also: Canberra stays out of Timor gas row

Australian Financial Review

April 24, 2002

Oil's not well in the Timor Gap

Tim Dodd

Australia's bęte noire returned to Dili last week to stiffen the spines of the East Timorese in their latest bout with Canberra over rich Timor Gap oil and gas reserves.

Peter Galbraith, an abrasive American political science professor who negotiated the new Timor Gap treaty with Australia on behalf of East Timor, was back in Dili to offer advice to the members of its new parliament. Galbraith, a former US diplomat who served as ambassador to Croatia in the mid-1990s, is never one to underestimate either his own impact or his own importance.

He told parliamentarians in Dili last Friday Australia had complained about him more than two of his previous antagonists, Slobodan Milosevic and Saddam Hussein.

The legislators appeared to take him seriously and that means the Australian Government may find it more difficult to settle remaining issues, which are clouding the prospects for the planned signing of the Timor Gap treaty on May 20, the day East Timor becomes independent.

During the treaty negotiations in 2000 and 2001, Galbraith played a crazy-brave game of brinkmanship that was surprisingly effective in winning East Timor valuable concessions from Australia and the energy companies.

Under the old treaty with Indonesia, oil and gas production from the so-called joint petroleum development area in the Timor Sea was split 50:50 between Australia and Indonesia. When negotiations over a new treaty began two years ago, Australia quickly moved to a position in which it was willing to offer East Timor 80 per cent.

That wasn't good enough for Galbraith, who was also a cabinet member in East Timor's transitional government until locals took over the reigns last September. With hard-ball tactics honed in the Balkans, he successfully pushed Australia to agreeing to a 90:10 split.

Immediately after that victory last July, he turned on the energy companies and demanded an extra $US500 million ($927 million) in taxes from the partners in the Bayu-Undan field in the jointly-administered area led by US company Phillips Petroleum. Phillips responded by putting on hold the second phase of the project, which includes an LNG processing plant in Darwin and a 500km pipeline to the plant from the Bayu-Undan field.

At the time, Galbraith was castigated for putting developments at risk, not only damaging Australia and the Northern Territory but possibly devastating East Timor's economy. In the event, Phillips decided in March this year to go ahead with the pipeline and the plant, which, when it comes onstream in 2006, will be the first big project operating from the joint development area.

Now the Timor Gap developments have hit another hitch, this time not of Galbraith's making, but this has not stopped him trying to influence the outcome. Australia wants several matters settled before it signs the new Timor Gap treaty, particularly a clarification of the arrangements for the next big project in the joint development area: the Greater Sunrise Field.

This field actually straddles the joint development area and Australia's zone. Because it is largely in Australia's area, it has been agreed that production should be "unitised" with 80 per cent attributed to Australia and 20 per cent to the joint area. Under the 90:10 split that applies to the joint area, this means East Timor gets 18 per cent of production.

Australia wants the legal detail of this arrangement cleared up as well as other matters canvassed in the wider agreement including, according to the East Timor side, issues of health and safety, environment, immigration and taxation.

But Galbraith is having none of that. He says Australia has acted in "bad faith" by putting forward new demands. "I can't comprehend it. It does boggle the mind," he says.

"This is Australia's first issue with [independent] East Timor. It is by far the most important issue of the bilateral relationship."

He says none of the issues raised by Australia needed to be settled before signing. "They are covered in the treaty, they follow from the treaty, they are subsequent steps."

The Australian side disagrees, saying that the issues are not new demands but "technical things which need to be tidied up before the treaty is signed".

It is clear that the treaty itself is not in peril because none of the issues still on the table appear to go to the treaty's substance.

And both Australia and East Timor need it to work. For Australia it opens a new gas development which will rival the North West Shelf and, for East Timor, it is a lifeline which will give the country an estimated $7 billion over 20 or so years.

There are also other problems to solve before full development can proceed that have nothing to do with the Australian-East Timor spat. In particular, there is a dispute between two key shareholders in Greater Sunrise, Phillips and Shell, over how the gas from this field will be processed.

Phillips wants to extend the Bayu-Undan pipeline to the Sunrise field and pipe the gas to Darwin, which will wring more value from the facilities it has already committed to build. This option also allows the gas to be transferred directly to Australia's domestic pipeline grid.

But Shell wants to build the world's first floating LNG processing plant and moor it in the Timor Sea above the field. Tankers will tie up next to it to transport the gas to market.

This commercial dispute is easily as big an obstacle to a go-ahead for development in the Timor Sea as the wrangling over the new treaty.

Australian Financial Review April 24, 2002

Canberra stays out of Timor gas row

Ian Howarth

The Federal Government has ruled out direct intervention to resolve the impasse between members of the Greater Sunrise joint venture over the disputed development of massive natural gas reserves in the Timor Sea.

Federal Industry, Tourism and Resources Minister, Ian Macfarlane, said yesterday he would not act as a circuit breaker between Woodside Petroleum and Shell, which support an offshore floating liquefied natural gas plant, and Phillips Petroleum, which opposes the deal.

Mr Macfarlane also revealed yesterday that the Government would introduce a modified depreciation regime for the petroleum industry in the May Budget.

Tax incentives to investors in small- to medium-sized petroleum and mineral exploration companies, in a bid to stimulate Australia's flagging resources sector, is also high on the Government's agenda.

The $5.2 billion FLNG Greater Sunrise development is under threat, as Phillips prefers to send Sunrise gas to Darwin via a 500 km undersea pipeline to supply a proposed onshore industrial market.

The Northern Territory Government has strongly endorsed the Phillips position as it tries to encourage industrial investment in the largely government-sector dominated Top End economy.

The NT Government believes it has identified sufficient gas customers to justify the additional cost of piping Sunrise gas to Darwin, but Shell and Woodside do not believe the NT market is a viable development option.

Meanwhile, the wider oil and gas industry is strongly supporting moves by the Federal Government to provide a more economically sensible depreciation regime.

The Taxation Department has deemed that offshore petroleum facilities have an effective life of 50 years, a position considered untenable by the industry.

"My expectation is that there will be an announcement in the Budget," Mr Macfarlane said yesterday. "I'll slash my wrists if it's 50 years."

Mr Macfarlane also revealed yesterday that he had commissioned the Australian Bureau of Agriculture and Resource Economics to investigate ways of stimulating more exploration through schemes like Canada's highly successful "flow through" shares.

"It's a scheme which has been introduced in Canada which allows people to invest and gain some taxation advantages, providing that money is used by the companies they are investing in on exploration," Mr Macfarlane said, after addressing the Australian Petroleum Production and Exploration Association conference in Adelaide.

"It's a process that basically gives tax relief to the investor while at the same time providing a capital opportunity to the company, provided they use that money to explore.

"We're keen to look at it and see what sort of opportunities can be presented. We're considering similar things in terms of venture capital."

In a wide-ranging briefing, Mr Macfarlane said he remained cautiously optimistic that Australia's North-West Shelf gas project partners would win a liquefied natural gas contract to supply China.

He said that at the end of the tender process, Chinese officials had lifted the supply contract from 3 million to 3.2 million tonnes of LNG a year and he hoped the contract could be expanded to as much as 4 million tonnes a year by the time the contract is awarded in about one month's time.

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