Australia and East Timor poles apart on oil treaty

Australia and East Timor poles apart on oil treaty

CANBERRA (Dow Jones): Australia and its fledgling northern neighbor East Timor remain poles apart on the vexing and as yet unsettled issues of boundaries and royalty shares from energy production in the Timor Sea.

Australia maintains the seabed boundary with East Timor should remain where it was set in the previous treaty covering the area between Australia and Indonesia, which is on the edge of Australia's continental shelf near to East Timor's south coast.

East Timor wants a boundary at a point midway between the two nations, which an Australian newspaper report this week suggested could also have ramifications for Australia's boundary with Indonesia.

Both Australia and East Timor claim international law supports their position.

At stake are hundreds of millions of dollars in revenue from royalties from current and future oil and gas production in the area.

If the boundary is set at the midway point, nearly all the royalties will flow to East Timor, reflecting the location of the resources.

A spokesman for Australia's Foreign Minister, Alexander Downer, told Dow Jones Newswires Thursday "we're comfortable with the boundaries as they are. We're not countenancing redrawing seabed boundaries."

Australia is focused very much on the royalty split between the two nations rather than the boundary location, he said.

The spokesman was commenting after Downer and Attorney-General Daryl Williams met late Wednesday to brief Dennis Burke, chief minister of the Northern Territory, and his Mines Minister Daryl Manzie on the negotiations with East Timor.

These talks follow two rounds of formal negotiations with East Timor representatives, many informal talks, and come ahead of another round of formal talks scheduled May 2-4.

The Northern Territory ministers said this week they were concerned a stalemate in the talks could stall billions of dollars of investment in energy production and downstream processing by potential investors.

Burke and Manzie are keen to see proposed investments in a methanol plant and liquefied natural gas plant and a domestic gas reticulation system become reality in Darwin city based on huge resources of natural gas in the Timor Sea and tied together with undersea pipelines.

Downer's spokesman said Burke and Manzie were conscious of a message sent to investors early April by Peter Galbraith, the cabinet member for political affairs and the Timor Sea in East Timor's transitional government.

In a hard-hitting speech, Galbraith told an annual meeting of the Australian Petroleum Production and Exploration Association that without a treaty based on international law, East Timorese are prepared to wait patiently for their rights and risk losing important markets.

"I would like to stand before you and declare the Timor Sea is open for business," he told the conference. "Unfortunately, at the moment, I am unable to do this. I can't say when it will be open for business."

Downer's spokesman said Australia is "prepared to be very generous in terms of the royalty flow" from energy production in the Timor Sea.

Media reports earlier this year suggested Australia offered a 60/40 split in East Timor's favor, but more recent reports say the offer now is 80/20. Australia won't disclose the exact split it has offered.

East Timor last year called for a 90/10 split in its favor, but suggested at talks in early April the split should be 100/0, a source said.

However, another source familiar with East Timor's leadership said they are "contemptuous" of Australia describing its offer as generous.

The East Timorese want the issue settled on the basis of international law, rather than Australia's generosity, the source said.

Sharing the benefits of energy production in the 75,000- square-kilometer area was covered by the 1989 Timor Gap Treaty between Australia and Indonesia.

But this lapsed when Indonesia formally withdrew after East Timor's August 1999 vote for independence from Indonesia.

Its terms were continued under a temporary memorandum of understanding between Australia and the U.N. Transitional Administration in East Timor and East Timorese representatives which oversee East Timor's transition to full independence, which will occur possibly later this year or early next year. This temporary MOU will lapse on independence.

Meanwhile, John Akehurst, managing director of Woodside Petroleum Ltd. (A.WPL), which has substantial oil and gas interests in the Timor Sea, said he doesn't expect development of these to be held up by calls for a new deal between East Timor and Australia over royalty shares.

"There is a huge amount of enthusiasm, both from the East Timorese and from the Australian side, for these things (gas projects) to go ahead," Akehurst told reporters.

"So our assumption is that, with the enormous prize that there is, we'll see a resolution of those (treaty) matters," he said.

Akehurst said the petroleum industry is "very keen" to ensure that revenues from proposed Timor Sea gas projects flow to East Timor in "the appropriate way, which is decided between governments."