fields - Laminaria and Buffalo - operating under Australian licence.

Such a boundary change would force Australia to redraw its northern sea border, giving up sovereignty over a substantial area of seabed to East Timor.

East Timor was happy to wait for a better deal, Galbraith warned. The current plan to pipe gas to Darwin only exists because it is impossible to lay a pipeline from the gasfields across the 3000-metre deep Timor Trough to Timor. However, in future it may be technologically possible to pipe gas to East Timor, "thus giving East Timor the downstream benefits of its own resource".

Galbraith quoted figures showing the benefit to the Northern Territory from the construction of gas and methanol production facilities in Darwin following resource discoveries in the Timor Gap. The territory would gain 2800 new jobs and a huge slice of capital expenditure of $4.7 billion.

As a result, Galbraith said, the increase in the annual household consumption of Northern Territorians would be $420 dollars - more than average per capita income of the East Timorese.

Central to plans to develop the Timor Sea reserves are strict, non-negotiable deadlines set by major buyers of gas and liquid natural gas. Both the Australian Government and the East Timorese administration know they must conclude an agreement that will give investors fiscal and legal certainty. Without it investors will drop out of the project because they will be unable to supply products to their clients on time.

The Federal Government does not share Burke's anxiety about the negotiations, and is optimistic about finalising a new treaty before the end of the year. But Australia is resisting any move to alter the seabed boundaries laid down in the initial treaty, and it is also not prepared to allow East Timor to accept all the oil and gas royalties.

"We want to be fair and equitable to both sides, but there are important Australian interests which need to be accommodated," said a spokesman for Alexander Downer.

The government wants to conclude the treaty before East Timor is handed over to local control, possibly forcing Australia to resume negotiations from scratch with a new administration.

But the resource industry does not share the Federal Government's optimism. Two companies, in particular, have huge investments at stake. The Methanex company of Canada plans to build a $1billion methanol production facility in Darwin using Timor Sea gas. They must have gas onshore and a plant built by 2005 in order to supply Asian clients. Methanex have asked the East Timorese UNTAET government for a "letter of comfort", an assurance that the lack of progress on the Timor Gap Treaty will not stop development of the field. That letter has not yet come.

Phillips Petroleum has been the main initiator of the gas pipeline and many of the downstream projects in Darwin. It will supply gas to enable another company, Epic Energy, to build a 2200 kilometre pipeline from Darwin to Moomba in South Australia to supply south-eastern Australia with gas. American energy giant El Paso has also signed a letter of intent to purchase nearly five million tonnes a year, for 20 years, from Phillips' proposed Darwin liquid natural gas plant.

At the Hobart conference, Phillips representatives voiced their alarm to representatives of both Australia and East Timor. "We made it very plain to them last week that we expected a speedy resolution of this issue, and that there's no longer any time for debate," says Phillips' Darwin manager Jim Godlove. "We need prompt and firm action. It's crunch time."

Industry insiders say they initially saw Galbraith's position as an ambit claim to get a better deal for the Timorese. That view has now changed. They now believe Galbraith has raised the expectations of the Timorese leadership that if they wait longer than the developer's July deadline, they can get all of the Timor Sea resources.

The industry argues that should East Timor hold up pipeline construction and lose the markets, there is no certainty anyone will develop the Timor Sea reserves in future. They say markets spark developments, not resources.

Abundant untapped gas reserves exist around the world and the markets will simply look elsewhere. Says one industry insider: "Any pragmatic assessment should be that East Timor should take this huge potential revenue stream now rather than wait for 100 per cent, which could turn out to be 100 per cent of not very much."

This story was found at: http://www.theage.com.au/news/2001/04/19/FFX0E6UYNLC.html

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