Global Insight

September 29, 2008

East Timor Optimistic about Sunrise as Government Draws up Deep Sea Pipeline and Petrochemical Plant Plans

Thomas Pearmain

The East Timor government has announced plans for a deep sea pipeline and a petrochemicals plant to process oil and gas from the Greater Sunrise Field. This flies in the face of existing pipeline plans by Australia's Woodside Petroleum Ltd., which if implemented, would see the gas processed in Australia.

Duel At Sunrise

Global Insight Perspective

Significance

With substantial reserves of 300 million barrels of oil and 8.3 trillion cubic feet (tcf) of gas, East Timor is keen to reap the benefits of the field to boost the population's living standards and encourage economic growth on the island which in turn will further political support for the government.

Implications

East Timor's pipeline proposal is likely to incur opposition from the project's consortium partners given its higher estimated cost and the significant risk to the Timor pipeline caused by doubts as to the island's political stability.

Outlook

The pipeline and petrochemical proposals set the stage for further tensions between the East Timor government and the consortium partners, raising the prospect of continued delays to the field's commercial development.

East Timor is drawing up plans for a deep sea pipeline and a petrochemicals plant to process oil and gas from the Greater Sunrise Field. The field is estimated to contain 300 million barrels of light crude oil and 8.3 trillion cubic feet (tcf) of natural gas, according to company and government officials cited by the Associated Press news agency. The East Timor government commissioned the survey by U.S. company DeepGulf Incorporated which claims that the 125-mile Timor Leste pipeline (which would run from the offshore Greater Sunrise field across the sea bed to East Timor) is feasible. East Timor is keen to press ahead with exploitation of the field since it is likely to generate around $3US billion in tax revenues as well as a further $10US billion from oil and gas sales.

However, East Timor will have to fight hard to get its pipeline proposal approved. The Greater Sunrise field lies in a disputed area of the East Timor Sea over which both East Timor and Australia claim jurisdiction and which neither party can exploit without the approval of the other. Australia's Woodside Petroleum Ltd. had originally proposed that a 530km pipeline should run from the field to ConocoPhillips $5US billion liquefied natural gas (LNG) plant located at Darwin, northern Australia. In July 2008, a Woodside spokesman announced that the Timor Leste pipeline option had been rejected by the company since the Darwin proposal promised lower capital costs, shorter construction schedules, and lower associated risks--for example, from political upheaval. The Woodside spokesman commented: "The Sunrise joint venture will not conduct any further work on the Timor Leste option. The extensive work that we've done shows it carries the highest capital cost, longest schedule and overall the most risk of the remaining options".

While Woodside and the consortium will develop the project based on the best commercial advantages, if the processing facilities are to be located in Australia it will either become the world's first floating gas liquefaction plant or an expansion of the existing Wickham Point LNG plant in Darwin. The Darwin facility is operated by

ConocoPhillips which holds a considerable stake (30%) in the Sunrise project (seeEast Timor-Australia: 31 July 2008:).

Indeed the proposed Tinor-Leste pipeline would have to run through the Timor Trough, a 3,350 metre deep chasm in the sea bed which would make pipeline construction costly and technically complex. Political instability in East Timor, (the country has been subject to violent demonstrations, insurgency and gang violence in recent years) is also likely to raise concerns despite the fact that the Timor pipeline is 405 km shorter than the Woodside's proposed 530km pipeline. Australia also has considerable leverage over the East Timorese government in the form of the 1,000 peacekeeping troops posted on the island that are helping to provide security and support to the incumbent government led by President Jose Ramos Horta.

In addition to the Timor Leste pipeline, the East Timor government is conducting a joint feasibility study with Malaysian NOC Petronas for a natural gas fired power plant and a petrochemical storage and shipping port, both located in East Timor, and the results of which will be released in October. Like the pipeline proposal, this idea flies in the face of the Woodside project although the Darwin plant is likely to make better economic sense since it will not need to be constructed from scratch. However, East Timor appears determined to process the field's output domestically and has announced that it is setting up a new NOC to invest the hundreds of millions of U.S. dollars needed to construct the pipeline. However, given the unlikelihood of East Timor having this sort of cash available for investment, the company may be being set up to gain a stake in planned future processing projects with Petronas or other partners. Woodside has a 33.4% stake in the Greater Sunrise field,

ConocoPhillips 30%, Royal Dutch Shell 26.56%, and Osaka Gas Co. Ltd 10%.

Outlook and Implications

Venture partners Woodside, Royal Dutch Shell, and Osaka Gas have announced that they are prepared to study East Timor's pipeline proposals, although judging by Woodside's July announcements and ConocoPhillips[] stake in the Darwin terminal, they are unlikely to favour them. Tracy Winters (a spokeswoman for Australia's Resources and Energy Minister Martin Ferguson) while avoiding expressing an opinion on East Timor's pipeline proposals, said that the location of the pipeline will be decided based on commercial reasons.

The survey by Deepgulf however suggests only that the pipeline is feasible, not that it is more economically viable than the pipeline to Australia making it unlikely that it will be accepted by the consortium partners.

Moreover, with sections of the East Timor Sea still disputed and the International Court of Justice and the International Tribunal for the Law of the Sea unable to hear the disputes due to legal exclusions obtained by Australia months before East Timor became independent in 2002, it appears that any emerging territorial disputes over the pipeline will have to be resolved bilaterally. The pipeline and petrochemical plant proposal by East Timor appears designed to strengthen the government's case for East Timor as a location for the project ahead of these decisions and to ensure that the government goes into any further negotiations in a position of strength with credible evidence to back its claims. East Timor has a history of having its interests crushed or ignored by bigger and stronger powers and government will win popular backing by holding firm on its proposals, especially since revenues from the field are expected to provide a significant boost to industrial growth, job creation, and living standards.

Both sides appear determined to push forward with their own project proposals, increasing the likelihood of tensions between the consortium partners, as well as creating further delays to the project which will in the short term, deny both sides any financial and commercial benefits. A decision on the Greater Sunrise project's location is expected in 2009 and a final investment decision could follow by the end of the year, but might be held up until 2010. Under the Australian project proposal, the first LNG shipment is scheduled for 2013 although the latest Timorese pipeline proposals threaten to delay these plans.

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