Subject: Risky pipedreams for East Timor

Asia Times

May 31, 2008

Risky pipedreams for East Timor

By Jesse Wright

DILI, East Timor - Asia's youngest and on several measures poorest country, East Timor has ambitious new plans to establish itself as the region's next big energy exporter. Industry analysts estimate the untapped off-shore Greater Sunrise gas field holds over 8.3 trillion cubic feet of natural gas and 300 million barrels of light crude oil. Though most of the field lies in disputed waters, a full one-fifth of the field is open for drilling by East Timor and Australia in a so-called Joint Development Area.

How those energy resources are converted into revenues and applied towards development will likely make or break the island nation's economic and perhaps political future. The Greater Sunrise field is shared by East Timor and neighboring Australia and could over its life generate tens of billions of dollars of revenues for Timor's national coffers.

Alfredo Pires, East Timor's secretary of state for natural resources, expressed his hopes in an exclusive interview with Asia Times Online that tapping the field will generate thousands of local jobs and establish the country as a big new regional energy exporter. He outlined still unconfirmed plans to establish by next year a new national oil and gas company, similar to Indonesia's Pertamina or Malaysia's Petronas. (President Jose Ramos-Horta has recently said that plan is still under consideration.)

"The government is very keen to see a lot of petroleum activities in Timor-Leste and will assist in those development activities," Pires said, referring to the country's official name.

Timor earned and received its first petroleum royalty payments in 2002 and has grown highly reliant on energy receipts to finance its national budget, which was US$347.3 million this year. Around 80% of Timor's $2 billion gross domestic product (GDP) is currently derived from oil-and-gas receipts and the country will have socked away around $3 billion in a sovereign wealth fund by the end of this year.

Those revenues are generated predominantly from production in the Bayu-Undan oil field, which is being exploited by a handful of multinational energy companies led by its main stakeholder, ConocoPhillips. Bayu-Undan is expected to be depleted by 2022, providing extra incentive for the government to quickly start production in the Greater Sunrise gas field. Gas from Bayu-Undan is currently piped to Darwin, Australia, where it is transformed into liquefied natural gas (LNG). Australian companies glean the lion's share of the downstream benefits and other subsidiary activities, while Timor takes its cut on the raw materials.

Pires said Timor wants to get a greater value-added stake in the Sunshine field including, potentially, through construction of an LNG plant on Timorese soil. That would cost about $15 billion, he said. Where the processing plant should be located has long been a matter of debate. The Darwin-based processing plant was designed to process only the estimated capacity of Bayu-Undan. Some have suggested that the Darwin facility be expanded to take on the gas from the Greater Sunrise wells, but no moves yet have been made in that direction.

The East Timor government and Australian oil-and-gas giant Woodside, the private company looking to develop the field, have since 2002 frequently discussed the best location for the plant. Woodside has insisted the final decision must work to its "best commercial advantage" and since last year has said flatly that a Timor-based plant was its least-favored of three proposals.

The other two options include expanding the present plant or building a new one in Darwin, or constructing a floating facility located between the two countries and near the actual wells. If constructed, the floating facility would be the first of its type anywhere in the world. Pires has argued the technology is still untested and so probably not the best option. At the same time, industry executives and analysts contend that the East Timor option is fraught with risks, including political instability, low education levels, especially on the south coast, where the proposed plant would be locate, and poor physical infrastructure.

Oily optimism

Pires takes issue with those bleak assessments and last month agreed to allow Malaysian energy company Petronas to assist the Timorese government in conducting a feasibility study into the Timorese option. He has been encouraged by record high global fuel prices and China's expressed interest in buying LNG directly from East Timor.

The study comes as Timor moves to pass legislation that would create the National Petroleum Authority, whose membership will include Norwegian advisors and a seven-person board of directors. The authority should begin work next month, though exactly what changes this will bring to the industry are unclear because Pires has so far refused any public hearings on the process.

He has been similarly tight-lipped about details of the proposed national oil company, but he told Asia Times Online the company will debut next year. He said he has made "more than verbal" agreements with big foreign energy concerns, including companies in China, South Korea and Thailand, but declined to reveal further details. All of them, he claimed, "are quite keen to have the [LNG] plant in Timor-Leste".

Pires points to a 2002 Australian study which predicted an LNG plant situated in Darwin that processed Sunshine gas field resources would generate $4 billion a year in local revenues and create thousands of local jobs. Those estimates were notably made before global energy prices soared to new record highs and Pires believes the economics of the project have changed. "We have been told early on that Timor-Leste is not the most viable option, so we have to look a bit more carefully," he said.

Due to the two countries' joint development agreement, both sides must agree on a processing site for gas produced by the Greater Sunrise field. Woodside chief executive Don Voelte told The Australian newspaper late last year that a floating plant would probably be the best option, even though such a facility would be the first of its type.

Many analysts and academics agree with Woodside's own assessment that "results from the ongoing extensive review of the three development options indicate that floating LNG and Darwin LNG are the two development concepts most likely to deliver the best commercial advantage," in the words of Kirsten Stoney, a Woodside spokesperson.

Jennifer Drysdale, a visiting fellow at the Fenner School of Environment and Society at the Australia National University, spent years in East Timor researching her doctoral thesis on the country's energy potential. She said that an East Timor-based plant would at best create dozens of low-paid, unskilled jobs - as opposed to the thousands promised by some project proponents in Timor - because of the young country's lack of skilled human resources.

"They would be very menial jobs like cooking and cleaning," Drysdale predicted. "It will take a long time - a generation - before Timor-Leste could create enough expertise to manage an LNG plant."

Lao Hamutuk, a local nongovernmental organization that has studied Timor's petroleum management since before the country achieved independence, echoes that assessment.

In a report released earlier this year entitled "Sunrise LNG in Timor-Leste: Dreams, Realities and Challenges" the NGO argues that "after the construction period, the benefits of the LNG facility will be small". Charles Scheiner, one of the report's authors, said separately that the plant would likely be in operation for 30 to 40 years, which would be enough time for Timorese to acquire the skills necessary to manage the plant. But he was quick to point out that that would depend on the government's ability to quickly develop a skilled workforce.

Pires said his ministry is already spending "millions of dollars" to educate local Timorese in relevant industry skills, including plans to send 120 students abroad this year to study engineering and geology. In addition, the government plans to build and within five years open a polytechnic facility focused on developing energy industry skills among the local population.

That's a particularly ambitious scheme, critics say, given that most people in the area haven't completed even a high school education. Pires responds that he would be willing to hire foreign workers to oversee the proposed pipeline's construction and LNG plant's management until local talent is up to snuff. At the same time, Drysdale and others argue that that won't be any time soon and have warned the government to avoid dependency on a single, unsustainable resource for the country's economic future.

Pires acknowledges the challenge, saying that the government will judiciously use its energy revenues to develop other local industries, including tourism and fishing. He conceded that the government was already understaffed and pointed out that even at the ministry of finance there were officials who were unable to calculate even basic fractions. But at East Timor's current low level of economic and social development, for now it's unclear what other economic choices the country has apart from trying to add value to its oil-and-gas resources.

Jesse Wright is the English language editor of The Dili Weekly and a freelance journalist based in East Timor.

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