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Can Timor Leste Avoid the Resource Curse?

By Charles Scheiner, La'o Hamutuk

Paper presented to the workshop on Transparency and Accountability in Government. Dili, 22-25 March 2004

PowerPoint presentation that accompanies this paper

An updated version of this article was an Editorial in the October 2004 La'o Hamutuk Bulletin,
and is available as a PDF version with pictures (271K)

Bon dia. During this presentation, I will give an overview of problems caused by oil and gas development in many countries, and look at conditions specific to Timor Leste which make it likely that similar problems will occur here, and what can be done to avoid them. Most of what I will say will be well-established facts, but I will also offer interpretations and analysis based on my knowledge, observations and experience. Feel free to disagree and debate.

Some of the information, such the funding sources and priorities of institutions involved in Timor Sea oil, is not a blanket condemnation of those institutions or the programs they finance, but rather a warning of the possibility of conflicts of interest or hidden agendas. A primary purpose of transparency and accountability is to expose such potential problems and prevent them from leading to corruption or bad decisions. I make no accusations against any individuals, but simply explain some of the institutional goals and pressures we are all functioning under.

When this workshop was originally planned, the organizers did not want government representatives even among the audience. But this week’s program includes hear presentations from several government officials and advisors. I encourage you to receive both my information and theirs with a healthy degree of skepticism, challenging what we say, identifying what we leave out,  and seeking our reasons for including or omitting certain information. As a member of civil society, I believe that accountability must apply to each of us and the institutions we represent, and I appreciate that the agenda includes extensive time for discussion, criticism and debate.

 

The Resource Curse

Around the world, many countries, including Timor Leste, have oil and gas under their territory. These can provide tremendous wealth for some citizens of the country, and for companies who extract and sell the oil and gas (petroleum). But in many nations, the wealth does not benefit most of the people, and developing the petroleum resources can cause more harm than good. This is especially true for nations which did not have a well-established government, long democratic traditions, and a strong and diverse economy before they began to sell their petroleum.

If Timor Leste is to be the exception to this pattern, we must first understand the factors that have caused many people around the world, from Venezuela to Nigeria to Aceh, to conclude that they would be better off if oil had never been discovered in their territory.

In affluent, industrialized countries, the economies and the comfortable lifestyles of most people depend on oil and gas -- for electricity, for transportation, for industry, and for petrochemical products. International companies which extract and distribute petroleum are among the largest in the world. This industry, based on complex technology which requires huge investments and employs few workers, is one of the most profitable on the planet.

 

What harm can oil development do?

More often than not, oil development does not benefit most of the people of the country, especially  where there is not a well-established government with strong traditions of professional civil service, responsiveness to the voters, and accountability of officials. Instead, the money goes to a few people or leads to misguided or unsustainable economic policies. The oil industry can damage the environment, and often leads to war or human rights violations. This takes place in many ways:

Corruption of public and industry officials

Oil profits are so large that they tempt both public and corporate officials, and can lead to fraud or bribery. From Suharto to the Shah of Iran, from Nigeria’s Sani Abacha to Iraq’s Saddam Hussein, dictators have taken power to obtain oil’s huge profits, and used them for personal gain, to maintain control, and to finance repression. But even in rich, democratic countries, corruption is widespread in the oil industry. Here are three examples which have recently come to light:

Environmental destruction

Wherever petroleum is extracted, processed and used, on land or in the sea, the natural environment is at risk. Catastrophic accidents -- fires, explosions, spills or pipeline breaks -- are an ever-present danger to workers, nearby communities, and the local environment. But even during normal operation, low-level leakage, emissions, pollution and small spills can injure marine and land environments, affecting water, fishing, biological diversity, agriculture and daily life.

On-shore oil extraction and processing uses land for factories, pipelines, security buffer zones, wells and other facilities, displacing local people.

And globally, the burning of fossil fuels, including oil and gas, changes the contents of the atmosphere, leading to global warning, rising sea levels and extreme weather in a process which will drastically change our planet over the next century.

War, militarization and repression

Oil is so valuable that governments go to war to obtain it. We know that one of the principal reasons Australia supported Indonesia’s invasion of Timor Leste was to get access to Timor Sea oil. And in the Middle East, European desires for oil were a primary motivation for British and French colonization after World War I.  More recently, one of the principal reasons for the United States-led invasion of Iraq a year ago was America’s wish to better control global oil supplies.

In Indonesia, Aceh is rich in oil and gas, but the benefits are not seen by the local population. When people resist the Indonesian military responds with violence, partly to keep ExxonMobil’s facilities secure so that oil money continues to flow to Jakarta.

In the Niger Delta, the Ecuadorian Amazon and around the world, military forces repress local people to protect oil and gas facilities.

