Simon Roughneen – East Timor's government has declined a proposal by Australian oil and gas company Woodside to process gas drawn from the Greater Sunrise field on board a floating liquefied natural gas (LNG) plant in the Timor Sea, claiming that it would be deprived of tens of billions of dollars in much needed revenues under the arrangement.

As the conflict between Australia's second-largest energy company and one of the world's newest and poorest island countries (whose official name is Democratic Republic of Timor-Leste) escalates, there is no quick resolution in sight. Dili may seek to prevent the plan coming into force and thereby seek a revision of the three treaties that underpin the Greater Sunrise project. Under the current agreement, East Timor has only the option to veto any arrangement to extract the gas which it disapproves.

Dili has accused Woodside and its partner companies of "grandstanding" over their plans for the multibillion-dollar floating processing project, and has said under no circumstances would it consent to the plans. The government also claims that the company has not followed all the procedures outlined in various international agreements between East Timor and Australia.

For its part, Woodside says that an onshore plant in East Timor "presents significant technical risks", according to a presentation (available on the Woodside website) given by chief executive officer Don Voelte to an investors conference in Sydney on June 3. Citing concerns about running a pipeline through the "seismically-active" 3,000 meter-deep Timor Sea trench to the Timorese coast, Woodside says that East Timor's infrastructure deficit would add "approximately US$5 billion" to the capital cost versus the projected cost of the floating plant. The company has accused the East Timor government of "posturing".

Dili has latched on to Woodside's admission that "there were no technical impediments" to processing the LNG onshore in East Timor. According to Dili-based La'o Hamutuk, also known as the Timor-Leste Institute for Development Monitoring and Analysis, the country's State Secretariat for Natural Resources (SERN) created a Sunrise Task Force in mid-2008 "to develop their own information on the technical, economic and social aspects of the Sunrise project."

That task force has been supported by Malaysian energy giant Petronas and Korea Gas, suggesting that Dili is courting other multinational suitors to exploit its share of the field as a counterweight to its existing commercial arrangements with Woodside. East Timor has said that it does not want to be Woodside's "guinea pig", claiming that there are as yet no other floating LNG processing projects in place anywhere in the world.

"This argument is weak... such projects are underway around the world from Brazil to Indonesia," said Anatoliy Kurmanaev, oil and gas analyst at Business Monitor International. "There are inherent risks to any new technology, but prospects for any environmental disasters are limited. No floating re-gasification facility has had a serious leak yet and they've been in operation for decades."

While Woodside and its partners have talked up the socio-economic benefits that East Timor would accrue through the proposed offshore facility, Dili says it would receive more benefit if the processing was done onshore. With a 33% share, Woodside is marginally the largest company involved in the Greater Sunrise project; other players are Conoco-Phillips (30%), Royal Dutch-Shell (27%) and Osaka Gas (10%).

The commercial reality is that Woodside is making its decisions first and foremost based on the bottom line and shareholder interests, though in this case within the parameters set by the existing bilateral treaties between Dili and Canberra. The Timorese government wants the gas piped to a "greenfield" LNG processing plant on the country's southern coast, saying that this would give the country billions in additional energy revenue and facilitate the development of spin-off industries.

Government spokesman Agio Pereira said those industries would help to create "five to thirteen times the proportionate revenue" of the fuel exploitation. In a June 4 statement entitled "Timor-Leste Can Wait", the government outlined its projection that it would generate a "minimum of [$65 billion] in additional revenue to rebuild the impoverished nation which has endured 24 years of war before gaining independence eight years ago".

The Australian government says it has no influence over decisions made by Woodside and its partners. The simmering issue nonetheless threatens to undermine bilateral relations. Australia provides A$100 million (US$90.7 million) per annum in overseas aid to its northern half-island neighbor.

An April 28 statement issued by the Australian High Commission in Dili said "Any suggestion that Australia has threatened Timor-Leste on the issue is incorrect. Australia's long-standing position is that a decision about development of Greater Sunrise is for the commercial partners to make, consistent with the treaties Australia and Timor-Leste have negotiated."

One of the options assessed by Woodside and the joint venture partners was to pipe the gas to an existing plant at Darwin on Australia's northern coast. Timor watcher and professor at Deakin University Damian Kingsbury commented on the East Timor Action Network (ETAN) website that "the assumption that the Australian government has, more than influence, a directing hand in this affair is incorrect".

He added that "the 'floating platform' option does not especially benefit Australia. It is a fairly neutral outcome in terms of flow-on benefits – one only has to go to Darwin to see the disappointment there with the decision to know this is not a pro-Australia outcome."

