Subject: Despite Treaty, Timor & Australia Bicker Over Gas Divide

Copyright 2003 Energy Intelligence Group, Inc.

International Oil Daily

June 10, 2003

Despite Treaty, East Timor and Australia Bicker Over Gas Divide

Newly independent but impoverished East Timor is locking horns with neighboring Australia over an unresolved international boundary to demarcate the two nations -- and determine who gets most of the revenues from the huge Greater Sunrise gas fields.

East Timor, formerly part of Indonesia, exists on international handouts totaling some $150 million per year, and faces illiteracy rates approaching 50% and an unemployment rate of 80% in a population of 700,000.

While Australia can play a waiting game, East Timor badly needs to get gas revenues flowing, particularly since international aid may begin ebbing away. The US, Australia's closest ally, is threatening to reduce aid to East Timor by 25% from its current level of US$25 million annually.

Although some revenues from future oil and gas projects have begun to trickle into East Timor's coffers, money from gas projects in the Timor Sea won't begin making a difference for at least a couple of years. And question marks remain over the development of the biggest gas field -- Greater Sunrise -- which is potentially the country's biggest moneymaker.

While the Timor Sea Treaty was signed in March, it left some big issues unresolved, particularly where the maritime border will be drawn permanently on maps of the Timor Sea (IOD Mar.7,p1).

What has been settled is the development of a 6,200 square kilometer chunk of the Timor Sea called the Joint Petroleum Development Area (JPDA), which contains most of the large Bayu-Undan gas field being developed by ConocoPhillips, but only about 20% of Greater Sunrise. This means that most of the Timor Sea gas will remain locked up until a binding territorial agreement has been hammered out.

Australia has been accused of playing hardball with its tiny neighbor, even though the Australians have arguably done more than anyone to ensure the country's independence by providing financial, and even military, assistance.

East Timor, formerly a Portuguese colony, was invaded by Indonesia in 1975 and suppressed for 25 years.

International aid is one thing and huge potential gas revenues are another. Australia's resources minister, Ian "Chainsaw" Macfarlane, is heading efforts to ensure that Australia gets the lion's share of revenues from the Greater Sunrise oil field in the Timor Sea by pressuring the East Timorese into accepting a deal that gives the Australians some 82% of combined royalties from Greater Sunrise and Bayu-Undan (IOD Nov.1,p3).

The Australian government argues that most of Greater Sunrise lies atop the Australian continental shelf. East Timor proposes a border equidistant between the two nations, much the way that most maritime territorial disputes are resolved.

Australia initially agreed to having the dispute settled by the International Court of Justice in The Hague, but later withdrew. Some observers say it pulled out when it realized that the odds weren't in its favor.

East Timor had little choice but to sign the Timor Sea Treaty and ratify a Unitization Agreement related to the JPDA, as it risked delaying or even jeopardizing more than US$3 billion of badly needed revenue from Bayu-Undan over 17 years.

Signing the agreement also enabled East Timor to receive oil royalties from Australia, which had been held in trust until a new deal was signed.

The Australian government, for its part, was under pressure to agree to the treaty from ConocoPhillips and its partners, as well as the government of the Northern Territories, which will benefit from the construction of a natural gas plant in Darwin, the terminus of a 500-kilometer pipeline from Bayu-Undan.

Still, East Timor now insists that the Timor Sea Treaty is no more than "an interim agreement pending the delineation of permanent boundaries which currently don't exist," according to a statement released last month.

Australia argues that East Timor should recognize the boundaries established when the country was controlled by Jakarta. East Timor rebuts that the Indonesian government agreed to a boundary favoring Australia in exchange for Australia recognizing its annexation of the former Portuguese colony.

While the fact that East Timor will receive 90% of total revenues from the JPDA sounds generous, the reality is that if it agrees to the Australian border proposal, it would receive 18% of the total revenues from Greater Sunrise -- or 90% of the 20% of the reserves in the joint area.

Bayu-Undan has reserves of around 400 million barrels of condensate and 3.4 trillion cubic feet of natural gas, compared with 9.5 Tcf of gas and 300 million bbl of condensate at Greater Sunrise.

To sweeten its offer, the Australian government has offered to give East Timor an additional US$10 million per year once the Greater Sunrise project is developed. Money will only start flowing in from Bayu-Undan when Japan's Tokyo Electric and Tokyo Gas start receiving their 3 million tons per year of LNG in 2006.

One rumor making the rounds in Australia is that Woodside Petroleum might be willing to spend A$564 million (US$338 million) to buy a 12% stake in the Bayu-Undan project as a means of boosting its short-term gas reserves. ConocoPhillips holds an equity position of 64.14% in the venture, along with Italian ENI (12%), Japan's Inpex (11.71%), and Australia's Santos (11.83%).

Inpex and ENI -- but especially Woodside rival Santos -- could flex their pre-emptive rights to buy any spare shares in Bayu-Undan, however. For ConocoPhillips to sell a portion would be a reversal of the company's strategy, as it has been actively snapping up stakes in Bayu-Undan from BHP Billiton, Petroz, US independent Parker and Paisley, and Kerr-McGee over the past couple of years.

It seems the only thing that everyone agrees on is that Greater Sunrise is worth a fight.

James Irwin, Singapore


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