Economic and social consequences

The unstable price of oil, combined with its huge revenues, causes even non-corrupt governments to make development decisions against their people’s long-term interests. Other sectors of the economy, such as agriculture, are often neglected because policy-makers see oil “rents” as an easier and larger source of revenue. In addition, imported food and other items are preferred over local products, reducing self-sufficiency.

When oil prices and revenues are high, governments undertake major development and infrastructure projects, or embark on expensive programs. When the revenues later decline, they have to borrow from the World Bank or other international institutions. In many oil-rich countries, debt payments are now larger than oil revenues; and total debt is larger than their remaining petroleum reserves.

Because oil revenue seems so easy, governments often fail to develop other income sources, or to make wise decisions based on affordability. Since citizens pay few or no taxes, they don’t monitor government spending as closely as in other countries, tolerating waste or unnecessary programs which would not be accepted elsewhere.

Both worldwide and in Timor Leste, petroleum is a non-renewable resource. For this country, the vast deposits under the Timor Sea will be exhausted in 50 years, within many of your lifetimes, and the country will have to rely on other sources of revenue. But oil revenues can be addictive, and very few countries have succeeded in “sowing petroleum” -- using the money to build a strong economic base in other sectors. A similar problem exists globally -- petroleum is so profitable that alternative energy sources are not developed or prioritized, leading to climate change and major crises when the petroleum flow is disrupted or used up.

Because of the specialized nature of oil facilities, and their need to function 24 hours per day, the expensive infrastructure they require is rarely made available to nearby communities. Although some local workers are hired during construction, the operation of petroleum facilities is very technical, and most of the jobs are highly specialized, requiring particular skills. It will be difficult for many Timor Leste people to obtain this work, because of the limited number of experienced and well-trained workers here.

 

Timor-Leste shares many conditions of oil-cursed countries, plus unique problems from its history and size.

No history of democracy or self-government

Because this nation is newly independent, we have no tradition of constructive public involvement in policy making. For most people, their entire relationship with government before 1999 was of resistance. Government officials tend to be protective of information and reluctant to trust civil society. For example, draft legislation is rarely shown to the public until it has been approved by the Council of Ministers. And when officials engage with civil society, socialization often substitutes for consultation, where the government tells the people what it plans to do rather than asking what the people want or need. This pattern was set by Indonesia and the United Nations, and will be hard to break.

Inexperienced officials and civil service

Because of the newness of Timor Leste’s government, there are few laws and regulations in effect, and neither the citizens nor the civil servants are familiar with those that are. We lack a solid understanding of what is acceptable and what is not. Without a professional, experienced civil service, possibilities for corruption or inconsistent application of law are widespread.

It will take time to establish a tradition of honesty, transparency and accountability.

Because Timor Leste has so few experienced managers or public officials, and because our government structure has not had time to learn from its mistakes, there are a number of potential conflicts of interest and people serving dual roles, which could reduce Timor Leste’s chances of making the best decisions possible. The points below are structural concerns, with no implication that any currently serving individuals are not honest, capable and well intentioned.

Few good examples to learn from

The Portuguese colonial bureaucracy was famous for inefficiency and arbitrariness, and the Indonesian civil service and military occupiers here raised corruption and brutality to record levels. Timor Leste is trying hard not to continue those traditions. But the many international agencies currently here are not always better examples, and often do not practice what they preach.

Because of limited local expertise, many international “experts” with varying levels of impartiality and experience, are providing advice to Timor Leste. One result is the $126 million “financial gap” the government faces over the next four years, largely due to bad advice when the National Development Plan was being written by people with little experience with the oil industry.

The international institutions supporting Timor Leste’s government, including petroleum development, promote a particular economic model, which may not be best for this nation. The World Bank, IMF, and other institutions support privatization, “free trade”, and the transfer of wealth and power from poor nations to rich ones.

The United States Trade and Development Agency (USTDA) just promised $644,000 for “technical assistance in the petroleum sector” to the Timor Leste government, adding to last year’s USTDA grant of $463,000 for this purpose, and $446,000 from USAID during 2002. Although the U.S.-based consultants hired with this money might provide good and impartial advice to Timor Leste, they also might serve United States interests. The U.S. government, including its diplomats and agencies, openly admits that a major part of its mission is to promote U.S. business interests overseas, and the current Bush Administration includes many oil company executives. It may not be coincidence that ConocoPhillips, the major oil company active in the TSDA, is the third-largest energy company in the United States, with annual revenues of $105,000,000,000 (billion).

The United Nations and its agencies frequently encourage the government of Timor Leste to be transparent and accountability, yet these institutions are among the most opaque in the world. For example, a secret “Status of Mission Agreement” gives UN staff and contractors in Timor Leste immunity from obeying the laws of this country. Internal UN reports on personnel, corruption and other problems are almost never shared with non-UN officials, including Timor Leste government.

