Sunrise LNG Chapter 2. Choices for Development

A Report by La’o Hamutuk
Timor-Leste Institute for Reconstruction Monitoring and Analysis

Contents of this file

In this study, we investigate the possible positive and negative consequences for Timor-Leste’s development of a decision to build a pipeline/LNG project for Greater Sunrise in Timor-Leste, and what Timor-Leste should do to maximize the positive and minimize the negative. Before presenting our analysis, we explain what we mean by “development,” as this word is used in different senses by different people. The vision for Timor-Leste described above suggests that the notion of development is complex, involving many different aspects of both goals and the process to achieve them.

We wish to emphasize that a commonly used measure of development, the Gross Domestic Product (GDP) per capita, is inadequate to evaluate what is good for our people. Dollars are important as a means to development in a broader sense, but they are not sufficient. Material wealth is, after all, at best a means for achieving good lives, and does not in itself constitute well-being or development. GDP/capita, moreover, does not capture enough of the essential information about poverty or prosperity.

In particular, it does not say anything about how GDP and wealth are distributed among the population. If GDP/capita goes up while most people remain poor, we would not say development has progressed—in fact, we could say that it has declined, because the inequality of such a change would make lives worse for the majority of people, even though a small elite does very well. An adequate view of development must also look at who becomes more prosperous, and if higher incomes are equitably distributed. In petroleum-dependent countries, where large amounts of money sometimes flow to only a few individuals amid a destitute population, it is particularly important to make sure that economic growth benefits everyone, to avoid alienation and social jealousy. Timor-Leste’s 2006 crisis is a small taste of what can result from social and economic inequality.

Petroleum revenues in most cases flow to the government, not to the people. It will take competent and conscientious leadership, a well-functioning democratic system, experienced and responsible civil servants and an engaged citizenry to ensure that the government uses these revenues effectively to benefit the entire population, both in the short term and with a view toward future generations. This generation may transform all of Timor-Leste’s petroleum wealth into dollars, but if the dollars are not saved, invested in our people, or used to strengthen other productive sectors of our economy, future generations may have nothing.

Box 2. Kerala’s development experience

The Indian state of Kerala illustrates how several human development goals can be achieved even without much economic growth. Kerala’s around 32 million inhabitants had a Net Domestic Product per capita of around US$530 in 2003 (calculated at market exchange rates). Yet Kerala has succeeded in lowering mortality rates and raising life expectancy to developed-country levels (the infant mortality rate is 11 per thousand live births; life expectancy at birth is 76 years for women and 71 years for men). Its literacy rate is 91%. [27] The experience of Kerala shows that it is possible to secure important aspects of human development even without material prosperity. These successes have been attributed to Kerala’s long tradition for the public provision of widespread education, as well as a culture favoring strong rights for women, including in education and inheritance. [95]

Development, then, means not just owning more things and having higher incomes, but that people’s lives actually become better. This broader view of development is recognized in some measures of development such as the Human Development Index (HDI), which takes into account lifespan and education as well as economic wealth. (The view of development that underpins the United Nation Development Program’s Human Development Index and Human Development Reports is described at http://hdr.undp.org/hd/. Timor-Leste ranks 150 in HDI among 177 countries rated in 2007. [107]) In the broadest sense, human development includes access to health care and education, security, and the ability to function well in a society whose culture can add meaning to people’s lives. That takes more than mere prosperity (and may not even require more than modest prosperity). It requires the general realization of and respect for the rights of the entire people, protection of the environment, and participation of the public. A true development process enhances the control people have over their lives, especially those who are traditionally disenfranchised: The poor, minorities, and women. This requires both that the process of sustainable economic growth respects people’s rights, and that a society in which those rights are fulfilled itself be seen as one of the goals of development.

Measures like GDP and HDI are insufficient to describe human development in Timor-Leste. For a society which lived through centuries of colonization, decades of military occupation and repeated trauma, personal and psychological security are very important. Timorese have to feel safe living in their homes and be able to travel around the country without fear. To overcome past repression, people must feel free to express themselves, talk to their friends and their leaders, elect their government, and take ownership of their state and their country. Our 24 years of struggle was not only to achieve an independent state, but also for the freedom of the people – and the state is responsible to protect the people’s human, economic, and psychological rights.

