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Sunrise LNG in Timor-Leste: Dreams, Realities and Challenges

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

February 2008

Chapter 8. International and Domestic Politics

Link to Index and Table of Contents

Contents of this file


Our analysis so far has mainly focused on the social, economic and environmental advantages and disadvantages of a pipeline/LNG complex in Timor-Leste. This section addresses the political effects of such a project. Building a pipeline and gas liquefaction plant will have important implications for political and power relationships within Timor-Leste and between Timor-Leste and other countries. Predicting these consequences is speculative, and the points we raise are neither unavoidable nor exhaustive. As each political actor in Timor-Leste decides whether this LNG project is a good idea, he or she should consider how it will influence both Timor-Leste’s domestic interests and its foreign standing.

In other petroleum-exporting developing countries, the money and critical decisions involved in petroleum exploitation often bring conflict and corruption. Many believe, for example, that Australia approved Indonesia’s invasion of Timor-Leste in 1975 in part because Canberra believed it would be easier to negotiate a deal over Timor Sea oil with Indonesia than with an independent Timor-Leste. (One reason this belief is widespread is the cable sent from Australian Ambassador to Indonesia Richard Woolcott to Canberra on 17 August 1975: “… I wonder whether the Department [of Foreign Affairs] has ascertained the interest of the Department of Minerals and Energy in the Timor situation. It would seem to me that this Department might well have an interest in closing the present gap in the agreed sea border and this could be much more readily negotiated with Indonesia than with Portugal or independent Portuguese Timor. I know I am recommending a pragmatic rather than a principled stand but that is what national interest and foreign policy is all about.” [56]) In our neighbors – Aceh, Bougainville and West Papua (see Box 8 above) – exploitation of oil and mineral resources has also brought war, human rights violations, and other violence.

Box 24. Power corrupts

In 2006, The New York Times revealed that the Bush administration had failed to collect billions of dollars from companies drilling for oil and gas in federal waters through a mistake in offshore leases that allows companies to escape an estimated $10 billion in royalties. In addition, leases were signed at royalty rates far below current global norms. Future royalty rates were raised somewhat in 2007, but past leases are still in effect. [8], [9]

Statoil CEO Olav Fjell and Chairman Leif Terje Løddesøl were forced to resign in September 2003 because of allegations that the company had violated Norwegian law by paying bribes to Iranian officials. [6]

Shell CEO Sir Philip Watts was forced to resign in March 2004 after regulators caught the company systematically overstating its reserves for many years. Watts received a million pounds in severance pay and was subsequently investigated by U.K. and U.S. authorities, although no charges were brought. [101], [119]

In addition, the profits and revenues from petroleum development are so huge that improper expenditures of tens of millions of dollars or more are hardly noticed. From Suharto to the Shah of Iran, from Nigeria’s Sani Abacha to Iraq’s Saddam Hussein, dictators have taken power to obtain oil’s huge profits, and used them for personal gain, to maintain control, and to finance repression. Timor-Leste will require leaders of exceptional integrity and consistent laws for transparency and accountability to resist corruption and bribery. Even in rich, democratic countries, corruption is widespread in the oil industry: Thanks to an error in contract negotiation, many U.S. oil companies are currently depriving the U.S. government of billions of dollars in natural gas royalties. In the last four years, the top executives of companies with the highest reputation – Statoil and Shell – have been forced to resign because of improper practices.

Timor-Leste has fortunately resisted these levels of corruption and violence since 1999, but there is no reason to believe that we are immune to such temptations. As petroleum processing and extraction move onshore, the decisions become more complex and the benefits of shortcuts and favoritism become larger than when they were out of sight in the Timor Sea. Timor-Leste’s 2005 petroleum legislation provides some protection against corruption and human rights violations, but it may not be strong enough to safeguard our people, our political system and our environment. Before a LNG facility or other large petroleum project is built on our land, we need to have a system that not only is better than current worldwide practice, but that will actually be effective. (The 2005 Petroleum Act [74] applies to newer upstream projects but not to Sunrise, as the Sunrise production-sharing contract was signed before Timor-Leste became independent in 2002 and was exempted from subsequent legislation by the Timor Sea Treaty. A downstream project like the LNG plant would have to obey other Timor-Leste laws, which are not yet written.)