No effective checks and balances to guarantee accountability

Up to now, Timor Leste has not established effective mechanisms for combating secrecy or corruption. For example, there is no independent process which could investigate the bribery allegations made by PetroTimor against the Prime Minister and Fretilin members of Parliament. Although the charges are probably false, how can the people know for certain when he Inspector General answers only to the Prime Minister, who can suppress or prevent his investigations? Two years after independence, the Constitutionally-mandated Office of the Provedor (Ombudsman) has not yet been established, and draft regulations for this office do not guarantee sufficient independence. Timor Leste’s legal system has little experience and many problems, both in the functioning of the courts and in the laws and procedures themselves.

At present, one well-disciplined political party has a large majority in Parliament, which reduces the ability of Parliament to counterbalance Government activities. Furthermore, the minority parties have little expertise or political experience, and have not yet developed the ability to constructively analyze and offer alternatives to Government policies.

The media, which often serve as a check on government corruption or misguided policies in a democratic society, are largely inexperienced here. They have little tradition of independent investigation, or of checking statements by public officials against alternative sources or prior records. All too often, local media reports opinions or data provided by others, without analysis or adding context or alternative perspectives.

Two large neighbors who do not respect our sovereignty and are eager to steal our petroleum resources.

Indonesia invaded and occupied Timor Leste, and has refused to repatriate past oil revenues, pay reparations, or cooperate with justice.

Australia supported the invasion, continues to occupy Timor Leste’s maritime territory, distorting the boundary controversy and extracting oil and revenue from Timor Leste’s undersea oil reserves. However, Timor Leste’s government expects Australia’s security, legal, environmental, labor and administrative systems to help manage oil activities within the TSDA, at least until our own systems are better. Are they trustworthy?

 

Timor Leste has some features which could reduce the oil curse risk.

Because Timor Leste is just starting to exploit its petroleum resources, we can learn from failures and successes in other countries. Hopefully this workshop is part of a growing, intensive and widespread effort by both government and civil society to prevent Timor Leste from following Nigeria’s path.

Timor Leste is fortunate that most of our petroleum is natural gas, since its price and market mechanisms are less unpredictable than oil. Petroleum prices are more stable now than in the past, when the OPEC producers cartel was dominant. These days, prices are primarily controlled by oil-consuming nations, which means lower revenues for Timor Leste, but more consistent prices could lead to better economic decisions.

The people of Timor Leste are fiercely committed to this country’s independence, and will continue to struggle for its sovereignty and rights, and to demand that their government serves the people’s interest. Perhaps more than any other factor, this may help keep the government in line. In addition, Timor Leste’s small size and effective rumor communications infrastructure make it harder for illegal activities or corruption to be conducted without exposure.

Finally, the use of the United States dollar as Timor Leste’s currency frees the country from having to worry about inflation or foreign exchange problems caused by oil money. In return, Timor Leste loses the tools of financial control which could be exercised through appropriate, timely exchange rate adjustments.

 

Many of Timor Leste’s decisions about oil and gas, were made before independence, but many remain.

Should we explore for and extract petroleum, when, and by whom?

During the Indonesian occupation, Australia and Indonesia decided to extract off-shore resources as rapidly as possible, perhaps because they knew their occupation might not last, and because the resistance would be less able to interfere. Although on-shore resources were exploited locally during the Portuguese time, neither Indonesia nor the current government has prioritized them.

Australia and RDTL have also agreed to extract the resources within the JPDA (such as Bayu-Undan) first, although Australia is also rushing to exhaust disputed reserves just outside the JPDA, including Laminaria-Corallina. Sunrise will wait a little longer, because neither Australia nor Timor Leste needs its revenue in the near future, world gas prices are low, and development choices are complex.

Australia and Indonesia decided to begin oil development before settling their maritime boundary, through a joint development area. Many experts consider this a mistake, but UNTAET and the government of Timor Leste continued that decision, signing hopefully temporary revenue-sharing agreements which will end once the boundary is settled. But that could take a long time, even more than the 40-year life of the oil fields. For many citizens of this country, the struggle for independence is incomplete without maritime boundaries, and these arrangements undercut this nation’s sovereignty.

Decisions and contracts signed during the Indonesian occupation brought Phillips, Shell, Woodside, Santos and the other companies into Timor Leste’s territory. But today, new contracts have been signed with the same companies. In some countries, like Thailand, Malaysia and Indonesia, a national oil company has helped keep control over their resources, but this option has not been seriously considered in Timor Leste.

