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

Executive Summary

Contents of this file

• The research

• Findings and recommendations

  • Dreams, expectations and realities

  • Fiscal and economic issues

  • Employment

  • Social and cultural issues

  • Environmental issues

Petroleum will be the most important factor in Timor-Leste’s economy and government budget for the foreseeable future. Revenues from oil and gas already comprise 50% of the country’s Gross National Income (GNI) and supply more than 90% of its government revenues. To date, this is entirely from offshore, upstream development, with downstream processing done in other countries. It is the hope of many Timorese, including the Timor-Leste government, that Timor-Leste will soon receive revenues from downstream (refining, processing and gas liquefaction). The most likely near-term possibility for this is an undersea pipeline from the Greater Sunrise gas field to the shore of Timor-Leste, with a liquefaction plant and Liquefied Natural Gas (LNG) tanker port to process the gas and ship it overseas.

People are imagining the wonderful things that will happen if the pipeline comes onshore in Timor-Leste: it will stimulate local economic development, spin off to boost the local and national economy, and create employment opportunities for Timorese workers. However those dreams and expectations will be difficult to realize in Timor-Leste in the current context of the new nation.

The government’s Petroleum Act and Petroleum Fund Act set out a legal framework outlining the transparent and prudent management of petroleum revenue and currently Timor-Leste has more than one billion U.S. dollars in the Federal Reserve Bank of the United States. Despite this, over half of the population continues to live in poverty, unemployment is widespread, infrastructure is weak, trust in security has broken and the laws that should protect human rights, land, economy and environment are not yet in place. The causes of these problems – fragility and inexperience of state institutions, lack of human resources, inability to execute the budget – must be overcome before a project like the Sunrise LNG plant can be used safely and effectively to benefit current and future generations.

The research

In 2006, La’o Hamutuk began to research the implications of the development of an LNG processing plant in Timor-Leste. The research was conducted over four months and involved interviews with communities, traditional and local government leaders, oil companies and key government and civil society players in the petroleum sector. With the assistance of outside technical and economics experts, we reviewed relevant documents to conduct an environmental and social analysis of the proposed project, learning from similar projects in other countries, and their people’s experiences with oil and gas development.

The purpose of this report is to explore the benefits and costs, the risks and opportunities that a pipeline and LNG plant could bring to Timor-Leste, so that our citizens and leaders will be better informed as they consider whether such development would be beneficial for the country. We tried to identify specific actions to maximize benefits and minimize risks to ensure that Timor-Leste gains more from this project than it will lose. We do not attempt to predict what the development decision will be. Rather, we hypothesize that Australia, Timor-Leste, and the companies decide to build a pipeline to Timor-Leste and an on-shore LNG plant on the south coast. If this were to happen, Timor-Leste’s people need to know the advantages and disadvantages of such a project, and our government needs to take actions now to maximize the gains and minimize the dangers.

In order to make this report useful and understandable by people with limited technical knowledge of the oil and gas industry, we have included an extensive glossary of technical and economic terms used in this report in Appendix 7.

Findings and recommendations

The consequences of landing natural gas and constructing and operating a gas liquefaction and LNG shipping facility in Timor-Leste depend largely on a number of factors. Firstly, to land natural gas from the Greater Sunrise field in Timor-Leste, the government will have to secure the agreement of Australia’s government and the Sunrise joint venture companies, and find companies that are willing and able to construct, operate, and responsibly decommission the pipeline and LNG facility.

In a best case scenario, such a plant could provide employment and training to Timorese employees, boost the economy of the country and the region where it is located, and provide increased tax revenues for the government, which can in turn be used for the benefit of all Timor-Leste’s people. However, the outcome could also be much bleaker. The facility could become an enclave, physically situated on the coast of Timor-Leste, but with few or no jobs for Timorese citizens, no money going into the local community, and indeed no integration at all with the rest of society— neither economically, socially, or in terms of infrastructure such as road connections. In short, it could be “in” Timor-Leste, but not “with” Timor-Leste. The worst scenario is a plant that displaces the local population, impinges on their sacred places and harms the natural environment, and is staffed by foreigners who live in self-contained living quarters near the plant, without any positive interaction with the rest of the country. It is easy to see that this would cause deep grievances and frustrations in a population that is already struggling with poverty and a history of colonialism and violence.

Which scenario prevails will depend on the actions of all parties involved in preparing for the arrival of the pipeline, plant, and port; during the construction of the facilities; and throughout the life of the project. The government, petroleum companies, local authorities, local communities, traditional leaders, and civil society, including non-governmental organizations and individual Timorese citizens will each have a role in this. To ensure that this project maximally benefits the people of Timor-Leste, and that the negative impacts are minimized, we must all be prepared for the opportunities and challenges that an LNG project will bring.

Dreams, expectations and realities

Timor-Leste’s people have high expectations that petroleum revenue will improve their lives and that the processing of petroleum will provide them with employment opportunities, attract local economic development and extract investment. In informal and formal discussions with communities, people expressed their hopes that petroleum revenues should be used for national development: improving agriculture, improving the health system, improving the quality of education, and improving the infrastructure so their children can go to school, receive adequate health care, have access to media and have better opportunities than they themselves had.

However, if we look around the world, petroleum development is often not a blessing, but a curse. The global record shows that many countries rich in petroleum wealth are low in Human Development index, have high poverty levels, authoritarian systems, environmental degradation, militarism, human rights violations and corruption. Although oil can bring money, it also brings problems. In countries like Timor-Leste, where our economy and government are dependent on petroleum income (90% of GDP and 95% of government revenues come from oil and gas), these dangers are even harder to avoid. It is critical to manage both the money and the industry well, and good models are hard to find.

