Weekend Australian Saturday, April 1, 2006

OIL & GAS SPECIAL REPORT

The Timor Sea - Status Report and Analysis

Pacts clear legal fog to let Timor Sea operations take off

by Damon Frith

THE Timor Sea has long been a beacon for oil and gas explorers, but territorial disputes between Australia and its closest Asian neighbour have hampered efforts to determine the true significance of the region. The dispute has already caused the collapse of the $10 billion Sunrise project and the creation of a gas hub in Darwin, but the corner may be about to be turned.

With little fanfare, the Federal Minister for Industry and Resources Ian Macfarlane and the Prime Minister of the Democratic Republic of Timor-Leste (formally East Timor) Mari Alkatiri last month signed agreements that have put in place the legal framework and production sharing agreements required by oil companies to operate with certainty in the disputed waters.

The signing coincided with the release of three large tracts of acreage within the Joint Petroleum Development Area -- formally known as the Timor Gap -- and encompassing the disputed zone. Each of the blocks is adjacent to previous significant discoveries, including Sunrise, Bayu-Undan liquefied natural gas project and the Laminaria/Corallina oil discoveries.

Bayu-Undan, operated by US-based ConocoPhillips and in which Australian-owned Santos Ltd has a 10 per cent share, operates under its own negotiated agreements with the Australian and Timor-Leste governments but like all of the zone, 90 per cent of royalties go to the Timor-Leste Government.

Prior to East Timor's independence, the disputed water was under an agreement with the occupying forces of Indonesia that had been signed in 1976, but the dispute goes back to 1953 when negotiations started (never reaching a conclusion) with Portugal, the occupying colonial power.

The treaty with Indonesia was always disputed as illegal by East Timor. Renegotiating the royalty split of the disputed area was the first priority of the new Timor-Leste Government, and after some bitter negotiations, the Australian Government finally reduced its take from the zone and agreed in May 2002 to grant one of the world's newest and most impoverished nations the lion's share.

Both governments remain eager for the Timor Sea to become a significant new hydrocarbon province, and the new releases and exploration and production agreements provide an avenue for that to occur.

Macfarlane told The Australian: ''One of the greatest advantages of doing business in Australia is certainty of the political, economic and legal environment in which companies are expected to operate. I would expect the industry will derive significant comfort, even courage, from the agreement of these documents. They deliver certainty for planned or future exploration and development plans in the area.

''From an investor's perspective, sovereign and legal risk has now been nullified when it comes to considering investment in the Timor Sea, with the legal and fiscal terms of exploration and development within the JPDA now clearly defined.

''Already significant investment has been made in the joint area, and I would expect that to continue given the amounts of proven reserves identified in, and close to, the region.''

The acreage release is being managed by the Timor Sea Designated Authority (TSDA), a jointly operated entity between the Australian and Timor-Leste governments. TSDA spokesperson Niny Borges said interest in the exploration blocks up for grabs was strong. Interested parties have until May 26 to register exploration plans. Both Woodside and ConocoPhillips are expected to bid on one or more of the exploration blocks.

There are also significant areas outside the disputed waters, and clearly inside Australian waters, that have the potential for new developments. These include the Tern, Petrel, Evans Shoals, Blacktip and recent Caldita gas discoveries.

Santos is eager to make the Timor Sea a core business unit for the group and its managing director, John Ellice-Flint, said: ''The company's main focus is to prove up sufficient reserves to justify the construction of a second LNG train at the newly commissioned Bayu-Undan facilities in Darwin.

''Late last year, Santos and ConocoPhillips were awarded permit NT/P69, which is adjacent to the Caldita discovery, and contains the previously discovered Lynedoch gas resource, which has now been renamed Barossa. Santos is working closely with its partners to optimise further exploration and appraisal wells in the area. Proposed activities planned for 2006 include a large 3D seismic survey covering up to 8,000 square kilometres and designed to take in the Caldita, Barossa and Evans Shoal fields.''

Various types of exploration and appraisal wells are also planned for Caldita, Barossa and Evans Shoal.

New entrants like AED Ltd and Goldsborough Pty Ltd are also eager to get production started in the Timor Sea.

But despite the move on several fronts to finally make the Timor Sea an attractive place to invest, there is still the dark cloud known as Sunrise hanging over the region.

Sunrise is project-managed by Woodside Petroleum but the 90-strong team that was working towards a development plan a few years ago has been disbanded as an agreement to allow the LNG project to proceed failed to materialise. Sunrise is not covered under the new agreements.

Sunrise contains in excess of 5 trillion cubic feet of gas (tcf) and has been earmarked as a future LNG development. The major sticking point is Timor-Leste's insistence that production facilities be built on its soil.

A pipeline to Timor would have to cross a 2km deep and geologically unstable trough. While the technicians say it is not impossible, it is a far riskier and more costly option to placing the facilities at Darwin. Darwin also has a growing base of secondary industries to service such a facility, and the stable political environment is an attraction.

However, given the ability of the governments to negotiate solutions in recent years to the problems that face development in the Timor Sea, an agreement on Sunrise may be on the horizon.

Macfarlane said: ''Last month's exploration and production agreements were agreed by both governments in recognition of the fact companies require this certainty before they can even begin to weigh the commercial considerations of investing in the JPDA.

''Given the successful negotiation of these operational instruments, Australia looks to East Timor to soon ratify the 2003 Greater Sunrise International Unitisation Agreement and progress ratification of the recently signed Treaty on Certain Maritime Arrangements in the Timor Sea to enable the Greater Sunrise project to proceed''.

------------------- Joyo Indonesia News Service 

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