Other decisions were made to process liquids from Laminaria-Corallina, Bayu-Undan, and Elang Kakatua at sea, while gas from Bayu-Undan will be piped to Australia for liquification. The only remaining major development decision, which Timor Leste will help make, is about Greater Sunrise Gas -- whether to pipe it to Australia, bring it to Timor Leste through one of the world’s deepest pipelines, or process it at sea in the world’s first floating gas liquification plant, as the companies prefer. Timor Leste has asked the companies to study piping it to our south coast, but economic, social and environmental analysis has not yet begun.

Australia and Indonesia, together with the oil companies, decided to sell the oil and gas overseas, and take the money. This was logical for them, as both countries have extensive other petroleum reserves. But Timor Leste needs energy for electricity and other purposes; perhaps using some of our own gas could help develop other sectors of our economy, or replace expensive diesel fuel imported from Indonesia. 

Spend or save the revenues?

Another major decision area, still to be made, is how Timor Leste should spend or invest revenues received from oil and gas. One option is to use them for current government budget expenses, which could include “investment” in Timor Leste itself, such as education, health, infrastructure and economic development. Under projected budgets for 2006-2007 and 2007-2008, about 75% of government income comes from oil and gas. This will increase in following years, as Bayu-Undan Phase II and Greater Sunrise come online, and the temptation to spend will be great.

Many international advisors recommend placing most or all the revenues in a “petroleum reserve fund,” which will save the money for future generations, and protect against global variations in oil prices. But if such a fund is to be meaningful, it must include safeguards to prevent this money from being used prematurely for short-term political or financial purposes.

Although the government and World Bank have stated their commitment to establish such a fund, they are already suggesting that monies received from oil royalties over the next three years, up to $90 million, be spent to help close the “financial gap” caused by Bayu-Undan delays. Furthermore, statements from the Government about their reserve funds plans have been inconsistent:

Last June, the Prime Minister told a London conference on Extractive Industry Transparency:

“the Fund will receive all our petroleum revenues and build up a balance that earns income. The Fund’s objective is to maintain the real value of Petroleum wealth (both financial assets from petroleum already produced and estimated revenues from petroleum still in the ground), thus protecting the interests of future generations. Withdrawals from the Fund will meet the difference between our spending and our non-petroleum revenues.

The “plus” in Timor-Leste will be firstly, a guideline that only sustainable income from our petroleum wealth can be spent and, secondly, a range of accountability mechanisms including an independent Fund Council to oversee the operations of the Fund.

If government proposes to spend more than the sustainable income from petroleum wealth it must give a separate justification to Parliament and also estimate the long-term effect on petroleum wealth.”

In January 2004, the PM’s Timor Sea Office published Essential Facts which stated

“In order to ensure that these resources will also benefit future generations, the Timor-Leste Government plans to save a significant share – about half – of the revenue it receives from Timor Sea resources in a Petroleum Fund.”

And today, the Timor Sea Office’s new website says:

“the Government would put all revenues from petroleum, both tax revenues and royalty payments, into the Petroleum Fund. In any budget year, the Government would be allowed to withdraw from the Petroleum Fund only an amount equal to the difference between total estimated expenditure and non-petroleum revenues. The Government would a

so have to control its spending to make sure that it did not withdraw so much revenue from the Petroleum Fund that none was saved for the future.
For example, if in one year, total Government spending is $100 million per year, and non-petroleum revenues are $20 million, then the Government can only withdraw $80 [sic -- presumably $80 million] from the Petroleum Fund in that year.

Since the spending of funds held in the Petroleum Fund would be part of the regular budget process, any withdrawals from it would have to be approved by the National Parliament. ....”

As Parliament is controlled by the same political party as the Government, and since the budget process is directed by the same leaders, there is little to prevent the Government from implementing a budget which spends nearly all of each year’s petroleum income on current expenses. The “guideline” for sustainability is not legally binding.

 

Conclusions

Timor Leste has many of the pre-conditions which have cursed other oil-rich, newly-independent countries, and it will take tremendous effort to ensure that our petroleum is a net benefit to our people.

Decisions have already been taken which might not be best for Timor-Leste.

There are still opportunities to avoid repeating the bad experiences of other countries

It will be difficult to ensure that Timor Leste’s oil and gas benefits Timor Leste’s people, in both the long and short run. But it is not impossible.

 

Postscript: Timor Leste’s “Financing Gap” and Laminaria revenues stolen by Australia

Australia took in an additional US$638 million from Laminaria-Corallina between November 1999 and 2002. This money all belongs to Timor Leste under current international legal principles.

We should never forget Nigeria’s experience, as this poem describes:
We Thought it was Oil. But it was Blood.

 

The East Timor Institute for Reconstruction Monitoring and Analysis
1a Rua Mozambique, Farol, Dili, Timor Lorosa’e
P.O. Box 340, Dili, East Timor (via Darwin, Australia)
Tel: +670-3325013 or +670-7234330
email: laohamutuk@easttimor.minihub.org
Web: http://www.etan.org/lh