http://www.timesonline.co.uk/article/0,,630-720400,00.html

Times (UK)

Analysis

June 21, 2003

Border battle for the newest petrostate By Carl Mortished

Our correspondent reports on the struggle that holds back East Timor's entry to the ranks of the oil rich MARI ALKATIRI, Prime Minister of East Timor, the world’s newest country, is pondering a long struggle with a powerful opponent.

He is not thinking of Indonesia. East Timor won its freedom a year ago, voting for independence in 1999, then fighting for two years as the Indonesian army waged a scorched-earth war of repression. The Prime Minister has recently softened his stance towards Jakarta — he no longer calls for war crimes tribunals for Indonesian army officers but talks to his former enemy about more practical problems, about refugees and security issues.

The struggle that now preoccupies him is with a bigger and more powerful neighbour. That country is Australia and the argument is over oil.

A stretch of ocean, the Timor Sea, separates the two countries, but there is no agreement over how to divide the expanse, in particular an area known as the Timor Gap, where the seabed is rich in hydrocarbons. The dispute has continued since the island was a Portuguese colony in the early 1970s.

Australia claims its border extends as far as its continental shelf, covering more than 80 per cent of the Timor Sea and all the oil and gas beneath it. Australian companies such as Woodside Petroleum are already producing oil from Laminaria, a 300 million barrel field in the Timor Sea. ConocoPhillips is developing Bayu-Undan, a bigger field with 400 million barrels and 3,000 billion cubic feet of gas. But the biggest prospect is Greater Sunrise, which has almost three times as much gas as Bayu-Undan, and there is talk of $25 billion (£15 billion) in potential revenues.

Woodside and Shell are champing at the bit, wanting a development agreement. The oil wealth ought to be great news for East Timor but Mr Alkatiri is worried. Before anything happens, he wants a settlement in the Timor Sea. “We have made it clear to the Australians that we would like the maritime boundaries delimited within three or four years. We do believe our claim is strong.”

His claim is nothing less than 100 per cent of the disputed oil and gas-rich area, including Laminaria, the field already pumping to Australia’s benefit. After all, Greater Sunrise is 150 km south of Timor but 450 km northwest of Darwin and East Timor’s claim is based on the median line, equidistant between the two shores.

Needless to say, Australia also claims the whole of the pie. There is, however, a unitisation agreement waiting to be tabled in both countries’ parliaments that would divvy up Greater Sunrise. East Timor would get less than a fifth, and Alkatiri is under pressure from Australia to get it ratified.

“I am waiting for a better opportunity,” he says. “If I table it now it will certainly be rejected. This is a question of self-determination for the country. I am waiting for a serious commitment to negotiate maritime boundaries and not talk about 100 years of negotiations.”

He sounds bitter, but there is history. When Indonesia invaded the Portuguese colony in 1975, Australia saw an opportunity to settle the boundary question in its favour. In 1989, the Timor Gap Treaty was agreed with Indonesia. Australia got its mineral-rich continental shelf and, in return, recognised Indonesia’s sovereignty over East Timor. A Joint Petroleum Development Area (JPDA) was created on Indonesia’s side of the median line, within which Australia and Indonesia would share resources equally.

Xanana Gusmao, the former rebel leader and now President of East Timor, called Australia’s act a “betrayal”. Australia’s role in leading the UN peace-keeping force in 1999 helped to improve relations with the leaders of the new country, but they soured again last year as the two countries hammered out a new Timor Sea Treaty.

Knowing the new government was desperate for cash from the ConocoPhillips Bayu-Undan field, which is within the JPDA, Australia resisted East Timor’s demand for proper maritime borders under the Law of the Sea convention, which stipulates the median line as the appropriate boundary. Fearing that East Timor might make a legal claim, Australia quietly withdrew its acceptance of the jurisdiction of the International Court of Justice in the Hague.

Australia wanted a free hand with Greater Sunrise. One fifth of the huge gasfield falls within the JPDA and a deal with East Timor is therefore necessary to start work on the project. But Australia said it could wait, if necessary for decades, if East Timor insisted on maritime boundaries.

The 800,000 people of East Timor could not wait. The revenge of Indonesia’s armed forces laid waste to the country, torching houses and wrecking infrastructure. Tuberculosis and Dengue fever are rife. The average income, says Alkatiri, is about $1 a day. “But that is not real, it is based on a lot of money from donors.”

Australia got its Timor Sea Treaty and unitisation of each state’s share of Greater Sunrise. East Timor has a much better deal in the JPDA, where the split is now 90 per cent in East Timor’s favour, but even that means only 18 per cent of the gas in Greater Sunrise. Alkatiri says the Timor Sea Treaty is subordinate and falls away once permanent maritime boundaries are agreed, but there is little sign of Australia rushing to the table.

In the meantime, Alkatiri is worrying about oil revenues. Not the lack of them but the rising expectation of riches. Money from Bayu-Undan’s oil is expected to come ashore late next year or early in 2004. The political opposition wants some expenditure now.

For a budding petrostate, East Timor’s oil revenues will, initially, be paltry, some $70 million in the first year. There was no upfront payment when the new government renegotiated the deal with ConocoPhillips, he says. However, the oil income, when it arrives, will double the government budget overnight. That will increase further as Bayu-Undan starts to sell its gas, and Greater Sunrise would increase the revenues tenfold.

Alkatiri knows the risks. “Petroleum wealth can be a curse,” he says. Badly handled, the sudden arrival of cash in an economy based on subsistence farming could be disastrous. The example of Papua New Guinea, ravaged by violence and corruption since the arrival of mining companies, is close at hand.

Asked what the relationship with ConocoPhillips is like, Alkatiri’s response is cool. “It is business. The relationship between host country and oil multinational is always very difficult. My main concern is how to manage the resources for current and future generations. We are looking for a system that can guarantee some equity and equality,” he says.

A petroleum fund is to be set up, with advice from the World Bank. The objective is to spend the income from investments and maintain the value of the fund. Only sustainable income from the fund will be spent and an independent council will oversee its operations.

But can the East Timorese do what no one else, including Britain, has achieved? Alkatiri has no qualms. “In 1975, people doubted that we would win our independence. People don’t understand the will of our people and their determination.”

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