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.