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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 9. Fulfilling the Dream

Link to Index and Table of Contents

Contents of this file

9.1. When should Sunrise development begin?

9.2. Recommendations


Timor-Leste’s people have high hopes and grand dreams about oil development for our young nation. We imagine that a pipeline to Timor-Leste will bring far more than natural gas: it will stimulate economic growth, create employment opportunities for Timorese workers, spin off money into our local and national economy, and show the world we are a modern, industrial, independent nation. We heard these expectations from officials and citizens in Dili, and from local people throughout Lautem and Viqueque.

However these dreams will be difficult to realize. Political stability in our new nation is fragile, law enforcement mechanisms and practices are weak, and the institutions of our state are inexperienced and incomplete. Many of the necessary laws to protect our human rights, land, economy, and environment have not been passed. People in local communities do not yet have much information about the Sunrise LNG plant, even as of our national leaders are unrealistic about the benefits and dismissive of the dangers. The “resource curse” that afflicts many other countries can also happen here.

The humanitarian and political crisis which began in April 2006 demonstrates how challenging it is to use Timor-Leste’s petroleum wealth to benefit our people. Even though the Petroleum Act [74] and Petroleum Fund Act [73] require transparency and promote wise revenue management and Timor-Leste has saved two billion U.S. dollars in the Federal Reserve Bank, poverty is endemic, unemployment is widespread, infrastructure is limited and deteriorating, and many of our population are not confident of their security and do not trust public officials. The causes of these problems – fragility and inexperience of state institutions, lack of human resources, inability to implement government programs – must be overcome before a project like the Sunrise LNG plant can safely and effectively benefit current and future generations. Before companies will invest billions of dollars in a plant on our shores, they, their customers and our people must be confident that the facility will operate harmoniously for three decades or more.

The vision that bringing the pipeline to Timor-Leste will provide many jobs for Timorese workers may be an illusion. The oil industry is global, powerful and high-technology, and most of its high-paying jobs require many years of education and experience. During the two to four year construction phase, there will be opportunities for short-term work for local people, but during the following decades of operation, the plant will require only approximately 200 people, mostly with specialized skills. If Timorese workers are to fill these positions, we must plan and prepare long in advance.

We all must work hard to come up with ways to fulfill these dreams. Since the Government as committed to bring the pipeline onshore to Timor-Leste, there are several steps which should be taken now:

  1. Timorese people must be well-informed about the government’s plans for LNG development. Communities should be told of the risks associated with the development as well as the benefits, and consultation should be held to ensure the informed voices of Timorese women and men are represented in decisions. Local people should be given the chance to choose what is best for them.

  2. A legal foundation should be in place which incorporates respecting land rights, assessing and protecting the environment, guaranteeing sacred places, managing pollution and disasters, enforcing transparency and public consultation, safeguarding workers’ rights and safety, and preventing conflicts of interests. More than five years after independence, Timor-Leste has not enacted laws to ensure the above, and without them we are vulnerable to violations of our rights. In addition to passing the laws, enforcement and monitoring systems and personnel must operational. Sanctions for violations must be severe enough to ensure that companies comply with these laws, and a judicial system must have the capacity to fairly and expeditiously resolve any disputes or violations.

  3. The Government must initiate programs to equip Timorese people to undertake higher-skilled jobs in the companies involved in the LNG project, as well for those who will manage and regulate the project on behalf of the Government. Training, scholarships, apprenticeships, and education should begin at the pre-secondary level to prepare people for work in petroleum and related industries. The better this is done, the more Timorese will get jobs that would otherwise go to foreigners. The Government should require companies to hire and train Timorese workers and facilitate the flow of information on recruitment, so that companies can find the people they need for positions and people have information to apply for the jobs that they are qualified for.

  4. We can avoid the worst by being ready. The hydrochloric acid leak in April 2007 illustrated that Timor-Leste is not prepared to handle even a simple accident in our capital. The recently repaired bridge to Beaçu (see Appendix 6) exemplifies how difficult it is for us to maintain and repair even simple infrastructure. With a major industrial facility like an LNG plant, the infrastructure needs are far more complex and critical; the consequences of a badly-handled accident would be much more devastating. Before undertaking such a project, Timor-Leste needs developed planning, procedures, interagency coordination, emergency medical response, communications and deployment systems which can deal with the worst that could happen.

