Subject: 3 E. Timor Oil/Gas Reports: Kitan In Spotlight; Gusmao Budget; Joint Block

also: Opportunity knocks: Oil and gas fund dominates Gusmao budget in battle to tackle poverty; E. Timor-Australia: Blocks release in the frame as pair eye further offshore success

Upstream May 1, 2008

Kitan in spotlight for East Timor

Russell Searancke

Eni oil discovery raises spirits in joint development zone with Australia as exploration work rate set to dramatically increase in next two years

Eni's recent Kitan oil discovery in the shared offshore zone between East Timor and Australia has rejuvenated the area, and drawn attention to other exploration efforts in the same area and in East Timor's sovereign frontier waters.

Eni is still analysing the results of its Kitan-1 and Kitan-2 wells drilled this year in Block 06-105.

East Timor sources say the Italian company is looking at the economics of a small standalone liquids project with a floating production, storage and offloading vessel.

The oil in-place volume in Kitan is estimated at about 80 million barrels, of which 30 million barrels could be recoverable under a 40% recovery rate, say sources.

"This discovery reinforces Eni's presence and growth potential in the region," says Eni.

Kitan is a huge boost for the shared zone - the 35,000 square-kilometre joint petroleum development area - which has seen very little exploration drilling in recent years.

That work rate will increase dramatically with Eni and several other operators committed to drilling exploration wells in their joint petroleum development area blocks over a two-year period, starting in about the fourth quarter.

This activity is a requirement on the blocks, which were awarded in the 2006 licensing round.

There are four active exploration permits in the joint petroleum development area.

Block 06-105 is owned by Eni and its joint-venture partners, Block 06-102 by a Petronas Carigali-led consortium, Block 06-103 by an Oilex-led alliance and Block 06-101 by privately-owned Minza Oil & Gas.

Australia's Oilex has a commitment to drill a total of four exploration wells in 2008 and 2009, while Malaysia's Petronas has a work programme of three wells in the same years.

Eni is keen to drill more wells in Block 06-105, where Eni has spotted seven or eight more leads based on a new geological model, according to sources.

Oilex is about to start the Maura 3D seismic acquisition with Wavefield Inseis vessel Geowave Champion.

The Perth-based company hopes to drill two exploration wells in the fourth quarter, and says it has leads with the potential to hold 200 million to 300 million barrels of oil in place.

Oilex's block is right next to Eni's permit, and sources say there is a chance that the Kitan geological trend extends into Oilex's block.

Oilex managing director Bruce McCarthy says his company's block was rated the most prospective of the permits on offer in the 2006 bid round due to its proximity to other joint petroleum development area fields and oilfields just outside the zone, including Laminaria, Corallina and Buffalo. Channel Islands-based Minza's work programme has no commitment well in the first three years, but rather a requirement to acquire a minimum 500 kilometres of 2D marine seismic in 2008.

Minza will be looking for a farm-in partner to help fund the drilling obligation in the secondary work programme, say sources.

The joint petroleum development area contains just one producing field - Conoco-Phillips' Bayu-Undan gas and condensate project - following the abandonment last July of the Elang-Kakatua oilfields.

There are two other licences in the joint petroleum development area, but both relate to the proposed Sunrise gas project led by Woodside Petroleum.

Sources say it is likely Conoco-Phillips and Woodside will bring in drilling rigs for development and appraisal wells at Bayu-Undan and Sunrise, respectively, in the coming years.

Meanwhile, in East Timor's exclusive frontier waters, Eni and India's Reliance Industries are making good progress with their exploration work programmes.

Eni made a big play in the 2006 licensing round by winning five permits, all of which lie between the joint petroleum development area and East Timor's south coast.

Blocks A, B, C, E and H cover more than 12,000 square kilo-metres off East Timor's south coast in water depths reaching 3000 metres.

Eni has farmed out 20% of the permits and retains an 80% operating stake. It has already acquired 10,300 square kilometres of 3D seismic, and is planning to drill two wells in 2009.

Reliance won Block K, and must drill one exploration well in 2009. The Indian energy giant will soon begin 3D seismic acquisition in Block K, which is directly north of the Sunrise fields.


Upstream May 1, 2008

Opportunity knocks

Russell Searancke

Oil and gas fund dominates Gusmao budget in battle to tackle poverty

East Timor Prime Minister Xanana Gusmao's budget speech last month highlighted the impoverished country's total reliance on taxation revenue from the Bayu-Undan gas and condensate field.

