The Wall Street Journal June 10, 2004

PAGE ONE

Deep Division

For East Timor, Energy Riches Lie Just Out of Reach

Poor, Fledgling Nation Seeks To Redraw Undersea Map; Australia Stakes Its Claim A Cloud Over Greater Sunrise

By TIMOTHY MAPES and PATRICK BARTA

Staff Reporters of THE WALL STREET JOURNAL

DILI, East Timor -- Tiny East Timor fought for nearly a quarter of a century to free itself from Indonesian invaders. Now it faces a struggle with this region's other giant, Australia, over lucrative oil fields critical to its economic survival.

When East Timor became the world's newest country just over two years ago, it needed immediate international life support. Almost a quarter of its population had died during a brutal 24-year civil war. Rampaging Indonesian forces burned about 80% of the territory's government buildings and infrastructure after its 800,000 people voted for independence in 1999.

Massive injections of foreign aid have kept the country afloat since then, allowing rebuilding to begin. But with almost no local industry -- the country booked just $6 million in exports last year -- East Timor is pinning its economic hopes on large oil and natural gas fields that lie off the island's south coast.

But that plan has hit a surprising obstacle: Australia. Though it led the United Nations peacekeeping force that restored order after the 1999 violence, and has been one of East Timor's biggest aid donors ever since, Australia lays claim to most of the Timor Sea's energy fields.

It cites a treaty it signed with the former Indonesian military dictatorship some three decades ago. That treaty also gives Australia control over the Timor Sea's biggest prize: a vast, underwater natural-gas field called Greater Sunrise. It holds an estimated $30 billion in oil and natural gas -- enough to transform East Timor's future. Sixty percent of the tiny country's residents live on less than $2 a day, according to the World Bank.

East Timor believes it has a strong claim to the Greater Sunrise field, which lies just 95 miles south of its coastline and 250 miles north of Australia. Many of the foreign charities that helped keep East Timor's fight for independence alive during the Indonesian occupation are now promoting its case against Australia.

"It is, quite literally, a matter of life and death," said Mari Alkatiri, East Timor's prime minister, sitting in a low, white colonial building facing the sea. Outside, battered taxis puttered up and down Dili's quiet and dusty streets, trying to encourage the city's few pedestrians to take a $1 ride.

Currently, more than 10% of East Timorese children die before they reach the age of five due to illnesses like diarrhea and malaria, according to Oxfam Australia, one of East Timor's most active charities. That rate is roughly three times the level of other Asian countries. Oxfam recently released a statement arguing that Australia's position on the Timor Sea oil fields is obstructing East Timor's efforts to reduce infant mortality and lift itself out of poverty.

A rugged tropical nation about the size of Connecticut, East Timor languished for three centuries as a generally forsaken Portuguese colony. The territory declared independence on Nov. 28, 1975, only to be invaded by Indonesia nine days later. Indonesian rule brought a massive military presence -- aimed at defeating Timorese guerrilla fighters who took to the hills -- and Indonesian civil servants who filled most of the top government jobs. In a 1999 referendum supervised by the United Nations, the territory's people voted almost four to one in favor of independence.

Despite East Timor's woes, Australia insists that it has already been sympathetic to the country and refuses to go further by giving up territory it has held for more than 30 years. Australia also insists it won't be swayed by East Timor's efforts to try to win over public opinion by showcasing its poverty and characterizing Australia as a bully.

"We were very generous given the role we played in helping to free the Timorese and give them their own country," says Alexander Downer, Australia's foreign minister. "We weren't asking for a kick in the teeth for our generosity." He says redrawing Australia's boundaries to accommodate East Timor would be like the U.S. volunteering to cede Texas to Mexico, just because Mexico is less wealthy and would benefit from added territory.

Much is also at stake for the oil and natural gas companies that have investments in the region. The four companies involved in the Greater Sunrise field -- Royal Dutch/Shell Group, ConocoPhillips, Japan's Osaka Gas Co. and Woodside Petroleum Ltd. of Australia -- have spent some $150 million so far in exploration and development costs related to the field.

While the companies aren't likely to produce significant amounts of natural gas until 2009 or 2010, even that target date could be put in jeopardy if the dispute drags on much longer. "We need markets [for the gas], and to get markets, we need certainty" about the boundaries, says Rob Millhouse, a spokesman for Woodside, the field's operator.

Some natural gas from the region is already flowing. Rushing to get some initial projects off the ground, East Timor agreed with Australia in 2002 to set up a joint development zone in one section of the waters between the two countries.

Under that treaty, East Timor will get 90% of the revenue from projects within the joint development zone, while Australia will get 10% -- a significant shift from a 50-50 split that Australia and Indonesia planned before East Timor broke free. In February, Houston-based ConocoPhillips began tapping natural gas and liquid condensates from a $1.8 billion venture in the zone.

But the treaty didn't resolve the status of Greater Sunrise, which lies mostly outside the zone. As a new state, East Timor insists it has a right to negotiate a new sea boundary with Australia. Moreover, it argues that the 1982 United Nations Convention on the Law of the Sea supports the use of a midpoint boundary in cases where territorial claims overlap, as they do in the Timor Sea.

By drawing a midpoint line, all of the area's major energy deposits would sit on East Timor's side, including Greater Sunrise.

