Andrew Trounson, Melbourne – East Timor is getting down to business. And that means playing tough, even with your friends.
The world's newest country, and one of its poorest, wants a big slice of the billions of dollars of royalties set to flow from the undeveloped Timor Sea oil and gas fields it shares with Australia. Unfortunately for Australia, that could mean almost all of the royalties. For Woodside Petroleum of Perth, it is an issue that needs to be keenly watched.
East Timor's fledgling Parliament last week endorsed legislation defining its boundaries for the first time, and claiming a maritime border with Australia extending 200 nautical miles, or 368 kilometers, from its coast. While in accordance with international law, the claim now leaves the two countries with overlapping borders above a seabed stuffed with trillions of cubic feet of natural gas.
East Timor's boundary claim takes in all of the Sunrise field, 80% of which currently lies in Australian waters. Sunrise holds over 30 billion Australian dollars (US$16.8 billion) of gas and is expected to be in production around 2007 or 2008. The other major oil and gas development in the Timor Sea is the US$4.8 billion Bayu-Undan project to which East Timor is already entitled to 90% of the royalties. East Timor's boundary claim would give it 100%.
"We are not asking for less or more than the international law allow[s] us to claim," East Timor President Xanana Gusmao, a former independent fighter, said last week on a trade visit to Australia's Northern Territory.
The Timor Sea oil and gas fields are critical for poverty stricken East Timor. Over its 17-year life, the Bayu-Undan project will generate about US$3.2 billion in revenue. That compares with a current annual East Timor government budget of just US$80 million.
"It isn't going to be Brunei, but there will be pretty serious oil revenue that will allow East Timor to have proper schools, hospitals and infrastructure," said Jonathan Morrow, head of the country's Timor Sea office in Dili.
While East Timor is claiming a 200-nautical mile boundary, it is only the opening gambit in a negotiation that could take years. In response, a spokesman for Australia's Foreign Minister Alexander Downer said Australia "will listen to what East Timor has to say."
The convention for settling such overlapping maritime claims is for the two sides to sit down and simply draw a line equidistant from their coasts. But when money is involved nothing is ever so simple.
For a start, even agreeing on an equidistant boundary would leave Australia with none of the Sunrise field. But there are greater implications. There are fears in Australia that if it gives up any ground to the East Timorese, Indonesia will be encouraged to seek to renegotiate its own maritime boundary. Australia's entire northern boundary could be pegged back, giving away even more oil and gas reserves such as the Laminaria and Corallina field areas.
The problem for Australia is that when it agreed on its maritime border with Indonesia in the early 1970s, it was able to claim all of its offshore intercontinental shelf as Australian. But times have changed. Under a 1982 convention on the Law of the Sea, Australia's border would arguably now lie well to the south.
Australia has already taken action to strengthen its position in any boundary talks with East Timor. In March it withdrew from the maritime jurisdiction of the International Court of Justice, blocking any East Timorese appeal should the two sides prove unable to agree a boundary. That could make it almost impossible to force Australia to do anything.
Still, the move isn't foolproof. Lawyers are debating the technical validity of Australia's withdrawal, and East Timor may still be able to force the issue to arbitration by an international panel.
In the meantime, both sides are going out of their way to reassure the oil companies that the dispute doesn't threaten their projects and capital. Key to that is the ratification of the Timor Sea Treaty that sets the fiscal regime for the so-called Joint Petroleum Development Area of the Timor Sea. This zone is jointly administrated by Australia and East Timor.
The JPDA replaced an original pact between Australia and Indonesia that carved up the Timor Sea oil and gas fields on a 50-50 basis. When it came to agreeing on the new deal with East Timor, Australia agreed to give East Timor 90%.
According to the East Timorese, it is tacit recognition of East Timor's claim for a larger maritime boundary. For now, though, both sides are putting the boundary issue aside, focusing instead on ratifying the treaty while specifically allowing for a later agreement on the maritime boundary.
Woodside, the operator of the Sunrise project joint venture, says it isn't surprised or fazed by East Timor's maritime claim. Instead it is looking forward to the finalization of fiscal terms under the Timor Sea Treaty's unitization agreement, which is expected to be signed before the end of the year.
"Both governments have shown goodwill to want to keep the Timor Sea investors interested, and the Timor Sea Treaty has stated an intention to complete the unitization agreement by the end of the year," said Niegel Grazier, Woodside's head of government and public affairs.
It isn't just governments, however, that are at odds over the Timor Sea. The Sunrise field development partners can't even agree on the best development route.
In a dispute that threatens to delay the project, Royal Dutch/Shell Group wants to develop Sunrise as an offshore floating liquefied-natural-gas operation that would export LNG to California. But Phillips Petroleum of the US, wary perhaps of Shell competition on its own patch, wants to pipe the gas ashore in Australia's Northern Territory to supply the local market there. Shell has the support of the other two partners, Woodside and Japan's Osaka Gas, leaving Phillips on its own. But any development decision needs to be unanimous.