However, the perception is growing in East Timor that Australia is trying to steal Timorese gas, as seen in a number of recent angry articles in the East Timor press that have conflated Australia's presence and policy towards the country with the controversial Woodside proposal.

At the same time, China has pushed ahead with the latest in a series of high-profile partnership projects, with East Timor's navy now the owner of two new Chinese vessels. Although China's official aid to East Timor is far less than major donors, including Australia, Portugal and the European Union, Beijing has focused on lavish government building efforts, such as the new Presidential Palace, that are prominent in the public eye as Chinese gifts to the impoverished new nation.

President Ramos-Horta and others have meanwhile engaged in diatribes against the vast overseas presence in East Timor since Indonesia's withdrawal in 1999, adding to the perception that many Western aid workers are vastly overpaid consultants who do little more than advise Timorese officials. A 2009 study showed that more than US$8 billion in aid had been spent in the country since 1999, but it remains possibly Asia's poorest nation in real terms. A counter-argument would point to what Ramos-Horta has described as entrenched corruption in the country's bureaucracy as an alternative and internal inhibition to development.

Figures of per capital gross domestic product of more than US$2,000 are based on the assumption oil and gas money will flow into the countryside and are not a reflection of what the average Timorese actually earns or spends. Around 90% of the population works in agriculture, much of which is subsistence, with unemployment rising to 40% for urban youth. The US Central Intelligence Agency Factbook's entry on East Timor says "the technology-intensive [oil and gas] industry, however, has done little to create jobs for the unemployed because there are no production facilities in Timor."

Driven by energy revenues and high government spending, economic growth has in recent years hit double digit figures, albeit from an extremely low base. The Timorese government has big spending plans, much of which is supposed to be financed on oil and gas largesse. Prime Minister Xanana Gusmao recently launched a summary of his country's new 20-year strategic development plan entitled "From Conflict to Prosperity". He said "We are determined to take Timor-Leste out of the list of fragile and poor states and make it a medium-income country in 15 to 20 years."

Critics argue that his government is aiming to spend existing energy-earned funds too quickly, undermining the logic behind the country's escrow-style Petroleum Fund, which is designed to ensure that the country spends oil and gas revenues responsibly and has plenty of money in the bank after the Timor Sea reserves are depleted.

East Timor is prepared to wait for Greater Sunrise if it means it gets better terms. Charles Scheiner of La'o Hamutuk told Asia Times Online that the 12-13 years of revenue accruing from the existing Bayu Undan field should tide the government over for the meantime – notwithstanding fluctuating oil and gas prices and if the government over time spends money responsibly.

The pipeline for this field, the other major one in the Timor Sea, already runs to Australia. Scheiner adds that East Timor would get much more value-added from a Greater Sunrise extraction project further down the line, and that a delay would hopefully see the country in a better position – in terms of infrastructure, human resources and know-how – to maximize revenues and the developmental impact of the project.

Another reason for Dili to hold off might be an opportunity to revisit the terms for extraction from the Greater Sunrise field. If a development plan is not approved by February 2013, or if extraction does not take place by 2017, then either Australia or East Timor can cancel the existing arrangements, meaning that Sunrise development would be suspended until a new treaty was in place.

Woodside's Voelte told the conference in Sydney that the combined effect of two of the treaties underpinning the Greater Sunrise project is "that approximately 82% of Greater Sunrise oil and gas is apportioned to Australia and approximately 18% to Timor-Leste."

He said that the 2007 Certain Maritime Arrangements in the Timor Sea (CMATS) treaty between Australia and East Timor "provides for the even distribution of upstream petroleum revenues from Greater Sunrise. Effectively this more than doubles the petroleum revenue to be received by Timor-Leste."

That assessment indicates that East Timor is getting a good deal. However, Scheiner believes that "some of the treaties and contracts derive out of an era of illegal occupation", referring to Indonesia's 24-year hold on its tiny neighbor, which was not recognized under international law.

Geographically, the Greater Sunrise field is much closer to East Timor than Australia, and under the UN Convention on the Law of the Sea (UNCLOS), maritime boundaries are generally drawn halfway between the land boundaries of the respective countries. That assessment would put the field in Timorese waters, contrary to the existing maritime boundaries, which were divvied-up between Indonesia and Australia. So Dili may have room yet to hold out until its gets its onshore LNG plant.

[Simon Roughneen is a journalist covering Southeast Asia. His website is www.simonroughneen.com.]