Timor-Leste’s leaders have often stated their commitment to learn from the experiences of other countries to avoid the “resource curse.” However, this commitment needs to be more than only a political statement, and should be implemented in laws and regulations, and with strong public institutions. So far, the Government appears to have been successful in petroleum development, by establishing some basic legal foundations, However it is too early to be know if such steps will ensure prosperity for future generations of Timorese and much work is still to be done in order to realize the dreams and expectations. Since the Government has committed to bringing 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 voice of Timorese women and men is 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 be in place. Sanctions must be severe enough to ensure companies comply by 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 regulate it 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 sooner and 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 at the port in April 2007 clearly illustrated how unprepared Timor-Leste is to handle even a simple accident contained to central Dili. The recently repaired Motale’e 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. To respond adequately 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.

La’o Hamutuk believes that it would be to Timor-Leste’s advantage to extend the period of Sunrise production by reducing the rate at which gas is extracted and liquefied. Timor-Leste will get more spin-offs from operating than from construction, and a longer project lifetime allows for more “Timorization.” Timor-Leste would also benefit if the project started later, giving us more time to prepare to receive its benefits.

Fiscal and economic issues

An LNG plant could potentially be of major fiscal and economic benefit for Timor-Leste. In addition to significant downstream tax revenues and some employment, we could receive secondary economic effects in local and national business booms through sub-contracts for construction, and a general increase in economic activity. However, under the current circumstances, Timor-Leste will not gain as much as 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:

Recommendations

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 (for instance 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, 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 policies 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 companies should establish coordination mechanisms to promote local content before the project begins to ensure that such objectives are met.

Employment

Employment opportunities created by an LNG plant could assist Timorese people in shifting from subsistence agricultural work into more lucrative agricultural production and stimulate employment in other sectors including manufacturing and public sector projects such as health, education and infrastructure. This would serve to stimulate the economy and develop corporate and individual skills for Timorese people.

However the dreams of many people that bringing the pipeline to Timor-Leste will provide job opportunities for many Timorese workers may be illusory as most of the well-paying jobs require a level of technical expertise that currently doesn’t exist in Timor-Leste. During the two to four year construction phase, there will be opportunities for short-term work for local people, but during the following 40 years of operation, the plant will require very few people, mostly with specialized skills. Indirect employment opportunities through demand for goods and services would also be limited by the localized demand for these goods and services and the localized current capacity to meet this demand. As Timor-Leste has experienced under UNTAET administration, a high international presence does not ensure economic growth if wages are spent overseas and products consumed are imported. In addition, Timor-Leste’s current labor laws do not ensure the rights and protection of those employed to adequately protect workers from exploitation.

Whether Timorese get jobs at the LNG plant will depend very much on the training policies the government manages to implement before the construction period, as well as the extent to which contractors are required to utilize local resources. Ideally, the expertise of foreign contractors should be used not just to construct the facility but also to train local workers, and this could be made part of company contractual requirements.

Recommendations

5. The government and companies should identify the specific job skills required for a 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. The 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.

6. 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 an increase in the quality of teaching in existing schools. Furthermore, the existing engineering faculty within the national and private universities in Timor-Leste should receive significant assistance to increase capacity, quality and facilities to anticipate the project’s needs.

7. 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. 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.

Women in Timor-Leste stand to gain less from the positive impacts of possible LNG development and suffer more from the negative. Timorese women play a crucial role in the economic and social management of the family and comprise a significant proportion of subsistence farmers. Although women’s rights as equal to men are enshrined in the constitution, women continue to face challenges in accessing these rights including limited rights to land tenure, livelihoods, health services, and education.

Recommendations

8. 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 negatively impact on their livelihoods, the Government should have in place an effective, transparent and adequate compensation system. This requires revisions of 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.

9. Company contractual requirements should include mechanisms to 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 resolutions, a coordination mechanism should be established which includes representatives from the company, workers, government, and civil society.

10. 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 be engendered.

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.

Although an LNG plant would be less harmful to the environment than a processing plant for oil or coal, pollution impacts of the plant include the release of increased greenhouse emissions from burning gas, possible methane leakages and waste discharge polluting Timor’s oceans and rivers. The RDTL has drafted a Protection Control Law which would mitigate the risk of pollution through the issuing of licenses requiring companies to conduct Environmental Management Plans however to date; this legislation has not been passed.

In addition to pollution, LNG development will also impact on the environmental stocks present in Timor. Use of land and waters for construction, operation and the needs of an influx of laborers will lead to the loss of vegetation cover and habitats for animals. The associated increase in demand for water can also reduce the water table, leading to the degradation of environmental resources for future generations of Timorese.

Recommendations

11. 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 non-governmental recognized expertise (both national and international). 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.

12. 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.

13. A base law on the environment, incorporating pollution control and environmental impact assessment laws should also define conditions for decommissioning of projects and constructions after 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.

14. Each law developed should spell out or refer to specific sanctions and/or penalties and the legal processes of conduct if regulations are violated, which are severe enough to compel compliance. Contractual agreements should exist stipulating 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.

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua D. Alberto Ricardo, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
email: laohamutuk@gmail.com    Web: http://www.laohamutuk.org    Blog: laohamutuk.blogspot.com