If material wealth is to make people’s lives go better, something else is also required: A social setting in which meaningful lives can be lived. The change from a traditional society based on subsistence agriculture to a more productive economy with its division of labor and larger industrial and service sectors is traumatic. Experience shows that this process has deep and painful implications, often uprooting old ways of life and placing people in new and disorienting social relationships. As traditional cultures are disrupted, social and family networks can be damaged, leaving many people disconnected from their roots, resulting in violence and substance abuse. While change is always challenging, we must not blithely accept threats to the traditional cultural context as “growing pains,” but rather avoid them where possible, and minimize and mitigate the unavoidable negative impacts of development, “modernization” and economic growth. Again, this means that an evaluation of projects from the point of view of development must not simply look at the economic gains and losses, but also take into account non-economic costs and benefits.

A successful development process requires the actors to pursue many goals and values at the same time, trying to balance them in the best possible way. There are many actors, each with their own interests, which will often come into conflict. It is critical, and difficult, to ensure that development decisions balance these competing goals, so as to serve the broader population and not only those who expect to receive a particular benefit (such as employment) or suffer a specific loss (such as loss of their land). However, the rights of individuals must also be protected and weighed against those of the community and the nation. Transparency of information, fully informed public consent and pluralistic democratic decision-making processes are essential to resolving these potential conflicts. Understanding this means accepting that there can be real trade-offs between the goals, say, of prosperity, respecting and fulfilling rights, and preserving of valuable cultural and social worlds.

In good situations, these values will be aligned. In bad ones, difficult choices will have to be made. But it is never a good idea to pretend that only one thing matters and that trade-offs do not exist. Our goal in this study is to survey the possible consequences a specific development project—the proposed pipeline/gas liquefaction plant—might have, in all of these dimensions of development. Whether they will conflict with each other will depend in part on how well each actor prepares for the challenges the project will bring up. Our aim is to provide a first inventory of what these challenges might be, and thereby contribute to solving them.

2.1 The “petro-state” predicament

The Timorese people’s optimism upon restoring independence in 2002 has so far not been rewarded with prosperity. The country has mostly stagnated economically, if not regressed, in the last few years. [35], [80] Nevertheless, the government receives large and growing revenues from the petroleum sector. Timor-Leste has established a successful Petroleum Fund, which has so far accumulated more than two billion dollars from petroleum operations in the Timor Sea. Timor-Leste is endowed with large reserves of this valuable resource (see Chapter 9. Fulfilling the dream), and is working to develop more fields than those already in operation.

Petroleum, however, also comprises one of the country’s greatest challenges. International experience shows us that succeeding with petroleum is very hard. Rather than being a blessing, oil and gas wealth is almost always a curse for poor countries. People in most resource-rich low-income countries with a lot of oil, gas or mineral resources, are worse off than similar countries which don’t have such natural resources.

Box 3. The curse of natural resources

Finding oil or gold is often thought to be the end to economic problems. In reality, for many countries, oil, gas, and mineral wealth has been a curse rather than a blessing. Many studies show that in comparison with similar countries that have few natural resources, natural resource-rich countries suffer in many ways: Lower economic growth, less democracy, and higher risk of violent conflict. In addition, the non-natural resource part of the economy typically does not develop alongside the resource sector, so when the resource is depleted, the wealth it generated proves unsustainable. There are several reasons for this “paradox of plenty.” One is that with large natural resource sectors, scarce resources are devoted to natural resource extraction and the influx of foreign exchange drives prices up. These effects make other exporting sectors, such as manufacturing, less competitive. Another reason for the underperformance of resource-rich countries is that “money for nothing” creates perverse incentives. People who have a chance of securing a share of the money will work to achieve that instead of engaging in money-making activities that are truly productive and meet people’s needs. In inexperienced and understaffed bureaucracies, moreover, the influx of large amounts of money with few controls encourages corruption, relieves the pressure for sound management of public funds, and creates rewards for undermining the rule of law.

The presence of petroleum or mineral resources can also be a cause for conflict and war. In our own neighborhood, we have seen this both within one country (Aceh, Indonesia or Bougainville, Papua New Guinea) and by encouraging foreign occupation (as in Timor-Leste in 1975, West Papua since 1963, or Iraq today). Domestic political instability, corruption, and conflict between communities or economic classes also often results from the “resource curse.”