  5. In order to maximize spin-off benefits, the LNG project needs to be integrated into local economic development plans. The plant requires water and electricity, for which it has to build its own supplies, and the construction of these facilities could also benefit the community, either by utilizing the contractors who build the plant infrastructure to build infrastructure for the country at the same time, or by constructing roads, docks, generators or similar infrastructure to serve both the plant and the local population. In order to ensure maximum and sustainable spin-off benefits, the Government must conduct specific, far-sighted planning, as well as stimulate and develop the capacity of local businesses.

When should Sunrise development begin?

As La’o Hamutuk recommended in our “Case for Saving Sunrise” paper [94], Timor-Leste would gain by extending the period of Sunrise production by starting later and reducing the rate at which gas is extracted and liquefied. Timor-Leste will benefit more extensively from operating than from construction, and a longer project lifetime allows for more Timorization. A single 3.5 mtpa train, with a smaller-diameter pipeline, would be less costly to build than the 5.3 or 7 mtpa plant capacities that have been suggested. Timor-Leste would also benefit more if the project started later, giving us more time to prepare to receive its benefits. Although these options may be less preferable for the companies, they would be better for Timor-Leste’s people.

At present, the Estimated Sustainable Income (ESI) to Timor-Leste from oil and gas projects under contract (primarily Bayu-Undan) is about $300 million per year, as described in the Petroleum Fund Act. [73] The ESI will increase to about $550 million/year when a Sunrise Development Plan is agreed, as the anticipated Sunrise revenues will then be included. If that Plan includes an LNG plant in Timor-Leste, the annual ESI would be about $625 million. All of these numbers are far beyond the capacity of the Government to execute programs responsibly, and the amount actually spent over the next several years is likely to be considerably less than the ESI. As the following two graphs show, the income Timor-Leste receives from Bayu-Undan alone is far above the ESI for the next decade, and Greater Sunrise will provide additional income for another couple of decades.

However, if Greater Sunrise is developed as quickly as possible (see Figure 24), its revenues will overlap those from Bayu-Undan, creating a revenue peak which will be deposited into the Petroleum Fund. In this case, Sunrise revenues will stop when the gas is exhausted, about 35 years from now. Figure 25 shows an alternative, delaying the start of construction until 2015, with production starting in 2020. In addition to providing six more years of income, this delay would have several advantages for Timor-Leste:

  1. It would allow more time to train our workforce and develop secondary businesses, increasing the share of revenues which would come into our economy.

  2. It gives time to develop, pass, implement and gain experience with environmental laws and other legal prerequisites for a successful LNG project.

  3. It gives our administrators and regulators more time to develop their capacities and experience, so that they are better able to ensure that the project serves Timor-Leste’s interests.

  4. It allows us to take advantage of improvements in rapidly-developing LNG and deep water pipeline technology.

  5. It will probably result in less expensive construction and higher revenues, as current very high construction costs (see Box 12) are likely to drop after a few years.

  6. It is likely to result in increased income, as the sales price of oil and gas is almost certain to go up over the long term.

  7. Finally, if development is delayed Timor-Leste could request renegotiation of the CMATS treaty, allowing us to achieve our right to a maritime boundary and secure a greater share of our natural resource entitlement.

Figure 24. A qualitative approximation of the revenues Timor-Leste will receive each year from the Bayu-Undan and Greater Sunrise fields if Sunrise construction starts in 2009 and production in 2013, which would be the fastest possible. This graph should be considered as a general illustration only, since the numbers depend on future oil prices and other factors which are impossible to predict with any accuracy.

In these two graphs,. revenues for Sunrise gas upstream and downstream are based on prices and other assumptions similar to Scenario 1 in Chapter 4.2 (see also Appendix 3). They are corrected for inflation, assuming a 2.6% annual rate. For illustrative purposes, we have included estimated revenues from Sunrise liquids (see Box 5) and Bayu-Undan adapted from information used by the Government of Timor-Leste. However, we have assumed a lower inflation rate and somewhat higher oil prices than the very conservative government estimates in order to more closely approximate actual revenues and make projections from two sources more consistent. References [80], [113], [125].

Figure 25. This graph uses the same assumptions as the previous one, except that Sunrise construction starts in 2015 and production in 2019.

