South China Morning Post July 6, 2001

EAST TIMOR Oil, gas deal 'favours Australia'

UN seen as striking bad bargain in revenue agreement giving nation-to-be '90 per cent of nothing'

VAUDINE ENGLAND in Jakarta

Photo; Champagne celebration: Australian Foreign Minister Alexander Downer and East Timorese interim economics minister Mari Alkatiri raise their glasses to toast the Timor Sea Arrangement on oil and gas revenues in Dili, while independence leader Xanana Gusmao looks on. Associated Press photo

East Timor's big hope for independence was signed yesterday - a pact ensuring the soon-to-be nation has economic security through oil and gas revenue. Tough bargaining between Australia and the UN Transitional Administration in East Timor produced a deal to share oil and gas revenues from the Timor Sea.

It was initialled in the East Timor capital Dili by Australian Foreign Minister Alexander Downer, Industry Minister Nick Minchin, East Timor's interim economics minister Mari Alkatiri and UN official Peter Galbraith. The deal agrees to give 90 per cent of revenue from the area to East Timor and 10 per cent to Australia.

"A great moment has arrived," said Mr Downer, toasting the deal with a glass of champagne. "I am convinced that the Timor Sea Arrangement is a good outcome for Australia and East Timor and that it will serve well in strengthening and deepening our friendship."

But while the 90/10 split appears favourable to East Timor, analysts and UN sources said Australia had secured by far the better deal through a combination of hard bargaining, psychological clout and misleading arguments about "generosity".

"The UN was totally outclassed by the Australians. In many ways the Australians were negotiating in bad faith," said a Western diplomat based in Jakarta. "It was a bit distasteful. Australia has done an immense amount for East Timor since it led the armed intervention which followed East Timor's independence vote in 1999. But this deal is not a good example of anything like generosity."

Prior to East Timor's 1999 ballot choosing independence, which will take full effect after elections on August 30, the rich oil and gas resources of the Timor Gap were shared between Australia and Indonesia, following a treaty signing in 1989. Indonesia had invaded the former Portuguese colony in 1975 and annexed East Timor a year later.

The earlier Timor Gap deal gave Indonesia 50 per cent of the revenues and Australia the other half, and included provisions beneficial to Australia such as a clause promising tax rebates on investments by oil companies.

That small print and other details disadvantageous to East Timor had been rolled over into the new deal, sources said.

"The new 90/10 split looks good on paper but there is a very arcane science in determining what is a barrel of oil, how by-products are defined, whether shipping is taxable, whether tax should start at the pipe or in the air and so on. You could argue that the Australians have given them [East Timor] 90 per cent of nothing," said a source close to the negotiations.

Timing and local politics played a role in shaping the deal. East Timor's transitional cabinet member for economic affairs, Mr Alkatiri, is thought to be unhappy with the deal but needed something signed before going into the election.

The UN's Mr Galbraith is due to leave the world body in five days, which may have further pressured a man who, along with Mr Alkatiri and Cabinet Member for Foreign Affairs Jose Ramos-Horta, was up against a large Australian team of lawyers, accountants, industry experts and more.

A key point left hazy by the signing ceremony, however, suggests the Timor Gap agreement may not be cast in stone. The UN administration for East Timor has no capability to sign treaties on behalf of a state which only gains sovereign independence after the August poll. This is why the deal has only been initialled so far, thereby leaving a window open for re-examination.

Several sources agreed that a future independent state of East Timor would have lots to argue if it chose to take Australia to international arbitration. One such point is the uncertainty regarding the actual seabed border between East Timor and Indonesia, something which was fudged by Indonesia in the original treaty.

This time around, Australia "bargained very hard on behalf of their own national interest", said Mr Galbraith. The negotiations, which began formally last October, were "surprisingly difficult. But I guess that's what happens when people start arguing about money", he said.

The agreement covers a 75,000 square km area between the two countries, now known as the Joint Petroleum Development Area. A key part states about A$13.7 billion (HK$55.4 billion) will be spent developing industry in and around Darwin to produce and use Timor Sea gas. Mr Galbraith said it showed "the greater economic benefit will go to Australia".

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