Some international observers believe East Timor has a strong case, despite considerable ambiguity in international law on these kinds of boundary disputes. "There's a substantial body of modern maritime law that supports East Timor's position on this issue," says Elisabeth Huybens, the head of the World Bank's office in Dili.

If East Timor can enlarge its maritime boundaries to include Greater Sunrise and other nearby fields, she says it could triple its spending on health, education, roads and other badly needed infrastructure. Currently, the East Timor government's entire annual budget amounts to just $75 million; about 40% comes from foreign aid.

Preliminary discussions over the issue began last year, and an initial round of negotiations was held in April. But so far the talks have been bogged down, with East Timor accusing Australia of dragging its feet to force it to accept a weaker deal, even as Australia continues to receive revenue from disputed areas.

While East Timor wants to discuss the issue every month, Australia has only agreed to meet twice a year. At the same time, Australia is getting an estimated $1.5 billion in royalties from projects in other parts of the sea that East Timor claims, and is selling new licenses to companies that want to search for more oil and natural gas in disputed areas.

As the dispute began to heat up in 2002, Australia also withdrew from an arbitration system for maritime disputes at the International Court of Justice. East Timor denounced the move as an "unfriendly act" and complains it now has no legal recourse if negotiations fail.

Australia counters that its 1970s boundary with Indonesia -- which extends along the continental shelf off Australia's coast -- would hold up under current international law. Foreign Minister Downer argues that debating Australia's boundaries could expose it to disputes with other countries, including Indonesia.

Since the 1970s, some international courts have favored boundaries that lie at the midpoint between countries whose claims overlap, absent compelling reasons to do otherwise. But courts have also been reluctant to dramatically overhaul boundaries that have been in place for many years, such as the Australia-Indonesia boundary.

In a meeting on the matter between Messrs. Alkatiri and Downer in November 2002, Australia took an extremely hard line, according to minutes of the exchange that appeared after the meeting on an Australian independent news Web site, called crikey.com.au. "We are very tough. We will not care if you give information to the media. Let me give you a tutorial in politics -- not a chance," Mr. Downer warned, according to the minutes.

Mr. Downer said the minutes were released by East Timor officials and reflected their views. He otherwise declined to comment on them. But he added, "If in the end they think they're going to get us to agree, they might find they're wrong.... We're not offering any concessions."

As the fight unfolds, life in East Timor remains unusually harsh. In Mota Kiik, a village an hour outside of the capital Dili, about 300 young students sit quietly in a makeshift primary school, jury-rigged from the remains of a burnt-out agricultural laboratory. The facility, surrounded by pumpkin fields and dense green foliage, has no electricity or working toilets. Only two teachers supervise eight classrooms.

"The government can't afford to give us anything," says Thomas Soares, the school's 26-year old principal. In some rooms, 8-to-10-year-old students sit on the floor because they have no desks. A wall covered in black paint serves as a chalkboard.

Mota Kiik is better off than many other villages. Schools and medical clinics become scarcer farther away from Dili. In the fishing village of Behau, about an hour's drive east from the city, few of its 150 children receive any education or medical care at all. No teacher has ever come to work in a one-room schoolhouse built five years ago by a Canadian charity. Only a handful of older kids are able to walk six miles under the equatorial sun to reach facilities in the next town.

"Can you please ask the government to send us a teacher? We will pay him ourselves," says Mario da Cunha, a 32-year old fisherman. Surrounded by a group of preteens, many with eye infections and runny noses, he frets that his village's isolation is destroying its hope for the future. "If we don't get a teacher, our kids will grow up knowing nothing," he says.

The World Bank and the International Monetary Fund are working with East Timor to set up a special fund for its share of the expected oil revenue to direct money to the schools and other dire needs. Another aim of the fund is to avoid the government corruption that has plagued some countries with sudden inflows of energy wealth, including neighboring Indonesia.

Some East Timor politicians, including Prime Minister Alkatiri, have already been accused of accepting bribes related to the oil business. In a March lawsuit filed in U.S. district court in Washington, Oceanic Exploration Corp. of Englewood, Colo., accused ConocoPhillips of paying more than $2.5 million to Mr. Alkatiri and other East Timorese officials, as well as to Australian officials.

In its filing, Oceanic claimed its Portuguese unit, Petrotimor Companhia de Petroleos SARL, was awarded development rights in the region by Portugal before the 1975 Indonesian invasion. It accused ConocoPhillips and the governments of Australia, Indonesia and East Timor of conspiring to illegally seize those rights.

Mr. Alkatiri denies the charges, as does ConocoPhillips. Mr. Alkatiri says he uses an Australian bank account mentioned in Oceanic's filing to pay for his children's school fees, but says it has never contained more than $6,000 of his own money. ConocoPhillips says it will vigorously defend itself in U.S. court, and notes that similar claims by Oceanic have already been dismissed by an Australian judge.

In East Timor's makeshift presidential palace -- a tiny bungalow behind a burnt-out government office -- President Xanana Gusmao says his people do not intend to give up this fight. A neatly-bearded 57-year-old who led East Timor's guerrilla army through years of jungle fighting against Indonesia, Mr. Gusmao now has a largely ceremonial role in government but is widely viewed as East Timor's founding father.

"In 1975, when East Timor was invaded by Indonesia, we were told that it was a fact and we had to accept it," says Mr. Gusmao. "Nevertheless, we did not accept it, and we fought and we won."

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