Citizens and decision-makers must also understand the effects that developing an on-shore LNG facility could have on the domestic politics of Timor-Leste. We will look at a few political challenges which often accompany large infrastructure projects in other countries. Nobody can tell for certain whether these would in fact materialize, but there is a risk (and there could of course also be others).

Alienation of local communities

Regional rivalries could emerge concerning the siting of the plant. Our field trip to Lautem and Viqueque showed that even with little knowledge about what an LNG facility would involve, local leaders are eager for it to come to Timor-Leste and to their district in particular. There is an almost universal perception that the effects will be positive, especially in terms of providing jobs and incomes to local residents, but also as an important national symbol. As plans advance, different regions might see each other as competitors for a desirable project. At the same time, there could be local advocacy against having the plant built in a particular community. When local residents become aware of the social and environmental costs of the plant (including the likely need to relocate an entire community from the chosen site), every district may want the plant, but no aldeias or sucos do — the “Not In My Back Yard” syndrome. Although policy-making in Timor-Leste is quite centralized, this creates the prospect of regional loyalties becoming more important. Once the plant site is chosen, moreover, any environmental degradation, accidents, or social problems between the construction crews or plant staff and the local population will foment anger and frustration that can turn to insecurity or violence if the grievances are not properly addressed, as examples such as Nigeria’s Niger Delta region (see Box 7 above) show.

Militarization

Oil, gas and mining operations are often accompanied by militarization and human right abuses. The companies require security for their facilities, and they often use armed guards to ensure that they can operate safely and without unexpected interruptions, employing military, police, civilian staff or private security companies to protect themselves from people they perceive as hostile.

In Timor-Leste’s current uncertain security situation, many people feel that their freedom of movement is restricted by the deployed international and Timorese security forces. Our people have had long experience with the oppressive Indonesian military, which causes them to be afraid of men with guns.

Timor-Leste’s perceived instability may motivate the operators of the LNG plant to hire local people and private security to protect their operations. Foreign governments could also decide to provide security for foreign investments, as has happened in Colombia, where the U.S. government used the war against drugs as a reason to provide $98 million to train and equip Colombian soldiers to protect an Occidental Petroleum pipeline. [16]

West Papua has become world-famous because civilian and military security personnel abuse the local population while protecting Freeport MacMoRan’s copper and gold mining operations (see Box 8 and reference [26]). In other resource rich countries, such as Ecuador, Bougainville, Nigeria and the USA, oil and mining companies have been in conflict with indigenous people for decades. Timor-Leste needs to carefully consider how we can avoid repeating those experiences, which will be especially difficult because our police, military and private security companies are inexperienced and have limited understanding of international human rights standards.

This problem has become more recognized internationally, and the United States, Britain and other governments and extractive industries have developed a set of Voluntary Principles on Security and Human Rights. [112] In addition to preventing conflict by developing good relations between the facility and the local community, international companies operating large facilities here should be required to follow these Principles.

Displacement

Throughout the twentieth century, massive numbers of people in many countries were displaced to make way for large industrial or infrastructure projects, often with disastrous effects on their lives. In recent years, society has recognized that these people’s rights must be respected, and a consensus is emerging around a standard that people forced to move should be better off after relocation than before. This is a complex topic, and conventional methods assign little value to “unimproved” land which is used sustainably or traditionally, while providing much more compensation to richer people who built expensive houses. This valuation would be unjust in Timor-Leste’s society and should not be unthinkingly applied here.

Secondary economic benefits

One of the main arguments for bringing Sunrise gas to Timor-Leste is the possibility of “spin-off” effects for local economic development. As we discussed in Chapter 5, this will require the central and district government to work together with the companies to maximize the share of local content in employment and supplies. Experience from other countries, however, suggests that promoting local content can easily lead to corruption and cronyism. Legally-mandated local content is often under the control of government officials who may be tempted to influence the allocation of contracts according to their private interests rather than the common good. Even the mere perception of corrupt behavior is damaging to the trust between the government and the governed, and so this risk should be very clearly taken into account from the earliest stages of planning for the project. The history of politics in Timor-Leste since independence is permeated with unsubstantiated allegations and unverified denials, with government officials employing criminal defamation charges to fend off their critics. If a multi-billion dollar LNG project is to be carried out, its managers and decision-makers must find a way to change this pattern.

