Dili squares up for oil fight with Australia

Dili squares up for oil fight with Australia

Tom Wright, Dow Jones, Dili

East Timor's new government is squaring up for a fight with Australia over its demand for the lion's share of royalties from energy projects in the Timor Sea.

The tiny country, which gained independence in May, moved quickly to pass a law which lays claim to ownership of a majority of the known oil and gas fields in the sea between the two countries, by extending its maritime border with Australia.

Now, Prime Minister Mari Alkatiri is threatening to block planned energy projects in the Timor Sea if Australia doesn't agree to drawing back its borders.

Under a current maritime boundary agreement, reached in the 1970s with Indonesia, Australia gets control of 80 percent of the massive Sunrise gas field, which at least one industry estimate values at US$40 billion.

But East Timor is claiming that under common maritime conventions, which put borders at an equal distance between two countries, the Sunrise field should fall completely in its waters.

Although formal boundary talks with Australia haven't yet begun, the Dili government is talking tough.

"Australia is maybe not going to accept our law, but we also don't accept the Australian claim," Alkatiri said in an interview this month.

If East Timor's larger neighbor is unwilling to accept its claims, then "Sunrise would stay in the same situation. Nobody could exploit the fields there.

"I'm willing to defend the interests of my people and my country," Alkatiri added.

This may only be the opening salvo in a battle which could drag on for years. But East Timor's position suggests it will be unwilling to accept a soft deal over oil and gas, which it sees as crucial for its financial future.

Impoverished East Timor, which has little in the way of exports apart from coffee, needs its energy revenues to give it a chance of economic independence.

International donors, who have earmarked $440 million for the budget and other development projects over the next three years, hope the country will be able to wean itself off aid by the middle of this decade when sizable oil revenues start flowing in.

East Timor is already aiming to garner revenues worth around $6 billion in the next two decades from its Timor Gap oil-and-gas agreement with Australia, signed in May.

Under that pact, East Timor gets 90 percent of royalties from energy projects in a joint development area of the Timor Sea, with Australia taking the remainder. U.S.-based Phillips Petroleum Co. has already begun drilling a $3 billion project in the area, which is due to begin production in 2004.

But rights to the Sunrise field, by far the largest known gas reserve in the Timor Sea, are not fully covered by the agreement. Only 20 percent of Sunrise falls in the joint development area.

Prime Minister Alkatiri's threat to stall the development of the Sunrise field isn't the only factor blocking the project.

The four partners involved in Sunrise, who hope to start production toward the end of this decade, can't agree on the best way to exploit the gas.

Phillips Petroleum hopes to pipe the gas to Australia. But Woodside Petroleum Ltd. of Perth, Royal Dutch/Shell and Osaka Gas Co. want to build a floating liquefied natural gas operation which would export LNG to world markets, including the U.S.

The companies hope to reach agreement by October, says Blair Murphy, a spokesman for Phillips, which has a 30 percent stake in Sunrise.

Still, he concedes that uncertainties over the maritime border are complicating the talks, as the developers are unsure of exactly what royalties and tax they will be paying on their operations.

"The oil companies don't want to move ahead until the borders are ratified," he said.

Would East Timor collapse without the Sunrise royalties? Probably not, donors say.

In fact, the World Bank has cautioned East Timor not to become reliant solely on oil and gas revenues, and to make efforts to develop other industries such as tourism. There are fears that a huge energy windfall would increase opportunities for corruption in government, and stall growth of private sector jobs, similar to experiences in other resource-rich developing countries from Nigeria to Venezuela.

For now, East Timor has committed to putting its oil and gas revenues in a fund to make sure they are spent wisely. Concerns remain, however, that any windfall might not feed through to more jobs.