East Timor tries to avoid dark side of oil

By Peter Gelling International Herald Tribune

TUESDAY, FEBRUARY 21, 2006

JAKARTA Asia's newest nation, East Timor, is also its poorest, with about 40 percent of its one million inhabitants living in poverty. But its prospects are brightening, at least for now.

Rumbling deep below the Timor Sea, between the nation's southern coast and Australia, are billions of dollars of untapped oil and gas reserves. East Timor, which is currently in the early stages of drawing on those resources, is expecting a huge windfall over the next few decades.

Celebrations, however, have yet to begin. Oil wealth in developing countries has often turned out to be more an affliction than a cure, especially in places where corrupt officials siphon off the revenues.

In an attempt to safeguard the nation's new oil wealth, the East Timor Parliament followed the advice of foreign donors and passed legislation last year to establish a petroleum fund to manage the flow of revenue and discourage corruption.

The move was hailed as a positive step, one that could help the country avoid the pitfalls of Chad, where a petroleum fund intended for poverty alleviation fell to pieces last month. There, against the wishes of the World Bank, the government amended laws giving Chad's officials more freedom to spend their oil money in any manner they wanted. Last month the bank suspended $124 million in payments to Chad.

In East Timor the proceeds from oil have the potential to take care of the country's infrastructure, schools and health needs, said Elisabeth Huybens, World Bank country manager. "One cannot underestimate how important this is," she said, adding that there was a "fairly solid set of arrangements" to protect the sanctity of the oil fund.

The East Timor legislation requires all revenue from oil and gas to be deposited into a single account. It allows the government to spend only a small fraction of that revenue, an amount dependent on gains made by the fund's investments. The bulk of the money is to be invested in low-risk bonds. When oil and gas reserves run out, there should still be substantial amounts left for future generations, said Huybens.

The law establishes several monitoring organizations to supervise the management of the fund, and the monitors are required to publish findings periodically to the public.

But whether the money will remain safe is open to question, said Charlie Scheiner, a researcher with Lao Hamutuk, a local nongovernment organization in East Timor. Like Chad, the government could easily amend the fund law to gain more power over the money, he said. "The fund is not well protected," he said. "The law doesn't require any special resolution or justification for alterations to the fund."

Expectations for development are now growing as oil money begins to flow.

One of East Timor's smaller deposits, Bayu-Undan, began production in February last year and the government's budget has increased from $80 million to almost twice that in 2006.

The Bayu-Undan field is expected to generate $250 million annually over its projected 20-year life span, almost $5 billion in all.

In addition, East Timor and Australia signed an agreement last month to share revenues from another area of oil and gas deposits known as Greater Sunrise. The two countries will evenly split the revenue, giving East Timor an additional $10 billion, depending on oil prices, over the development's projected 30-year life span, said Geir Ytreland, a Norwegian adviser to the East Timor government.

On March 17, East Timor will begin selling off 11 oil and gas contract areas located near its southern coastline that are entirely under East Timor's jurisdiction. Ytreland said these deposits could generate revenues similar to the Greater Sunrise development.

East Timor became independent in 2002 following 24 years of Indonesian control and several years of United Nations administration. After East Timor voted for independence in 1999, Indonesian militias led a scorched-earth campaign killing more than 1,000 civilians, burning an estimated 70 percent of the country's infrastructure and displacing three-quarters of the population.

These days East Timor continues to struggle. According to the World Bank, unemployment has reached 20 percent in urban areas. Life expectancy is in the mid-50s, one in 10 children die before the age of 5 and 40 percent of the population cannot read or write. One in five people live on less than $1 a day.

The East Timor government and multilateral donors are depending on the oil and gas deposits to improve all this. The donors, who have invested hundreds of millions of dollars in the country over the last seven years, say they expect that these petroleum reserves will supplant their assistance.

Foreign donors and local officials are optimistic that the provisions written into the petroleum fund legislation will prevent the government from spending irresponsibly. Revenue from the Petroleum Fund spent by the government must be accounted for in the national budget, and cannot be spent in any other way, Ytreland said.

In addition, an independent external audit will be carried out annually by an internationally recognized accounting firm, while the Banking and Payments Authority operating the fund will make quarterly public reports, available on the Web. The law also calls for establishing a council to monitor investments.

Norway, a small country with large oil and gas deposits, has acted as a prominent adviser and model for East Timor. Ytreland, who has been working in oil development around the world for more than 20 years, said East Timor's adoption of the petroleum fund and its apparent commitment to transparency gives it a good chance of beating the odds that have plagued other developing countries.

"We see the pitfalls of corruption and nepotism in so many African, South American and Asian countries and we are trying our best to prevent that from happening here," he said.

But the lack of experienced government administrators is adding to that challenge, said Bjorn Blokhus, the Norwegian ambassador in Jakarta. Indonesians occupied most high-level positions when they left in 1999.

Timorese slowly took over in the ensuing years, but often with weaker skills and less education.

A lack of experienced officials can also be a disadvantage to East Timor when it negotiates with oil companies and major powers like Australia and Indonesia. Last month when East Timor negotiated to share revenues from the Greater Sunrise oil deposits, some East Timorese said the nation got a poor deal.

The oil field is closer to East Timor than Australia and under standard international law, East Timor should have full rights to it, Scheiner of Lau Hamutuk said. The possibility of developed countries taking advantage of East Timor's inexperience at the negotiating table is more of a problem than the potential for corruption, said Scheiner.

"My concern is how the East Timor government can deal with other powerful players like the Australian government and oil companies that are hundreds of times larger and more powerful and more experienced, which are trying to manipulate the system to get the most money they can," he said.

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