The Christian Science Monitor Monday, May 21, 2001

In Timor Gap deal, little guy may finish first

By Shawn Donnan Special to The Christian Science Monitor

SYDNEY, AUSTRALIA

Almost two years after East Timor was left in ruins by pro-Indonesian militias, the nascent country is about to sign a deal with Australia that could go a long way toward helping it one day stand on its own two feet economically.

After months of talks, Australia and East Timor are close to agreeing on the basic tenets of a new treaty covering a 30,000-square-mile zone of oil and natural gas reserves known as the Timor Gap. Under that treaty, people close to the negotiations say, the Timorese will be getting 85 to 90 percent of what could prove to be hundreds of millions of dollars in annual royalties.

But there's another hopeful sign for East Timor. Amid doubts that they can muster the personnel resources to avoid some of the mistakes made by other nations rebuilding after conflict, East Timor's leaders - with the help of the United Nations - have proved that when it comes to the economic future of their country, they can play hardball.

"For 24 years we fought against another big country, says Mari Alkatiri, the East Timorese minister for economic affairs in the UN-backed transitional administration now in place (UNTAET). "Now we are really lucky because we can deal with a democratic country." A spokesman for Australian Foreign Minister Alexander Downer said last week: "They've taken a pretty tough negotiating position."

The zone was delineated in 1989, when Australia and Indonesia signed a controversial treaty splitting royalties from the area straight down the middle. So when East Timor voted for independence from Indonesia in 1999, most expected East Timor to take over Indonesia's share and end up with 50 percent of the royalties. Seeking to appease nervous investors, the East Timorese themselves indicated just that. "The only thing wrong with the treaty is who signed the treaty," Nobel laureate José Ramos Horta said shortly after UN peacekeepers moved in.

That appeasing tone is now gone. Mr. Alkatiri, the Timorese minister, argues the entire Timor Gap actually falls in his country's territorial waters. "We think if we apply international law, 100 percent of the revenues would be ours. Our weapon is the legal one. And we are going to use it."

Australia begs to differ and the two sides have agreed to disagree for the time being on the issue of sea boundaries. But experts say the East Timorese case is a good one. International law, they point out, has grown in recent years to define the sea boundaries between two countries as the median line between them and to extend that to the seabed and the resources held in it.

East Timor's tactics have led some Australian commentators to call the Timorese greedy, and to blame the UN official leading the negotiations with Alkatiri of leading the Timorese astray. Some investors have raised the possibility of withdrawing if an agreement isn't signed soon. The way some see it, Peter Galbraith, a former US ambassador to Croatia, has been waging a personal vendetta against Australia because of its past policies toward East Timor. (Australia was one of the few countries to recognize Indonesia's 1976 annexation of the former Portuguese colony.)

But Alkatiri, who says the framework for an agreement could be agreed to at a meeting in the East Timor capital of Dili at the end of this month, is unrepentant. The hardball is all Timorese, he says: "The UN is ... playing the ball that we East Timorese want them to play."

The long fight for independence taught the leaders of tiny East Timor not to be intimidated by bigger adversaries, he adds. "We are not really worried about the size of the country we are negotiating with." And he and his negotiators aren't done yet - they want jobs for East Timorese workers and a share of profits from Australian-based refineries processing oil from the zone, for example.

Observers say Australia may have little to lose in giving up royalties. However the royalties end up being split, Australia will get most of the jobs and other economic benefits from the zone since the northern Australian city of Darwin will be the base for most of the companies working in the Timor Gap.

"They're right to push hard," says one Western official. "For the Australians the issue is almost a zero-sum game. What East Timor doesn't get from the Timor Gap is almost something that they will need in terms of aid."

With just a few minor oil wells in operation, royalties from the Timor Gap now amount to a few million dollars a year, and no one is sure how big the eventual windfall will be. The first significant production in the area isn't expected to begin until 2003, and while it's estimated that the equivalent of some 500 million barrels of oil - about $15 billion at current prices - are in the Timor Gap, variables abound.

Estimates of East Timor's annual share range from $70 million to $300 million, according to Joao Saldanha, an East Timorese economist now completing his PhD in the US. But, whichever end of the range you look at, for a country of 850,000, with an annual budget of $60 million a year, that's big money. In per capita terms, it's equivalent to about $350 a year for every man, woman, and child in a nation whose per capita income before the destruction of 1999 was only a little over $400. "This country was poor to begin with, even without the destruction or the violence. That's a bonanza for any country in the world if you look at it on a per capita basis," says Klaus Rohland, a Sydney-based World Bank official in charge of East Timor operations.

That bonanza doesn't come without potential complications. Experts caution that while they can enjoy a brief and intense wealth for a time, small countries relying on just one or two resources often get burned in the end as a result of a cruel brew of naivete, corruption, and misguided spending.

The East Timorese say they are conscious of that. According to Alkatiri, they plan to invest most of the Timor Gap revenues. The rest will be used to help develop other sectors of the economy.

But it could be decades before any sector can grow to rival the Timor Gap.

The coffee industry was East Timor's biggest export sector before the 1999 crisis, but even then it amounted to only $10 million to $20 million a year. There are hopes for eventually exploiting other agricultural commodities and fisheries, and even building a tourism industry. But with the exception of businesses servicing the rich - and, by design, temporary - market provided by aid workers, the private sector has been slow to develop.

"In terms of the long-term viability of the economy and their chance to not rely on international aid, the Timor Gap is it at the moment," says Jan Van Houten, the International Monetary Fund's representative in East Timor.

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