During the first half of 2007, the Government of Timor-Leste drafted three decree-laws to restructure regulation of petroleum projects and to establish a national oil company. Two rounds of public consultation were held, but the laws were not enacted before the Government was voted out in June. Follow this link for background, draft laws and submissions made during 2007.
The Timor Sea Designated Authority (TSDA), a transitional Timor-Leste/Australia organ established by the 2002 Timor Sea Treaty, was scheduled to be merged into a Timor-Leste National Petroleum Authority (with binational oversight) in April 2006. As the new NPA has not been created, this deadline has been extended many times, to July 2007, then December 2007, and currently until 30 June 2008.
On 29 May, Secretary Pires informed La'o Hamutuk and other NGOs that he will hold a public consultation on this law prior to its discussion by the Council of Ministers in June. On 2 June, he circulated the draft law for a one-week public consultation.
La’o Hamutuk
Timor-Leste Institute for Development Monitoring and Analysis
Institutu ba Analiza no Monitor ba Desenvolvimentu iha Timor-Leste
1/1a Rua Mozambique, Farol, Dili, Timor-Leste
Tel: +670-3325013 or +670-7234330
email: info@laohamutuk.org Website: www.laohamutuk.org
Submission to the
State Secretariat for Natural Resources, Democratic Republic of Timor-Leste
from La’o Hamutuk
regarding the Draft Decree-law to establish a National Petroleum Authority
10 June 2008
Summary of key recommendations
This public consultation is so late and short that it borders on tokenism.
The TSDA should be extended again to allow time to develop an effective and safe NPA law. It will be impossible for the NPA to effectively regulate by July 1, given its lack of personnel, officials, budget and regulations.
This should be a Parliamentary Law, not a Decree-Law passed by the Council of Ministers in secret session.
A comprehensive legal framework should precede these specific laws, which do not easily transplant into our mixed Timor-Leste/UN/Indonesian legal regime. In particular, overall laws on transparency, dispute resolution and conflicts of interest, as well as the organic law for the State Secretariat for Natural Resources (SERN) should be enacted first.
This law must comply with existing legislation, especially the Petroleum Fund Act, the Petroleum Act, the structure of Government, etc.
The National Petroleum Authority should be involved in upstream operations only, and not have its mandate expanded to downstream operations. Downstream and distribution have different objectives and dangers and are new to Timor-Leste, and should be the subject of separate legislation. Midstream and downstream licenses for businesses are different from exclusive upstream access to state-owned natural resources.
The NPA should be a regulatory body only, with policy-making reserved for the Government and Parliament.
This law should define many technical and legal terms. The lack of definitions leads to an overly broad scope of activities to be regulated.
Decision-making power, appointments and access to information are too centralized in the President of the NPA and should be distributed to create checks and balances.
The NPA Board of Directors should be appointed from diverse sources, as should the single auditor. Qualifications and disqualifications for Directors and other officials should be in the law.
There should be an independent oversight body for the NPA. Independent oversight by Parliament, the courts, the Provedor, the Prosecutor-General and other state agencies and other independent bodies is also necessary.
Provisions to avoid conflicts of interest need to be greatly strengthened.
Transparency is almost entirely lacking, and this law should be changed or augmented to ensure that important information is available to the public and that the public has meaningful input on decisions which affect them.
The NPA should be a government agency, not a semi-autonomous instituto público. Its expenditures should be exclusively through the State budget approved by Parliament.
The NPA should work together with other government organs to accomplish its mission. In particular, the relationship between the NPA, SERN and the Government is unclear in many areas, as is the relationship between regulation inside and outside the Joint Petroleum Development Area.
Revenues from petroleum-related activities are required to be deposited in the Petroleum Fund, and cannot be diverted by the NPA.
The NPA’s primary responsibility is to safeguard the public interest, not the economic concerns of the petroleum industry. Its mandate must give adequate attention to environment, sustainability, good governance, worker safety, and community and human rights.
The NPA Single Auditor should be appointed independently of the Authority and SERN, and NPA financial and other activity should be subject to outside audit.
The NPA needs effective processes for dispute resolution and due process for administrative and enforcement decisions and appeals.
NPA personnel should have the same rights and benefits as other public servants in Timor-Leste, under civil service and labor laws.
All authorizations for upstream petroleum activities must conform with the open bidding processes for Production Sharing Contracts defined by the 2005 Petroleum Act.
Introduction
La’o Hamutuk appreciates the opportunity to provide input to this draft decree-law, which creates an agency with responsibilities which are critical to the survival and prosperity of future generations of Timor-Leste citizens.