Recommendations

As stated above, these recommendations must be implemented now, even before a development plan is agreed to and contract negotiations begin. They should be done in consultation with civil society and other relevant stake holders. Carrying out these recommendations will help ensure that our government and people are prepared to host such a project, and that we have time to develop the mechanisms to carry them out. A firm legal framework will also provide assurance to the companies that the rules will not be changed in the midst of the project.

Putting these recommendations into practice will be good for Timor-Leste even if the Sunrise pipeline goes elsewhere. Most of them will be relevant to any large or industrial project, to increasing the range of jobs available to our workers, and to protecting the rights of our communities and vulnerable groups. Whether or not Timor-Leste receives the Sunrise LNG plant, we will benefit if discussions of this project stimulate our leaders and citizens to think and act seriously and concretely about the future.

Fiscal and economic issues

An LNG plant could potentially be of major fiscal and economic benefit to Timor-Leste. In addition to significant downstream tax revenues and some employment, we could receive secondary economic effects such as local and national business booms through sub-contracts for construction, and a general increase in economic activity. However, under the current circumstances and recently proposed legislation, Timor-Leste will gain less than many people are expecting. The project runs a risk of becoming an enclave, with no spin-off benefits to Timor-Leste, and therefore several measures are needed to maximize fiscal and economic impact:

  1. Downstream tax revenues could be as much as four billion dollars over the lifetime of the project under the current tax laws, the most important being a 30% corporate income tax. A reduction of this tax to 10%, as currently proposed, would mean a huge (approximately 2 billion dollars) loss in revenues, and we recommend that the government reconsider the implications the proposed tax reform would have on a project of this scale and any other future projects.

  2. The Government should integrate the LNG project with local economic development plans. Feasibility studies should be conducted on using electricity from the plant’s power generator for the national grid, and whether the construction dock can be adapted to become a commercial port. These studies need to be translated into a concrete plan with budget allocation, to be implemented by relevant ministries. These measures will not only serve the plant, but will also boost economic development in the south coast region.

  3. The Government should increase efforts to develop the local private sector. This should include provision of subsidies and loans (e.g. through a special investment fund for small Timorese businesses to establish and develop business activities), an increase in business information and development services as well as training in project acquisition and management (with special attention to construction and hospitality services). The juridical and social security of the private sector should be improved requiring a review of Investment Law and the Land and Property Law. This should include incentives for setting up local businesses and the promotion of the creation of cooperatives through the establishment of a Cooperative Supporting Institution.

  4. Contracts, laws and other arrangements should encourage the oil companies to give preference to sourcing workers, products and services from Timor-Leste, in general terms, increasing local content. For instance, a requirement could be that local content steadily increases over the operational period of the project, reaching 85% or more after 20 years. Both the Government and the companies should establish coordination mechanisms to promote local content before the project begins to ensure that such objectives are met.

Maximizing employment benefits

Many of the dreams currently being discussed for the LNG Plant revolve around the job opportunities which will be presented in the building and operation of this facility. Although these are fewer than some believe, Timor-Leste workers could receive a significant number of positions if proper preparation and legislation are undertaken. If not, low-paid cleaners and maids will receive the crumbs from higher-paid foreign workers.

  1. The Government and companies should identify the specific job skills required for an LNG project – from construction through to decommissioning – and begin to prepare now. The development of Timorese skills should include local education, providing scholarships, on-the-job training and internships. Government should increase investment in technical education and training, encourage local educational institutions to expand on relevant subjects, and give scholarships for Timorese in specific areas of mechanical and civil engineering and the hospitality and services industry.

  2. To increase Timorese employment over the multi-generational lifetime of the project, the Government needs to improve vocational education in Timor-Leste, including a review and reorientation of the technical and vocational education curriculum to enable adequate and flexible response to demand, and increase the quality of teaching in existing schools. Furthermore, the existing engineering faculty within the National University and private universities in Timor-Leste should receive significant assistance to increase capacity, quality and facilities to anticipate the project’s needs.

  3. To protect those who will be employed by the project, the Labor Code and other Health and Safety Regulations should be revised to clearly stipulate regulations related to working hours and shifts, secondary benefits, health and safety measures, working in hazardous environments, as well as regulations related to injuries and death. The Government must have effective mechanisms to enforce, regulate and arbitrate labor laws and disputes.