Gusmao estimates that East Timor's 2008 income will be $1.38 billion, of which all except $27 million will come from petroleum revenues.

Its oil and gas revenues are paid into a petroleum fund based on the Norwegian model, and only a small percentage is available to cover budget deficits.

This year, East Timor's fiscal deficit is estimated at $321.1 million, of which $294 million will be covered through withdrawals from the fund.

The remainder will come from the state treasury account, says Gusmao.

The fund was set up in August 2005 and, according to government reports, had a balance of $2 billion at the end of 2007.

It is estimated to reach $3.1 billion by December 2008, rising to $5.8 billion by December 2011.

Gusmao says the level of drawdown from the fund "has caused much controversy in public opinion and especially among some members of parliament".

"I would like to clarify the government will not be withdrawing from the petroleum fund any amount that exceeds the estimated sustainable income for the next fiscal year," says Gusmao.

He adds that the $294 million drawdown this year will be used on infrastructure, health, education, training and rural development.

These are "areas without which it would be impossible to combat generalised poverty".

There are no changes envisaged to the drawdown ideology, but Gusmao is looking at possible amendments to the workings of the fund, particularly with poverty being "a reality in the country, where about 41% of the population lives below the poverty threshold, on 55 cents a day".

"This government is aware that the petroleum fund should contribute to a sensible management of oil resources

but believes we can manage it with greater efficiency still," says Gusmao.

"The petroleum fund is steadily increasing and there is potential to have a greater increase in the return of the investments," he says.

"Therefore we are considering the current investment strategy and the management of the fund

so as to maximise the total value of the revenue from the petroleum sector."

The East Timorese government intends to start a revision process this year of the Petroleum Fund Law.

"Let us not turn the petroleum fund into a political banner," says Gusmao.

"The natural resources belong to the people and must be used fairly and according to the good of the nation."


Upstream May 1, 2008

Blocks release in the frame as pair eye further offshore success

East Timor and Australia are hoping to launch an acreage release for the joint petroleum development area later this year, while East Timor will hold off on an independent round until Eni and Reliance have drilled in 2009, writes Russell Searancke.

The joint petroleum development area spans 35,000 square kilometres and roughly 62% of it is vacant acreage. Water depths are understood to range between 70 metres and 1000 metres.

East Timor sources say that moves are well advanced on the selection of two or possibly three blocks within the area to have them ready for launch later this year. Eni's Kitan oilfield discovery this year has given the joint petroleum development area a much-needed boost and will have caught the eye of the industry.

"We think the joint petroleum development area is attractive and there will be renewed interest as a result of Kitan," says an East Timorese official.

The Joint Commission for the joint petroleum development area, which comprises two representatives of East Timor and Australia, is due to meet in May.

At that meeting, it is hoped firm details on the new acreage will be presented to the commission with an official request to launch the round, say sources. The East Timor commissioners are Francisco Monteiro and Antonio Jose Loyola de Sousa. Their Australian counterparts are John Hartwell and Bob Pegler, according to the Timor Sea Designated Authority, which oversees all petroleum activities in the joint petroleum development area.

The 2006 licensing round was a success, with three out of four blocks awarded and 12 oil companies submitting bids individually or in groups.

The three permits went to operators Petronas Carigali of Malaysia, Australia's Oilex and Channel Islands-based Minza Oil & Gas. Private company called Zetex won the fourth block but declined to sign the production sharing contract.

Under the Timor Sea Treaty between East Timor and Australia, the former gets 90% of petroleum taxation revenues from oil and gas production in the joint petroleum development area.

The joint zone is an economic lifeline for impoverished East Timor, and a reminder of Indonesia's 25-year-long occupation.

Indonesia and Australia established the area in 1989 when the former ruled East Timor.

By the time of Indonesia's violent withdrawal in 1999, production had started at the Elang-Kakatua fields, while the Bayu-Undan field had been found, as had Jahal, Chudditch and the two Sunset fields within the Greater Sunrise complex.

The Timor Sea Treaty replaced the illegal Timor Gap Treaty between Indonesia and Australia, and the joint petroleum development area replaced the former Zone A offshore block.

The joint petroleum development area, like the Timor Sea Treaty, remains a temporary arrangement that will terminate when East Timor and Australia agree on a permanent maritime border.

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