We have already warned in this report that without careful preparation, the non-fiscal benefits of a pipeline/LNG facility will prove elusive. People have great expectations that a facility will spur economic development in their area, and if these are disappointed the results could be devastating. In extremis, such frustrations fuel violent conflict. The tragic situation in many oil-rich countries reflects in great part the offensive physical juxtaposition of continuing poverty with extractive industry facilities whose benefits are not enjoyed by the population that suffers the negative effects of the infrastructure.

On the international level, it is important to note that any development option for Sunrise must be approved by both Timor-Leste and Australia, and by the private companies, led by Woodside (see Figure 2). Our fiscal estimates in Chapter 4 showed that, other things being equal, Timor-Leste’s government would benefit in fiscal terms from the downstream project being located in Timor-Leste. Australia, by comparison, stands to benefit more from a downstream project located in their tax jurisdiction. In other words, supposing that the profitability of the downstream project would be the same in the two countries, the decision where to locate it amounts to a zero-sum-game between the two countries. On the same assumption, the developer of the downstream project would seek to build in the jurisdiction that both offered the lowest taxes (or highest subsidies) and the most secure and stable conditions for profitable operation. It is likely that Timor-Leste will be perceived as worse on both of those dimensions, especially if current tax laws are applied.

If we consider, as some claim, that the downstream project would be less profitable if built in Timor-Leste — either because of higher construction costs or because of a lower risk-adjusted LNG sales price — the conflicts of interests are even more stark. As we explained in Chapter 4, Timor-Leste could still benefit in fiscal terms, because the loss would be passed on to the upstream project. That means, however, that Australia would not only lose the tax revenue from the LNG plant, but would also receive less from the upstream project. Similarly, the upstream private contractors would reap lower profits if a less-than-maximally profitable downstream development is chosen, since this will lead to a lower netback price to the upstream. Australia and the companies will need to be persuaded that the non-fiscal benefits to Timor-Leste from building the plant here outweigh whatever tax revenues and profits they might lose, and Timor-Leste will be under pressure to compensate them for conceding that income. Similarly, if the plant is built in Australia, Timor-Leste should insist on compensation for lost revenue and development opportunities, which could be cash payments and/or opportunities for training, employment and subcontracting.

These conflicts of interest mean that it will be difficult for all parties to agree on how to develop Sunrise. We expect that both the upstream contractors and the Australian government will push for a downstream solution in Australia. Australia may well link this issue to other negotiations with Timor-Leste, such as other Timor Sea questions, Australian influence over Timor-Leste security policies, or Australia’s military presence in Timor-Leste. Potential downstream contractors will likely seek tax concessions from both countries, making them bid against each other to offer the most profitable arrangement to the companies. When evaluating the prospect of a pipeline/LNG project, therefore, Timor-Leste must determine how much it is willing to concede to achieve an agreement on the downstream project, or alternatively, whether it should use the LNG questions as a bargaining chip to improve its standing in other matters to be negotiated with Australia. Timor-Leste could also negotiate compensation from the companies in return for approving their preferred development plan outside Timor-Leste.

If the RDTL government achieves its policy goal of building an LNG facility in Timor-Leste, this will have another large effect on the country’s international political situation. It will make Timor-Leste a more integral part of the international energy supply chain, significantly increasing energy-importing countries’ concern about political or other instability that may interrupt the delivery of LNG. The countries that will buy Timor-Leste’s LNG – perhaps Japan, China, Korea, USA or India – would be the most concerned. More indirectly, any disruption in Timor-Leste could potentially effect gas markets in general, at least insofar as a global LNG spot market continues to develop (see Box 13).

Countries concerned about energy supplies may therefore pay particular attention to Timor-Leste, which could on balance be beneficial or nefarious. The increased importance of Timor-Leste in global energy politics could be harnessed by a wise foreign policy. However, it may also encourage a more intrusive attitude vis-à-vis Timorese politics in reaction to real or imagined threats to stability or to policies perceived to increase the risk to LNG production and exports. We are not making judgments on these questions, but simply highlight them as important topics to consider while deciding about the LNG facility.

Continue to Chapter 9. Fulfilling the dream

Go back to Chapter 7. Effects on Women

Return to Table of Contents

 

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua dos Martires da Patria, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
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