Social and cultural issues

Although the project promises positive effects, it also carries risks of negatively affecting Timor-Leste’s people. Most land in rural areas is still considered traditional land because few people have legal documents to prove formal ownership. A national-interest endeavor, such as the LNG project, endangers local community land rights, threatens livelihoods of communities, and could destroy existing sacred places and infrastructure reflecting traditional values of the community. A huge influx of foreign workers further threatens local economies such as fisheries and agriculture, and could increase the vulnerability of women, elders, and children. Timor-Leste is currently unprepared to prevent these effects, and important steps need to be taken:

  1. Land and property rights must be clarified, with recognition of individual and collective ownership over land and traditional systems of tenure. If the project requires land from individual or community owners, or will negatively impact on their livelihoods, the Government should have in place an effective, transparent and adequate compensation system. This requires revisions of the Land and Property Law and regulations on protected areas. Any decision for a plant location should be preceded by a coordinated assessment, of local social and cultural traditions, sacred places, land and water use and other related factors, with concrete recommendations to mitigate the project’s negative impact. This assessment should have extensive involvement of local civil society and be part of the formal Environmental Impact Assessment discussed below.

  2. Company contractual requirements should include mechanisms to mitigate adverse effects and resolve disputes that may arise due to the influx of foreign workers, with a priority to respect local values and customs as well as the obligation to obey national judiciary law and respect Timor-Leste’s courts and arbitration procedures. To minimize conflicts between the community and foreign workers, and to channel community voices and facilitate dispute resolution, a coordination mechanism should be established which includes representatives the company, workers, government, and civil society.

  3. All institutions, bodies and committees should take special consideration of gender issues, so as not to perpetuate discrimination against and the victimization of women. This ranges from women-focused business training and scholarship preferences, to mechanisms to avoid wage differentiation and sexual exploitation of women. All assessment teams, coordination teams and liaison teams, at all levels and stages, must include women as well as men.

Environmental issues

An LNG Project will introduce many new environmental problems. The project could double Timor-Leste’s carbon dioxide emissions to the atmosphere and will generate significant amounts of polluting materials, such as hydrogen sulfide, oils, garbage, sanitary water, and other waste. Timor-Leste currently has insufficient laws or capacity to regulate, monitor and control waste generation and pollution of this scale, and many important steps need to be taken:

  1. The Government should revise the Law on Environmental Impact Assessment and, related to this, develop proper guidelines for conduct of an EIA for an industrial project. An EIA should include a detailed Environment Management Plan spelling out pollution management and mitigation, disaster management plans, and detailed mechanisms for minimizing negative cultural and social impacts. To enable proper evaluation of a submitted EIA, the Government should establish a joint coordination mechanism among ministries and departments, increase capacity of these departments, and include recognized expertise from national and international non-governmental organizations. The Environmental Impact Assessment process should include informed local consultation and consent, as well as the opportunity for civil society organizations and local community leaders to give input to and modify the Management Plan.

  2. A Pollution Control Law should specify limits to pollutants, including CO2 and other greenhouse gases, chemicals which affect sea, ground water and soil quality, as well as issues like flaring and noise pollution. The law needs to be detailed on requirements for waste disposal and treatment of various types of waste, so that regulatory and monitoring bodies can enforce it, and public and private waste disposal and treatment facilities can be developed.

  3. A base law on the environment, incorporating pollution control and environmental impact assessment laws should also define conditions for decommissioning of projects and constructions when their operational period has ended, to ensure that Timor-Leste is not left with toxic materials or dangerous structures after the company leaves. Plans on decommissioning should be part of the contract and the EIA, although they could be written to enable Timor-Leste to revise its decommissioning requirements during the course of the project.

  4. Each law developed should spell out or refer to sanctions and/or penalties which are severe enough to compel compliance. Contractual agreements should stipulate that the operating companies obey these laws. It is therefore necessary that laws and regulations are in place before the onset of the project, and that Timor-Leste has the personnel and the mechanisms necessary to identify violations and expeditiously enforce the law.

Continue to Appendix 1. Oil and gas in and near Timor-Leste

Go back to Chapter 8. International and domestic politics

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
email: 
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