La’o Hamutuk’s OilWeb CD-ROM contains many articles, analyses and case histories about different examples and manifestations of the Resource Curse. See also “Untapped: The Scramble for Africa’s Oil” [25]

Petroleum brings money, but as we emphasized above, money is not the same as development. In many petroleum-rich countries the revenues from natural resource exploitation has been extremely unequally distributed. Not only that, the desire to capture the cash from the natural resource has often led to war, violations of human rights, and local communities being uprooted. Petroleum development damages both the local and planetary environments, and these costs must be balanced against the financial and developmental gains. In Third World countries, such development also brings a clash of cultures and a local window into global economic injustice, as highly-paid foreign workers and executives come into contact with a local population unaccustomed to their priorities and values. Dili has experienced this on a small scale over the last few years, with the influx of highly-paid foreign UN staff and international advisors. But the culture of oil workers is different – they are less knowledgeable and caring about the people, culture or development of the countries they are working in.

Until today, all of Timor-Leste’s experience with the petroleum industry has been with offshore upstream extraction, out of sight in the middle of the ocean. The potential risks from onshore and downstream projects are much larger, but our people have never seen such things. Our regulators have no experience with such projects, so we do not yet have the legal frameworks, administrative systems, and ongoing supervision mechanisms they will require.

So far, Timor-Leste has not suffered the worst consequences petroleum revenues have caused in other countries. Hopefully, they will benefit future generations of Timorese, since they have not been stolen or squandered. But neither have these revenues made much improvement on the lives of the present generation. And other countries’ experience with the “natural resource curse” should caution us against thinking that petroleum will magically solve the challenges of development. Timor-Leste must not be content to simply receive payments for a depletable natural resource taken out of our ground. All development policies, and in particular those relating to petroleum exploitation, should aim to develop a more diversified productive base in the domestic economy, as well trying to reach the broader development goals described above.

Although nearly all Timor-Leste politicians and citizens want the Sunrise LNG plant to come here, there is a significant chance that their hopes will not come true, and the gas will be piped to Australia or processed at sea. Even if this happens, nearly all of the information and recommendations discussed in this report are still relevant and important. They would apply to any large industrial project, and to any on-shore petroleum activities. Timor-Leste will need practical, realistic, forward-looking policies and mechanisms to develop our economy, safeguard our environment, and protect our people’s rights from any project or industry, and virtually all entail the kinds of opportunities and risks that this report discusses in relation to Sunrise natural gas.

2.2 The proposed project

The pipeline/gas liquefaction project we examine in this report would be another step along a development path based on natural resource exploitation. While it therefore contributes to the risks we described above, it also carries the promise of large revenues for oil companies and the government, with smaller amounts injected into the local economy. The project is a proposal for processing natural gas from the Greater Sunrise field in the Timor Sea. A problem for Timor-Leste’s natural gas production is that our country is located far from the potential customers—large countries that need more gas for their energy needs than they produce themselves. In the Pacific, the most important importer of gas is Japan, but China and India’s imports are likely to continue to grow. These markets are too far away to build pipelines from the Timor Sea. Nor is natural gas in its normal state a liquid that can be transported on tanker ships, unlike oil.

In other gas fields in the same situation, the solution has been liquefied natural gas (LNG). By cooling the gas down to very low temperatures (around minus 160 degrees Celsius), natural gas becomes liquid and takes up much less space than at normal temperatures. (See Box 4.) In this state, it can be transported on special tanker ships, much like oil. The gas from Timor-Leste’s Bayu-Undan field is piped to Darwin in Australia, and liquefied there before it is shipped to Japan.

The world market for LNG is new and growing rapidly. The map and table below show the international LNG trade, which totaled 211 billion cubic meters (7.45 trillion cubic feet, about the same as the contents of the Greater Sunrise field) during 2006. This is about 7% of all natural gas used globally during the year; the remaining 93% was transported by pipeline to the end user. Of the natural gas used worldwide, 15.4% was used in the Asia-Pacific region (dark green on the map below), and gas consumption in the region increases about 7% every year.

Figure 4. Major LNG trade movements, diagram from BP Statistical Review of World Energy, 2007 [14], p.31

Table 1. Major LNG trade movements 2006, from BP Statistical Review of World Energy, 2007 [14], p.30

Figure 5. LNG prices in Japan (solid and dashed lines, left scale) and Asia-Pacific usage (dotted line, right scale) have grown significantly in recent years and are likely to continue to increase, with demand growing faster than supply. Prices include cost, insurance and freight. Data from BP Statistical Review of World Energy, 2007 [14].