Disputes threaten lucrative Timor Gap pipeline By Virginia Marsh Financial Times

Published: October 24 2001

If all had gone to plan, divers would now be laying a pipeline along the seabed linking Darwin to the substantial gasfields off its shores and a decades-old dream would be close to becoming reality.

Instead, the Northern Territory government and several big oil companies are scrambling to prevent the collapse of projects worth up to A$16bn (US$8bn) that would generate - from a city some said should be abandoned just 25 years ago - substantial export earnings for years to come.

"Make no mistake, the development of an oil and gas industry here is the most significant opportunity the Top End [Northern Territory] has ever seen," says Clare Martin, the territory's new chief minister.

But if progress is not made in the coming weeks, Methanex, the Canadian chemicals group that hopes to build the world's biggest methanol plant in Darwin, and El Paso, the US energy group that intends to buy up to A$7bn worth of local gas, have threatened to take their business elsewhere.

The two groups are cornerstone customers for the first two gas fields to be developed in the resource-rich Timor Gap that separates Australia and East Timor. Together, the fields - Bayu-Undan and Greater Sunrise - have estimated reserves of 12,600bn cubic feet with the first gas, from Bayu-Undan, due on shore in 2004.

Two events, however, have blown the long-held plans off course.

First, East Timor unexpectedly announced in July plans to raise up to US$500m in extra taxes from the developments, plans that Australia and the oil companies say go back on earlier commitments.

Bayu-Undan lies wholly within an area operated jointly by the new state and Australia, while about 20 per cent of Sunrise falls in the shared zone. As a result, Phillips Petroleum, the US company that operates Bayu-Undan, put construction of the pipeline on hold.

Second, the partners in Sunrise - Australia's Woodside Petroleum, Royal Dutch/Shell, Phillips and Osaka Gas of Japan - are bogged down in a dispute over how best to transport their gas to market. A decision had been due this month but Woodside, the operator, says an agreement remains some way off.

Under the original plans, the Sunrise gas was also to have been piped ashore and processed at a new A$3bn liquefied natural gas (LNG) plant in Darwin, jointly owned by the venture partners.

But in August, Shell unexpectedly proposed that the gas instead be processed at sea on a floating LNG plant that it alone would own. The technology is untested - it would be the first such facility in the world but Shell claims it could cut costs by up to 40 per cent.

"The problem with the Shell proposal is that it doesn't include the other partners in the value-added part - the processing, marketing and selling," says Mike Lane, Woodside's Darwin manager.

For the Northern Territory - which will not receive royalties from the offshore developments - it is critical the gas comes onshore.

The LNG and methanol plants and pipeline construction would in themselves create hundreds of jobs.

But cheap gas would also mean the energy-strapped territory could at last develop an industrial base, enabling it to justify its existence from an economic point of view for the first time in its history.

In the mid-1970s, after Cyclone Tracy flattened Darwin - a city as close to Singapore as it is to Sydney - Canberra considered giving up on the country's costly tropical north.

"There was a strong impulse not to rebuild, just to let it go," says Ms Martin.

To this day, some 80 per cent of the territory's funding comes from the federal government. An area three times the size of France, it has just 200,000 inhabitants, nearly half of them in Darwin.

"A diversified industrial base would make us viable," says Paul Henderson, the territory's minister for resources. "Gas is the key. Without it, we are fairly stranded in terms of economic or population growth."

But he argues the projects are also of national importance. Within Australia, where demand for gas is set to outstrip supply in the next five years, the developments would be second in size only to the North West Shelf, one of the world's biggest LNG projects.

Although the territory's new Labor government has no formal role in the negotiations with East Timor, it hopes its good relations with the impoverished new state will help produce a compromise.

"East Timor will be seeking an outcome sooner rather than later," Mr Henderson says. "Revenues from oil and gas are about the only light on their horizon."

But even if other investors are being lined up to replace those threatening to pull out, time is short.

"Keeping El Paso on board is critical," he says. "All of a sudden, we could find ourselves with a world-class resource and no markets."

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