Subject: Fortune: Letter From Dili: Oil Under Troubled Waters

Received from Joyo Indonesian News

Fortune June 10, 2002

LETTER FROM DILI

Oil Under Troubled Waters

By: Eric Ellis

In the low-slung capital of the world's newest nation, "oil deposits" more likely mean greasy puddles left by decrepit cabs smuggled from Hong Kong and Singapore than barrels of black gold. But East Timor hopes that oil will help transform it from one of Asia's poorest nations (per capita income: $ 450 per year) into a thriving petro-republic.

On May 20, hours after it formally declared independence, the country took its first steps in this direction when freshly minted Prime Minister Mari Alkatiri signed a treaty with Australian leader John Howard to share oil and gas in the seabed between the two nations. East Timor will get 90% of the royalties from the Bayu-Undan gasfields being developed by U.S.-based Phillips Petroleum (soon to be merged with Conoco). Australia, whose military intervention in 1999 helped set East Timor en route to freedom from Indonesia, will get the rest. The U.N. estimates Dili's share will be $ 3.2 billion over the field's 17-year life.

An even bigger prize is the Greater Sunrise gasfield, which Phillips is also developing, along with Royal Dutch/Shell and Australia's Woodside Petroleum. Sunrise could bring in as much as $ 36 billion to East Timor over the next 25 to 30 years if the royalties are split the same way. That translates into a per capita GDP of about $ 2,000 for the nation's 750,000 citizens. And it would make Phillips and its partners East Timor's dominant economic power, accounting for 80% of GDP.

But there's a hitch. Australia doesn't want to share Sunrise, at least not so generously. Bayu-Undan falls within a cooperative development zone established in 1989 by Canberra and Jakarta, which then controlled East Timor. That treaty divided royalties fifty-fifty, so the new ninety-ten split favoring East Timor seems generous. But the 1989 accord covers only 20% of Sunrise. The rest, Australia says, falls on its side of a 1972 seabed boundary drawn with Portugal, at the time East Timor's colonial ruler, meaning East Timor has no claim to it. Dili's new government, hampered by accords it had no say in, wants to negotiate, but Australia won't budge. It has even pulled out of an international court that hears maritime disputes.

Prime Minister Alkatiri is not amused: "East Timor will press for the correct maritime boundaries," he told FORTUNE. As to what those boundaries should be, he has said he believes international law would "give East Timor all or the majority of the Greater Sunrise field."

Phillips is caught in the middle--and is under increasing pressure. Company officials have stated that first-quarter losses could be as high as $ 102 million, four times what was reported in April, largely as a result of drilling problems in Angola, another former Portuguese colony. Phillips and its partners have already sunk $ 1.5 billion into the Timor Sea projects and secured customers in Japan and the U.S. All the company wants is for the two governments to resolve their differences.

Phillips officials wouldn't comment about the dispute, but the company is doing its best to win favor in East Timor. It plans to re-develop the airport in the nation's second-largest city, Baucau, as its operations center. And it helped pay for the Independence Day celebrations, which Chairman Jim Mulva attended.

The betting is that Dili and Canberra will resolve their differences over Sunrise sometime this year. Even so, gas won't start flowing from Bayu-Undan until early 2004, or from Sunrise until after that. And that won't end East Timor's problems. The economy currently consists of little but subsistence agriculture, with coffee providing the only significant export earnings. Tourism will be difficult to develop, with world-class competitors like Bali nearby. And few jobs will be generated by the petroleum boom, since the oil and gas are expected to be piped to Australia. Nonetheless, oil could make the difference between East Timor's being permanently hooked to an international-aid drip and controlling its own economic destiny.

Photo: COLOR PHOTO: DARREN WHITESIDE--AFP, Independence brought fireworks and hope, but oil will bring money.; COLOR MAP: FORTUNE MAP


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