However, with only five working days between when the draft was first made available and the deadline for submissions, we wonder if this is merely a token consultation, without any real intention for input from ourselves and others to be considered before this law is put into effect. The proponents of this law established an artificially rigid deadline of 30 June for establishing the NPA, and then waited until less than one month before that date before allowing people to see the draft law.
Indeed, we doubt that even this inadequate consultation would have occurred if La’o Hamutuk had not appealed to higher authorities in our open letter of 23 May 2008. Although we are grateful that Secretary of State for Natural Resources Alfredo Pires responded to our request for public consultation, we wish that response had been more genuine, with adequate time and translation provided so that the public could participate in a substantive way.
We only had access to a “Non-Official English Translation,” which makes it impossible for us to comment on the actual law or consult others in civil society. Furthermore, some translation anomalies would appear to change the law. For example “notwithstanding” seems to have been used to mean “subject to the requirements of” in articles 8.1(c), 11(c), 15.1 and 15.4, but in article 7.2 it apparently means “however.”
Nevertheless, La’o Hamutuk analyzed the draft legislation as best we could in the limited time available, although we were unable to consult outside experts or Timorese civil society. We found many serious flaws in both the concepts and the details of the draft decree-law which could seriously harm future petroleum operations. We believe it will take more than a couple of weeks to fully analyze the legislation, including meaningful consultation and sincere redrafting.
In December 2007, SERN presented a 2008 work plan to Parliament which included public consultation on the NPA law in February, with approval by the Council of Ministers in March. Since this timetable has slipped by four months, we urge the relevant authorities in Timor-Leste and Australia to extend the life of the Timor Sea Designated Authority (TSDA), as has been done several times before, usually shortly before its mandate was to expire. The TSDA has been prolonged for more than two years after its initial three-year mandate, and there is no reason not to give it another six months. If this is not done, we fear for the future of petroleum regulation in Timor-Leste.
In March 2007, the RDTL Ministry of Natural Resources, Minerals and Energy Policy (MNRMEP) circulated a draft legislative package on reorganizing petroleum industry activities in Timor-Leste, including the creation of a National Regulatory Authority for Petroleum, Natural Gas and Biofuels (ARNP), whose mandate was similar to the currently proposed National Petroleum Authority (NPA). We were the only Timorese organization to make a submission during the brief time available, and urged that the consultation be extended. The Government followed our suggestion, and MNRMEP accepted more input in July 2007, including a second La’o Hamutuk submission and others from the World Bank and several international experts. The many issues raised caused the Government at that time not to enact the legislation, and it has since been redrafted into its current form.
We appreciate that some problematic aspects of the draft ARNP decree-law have been removed in the current NPA draft, and that some of the flaws mentioned during public consultation have been addressed. However, a number of critical problems remain to be addressed, and several new issues have arisen.
This submission consists of two parts. This narrative section discusses some overall concerns, general concepts and suggestions for additional material to be included in the NPA decree law. Following that, an article-by-article analysis table contains La’o Hamutuk’s suggested changes, questions and commentary about many of the clauses in the draft. Although some overriding concerns are mentioned in the two parts, many are in only one, so that both parts should be read together to fully understand our concerns.
This law should help Timor-Leste avoid the resource curse.Timor-Leste has avoided the resource curse so far, which is relatively easy to do when oil prices are at record highs and only one field is in production. But this will not be the case forever, and consistent efforts and insight are necessary to keep our country from following the path of almost every cash-poor, oil-rich developing nation. This will take more creativity, checks and balances, decentralization, public involvement, stability, transparency, independent oversight, accountability and legal effectiveness than is in the current draft law, and we again urge a careful and conscientious effort to learn from problems elsewhere to enact laws which will truly protect current and future generations of Timor-Leste citizens.
Effective, transparent regulation is an essential part of both the rule of law and successful development of petroleum projects. When transnational oil companies are free to do as they choose, the results are almost always disastrous. Without clear rule, consistently applied, corrupt officials in governments and companies abuse the public trust and the people’s mineral birthright for personal gain. Signs of this are beginning to emerge in Timor-Leste – secret agreements between companies and officials which transcend legal processes – but it could get much worse.
Our petroleum regime must be founded on a deliberative, consultative process which is supported and understood by citizens across the nation. It should prioritize social justice and intergenerational equity for Timor-Leste’s people above the short-term economic needs of those who wish to profit from our resources.
These should be a Law enacted by Parliament, not a Decree-Law approved by the Council of Ministers. La’o Hamutuk raised this in our 2007 submissions, and it was seconded by many others.
Although some believe that these matters are technically within the competence of the Government (and could therefore be adopted as a Decree-Law), there is no doubt that they are also within the competence of the Parliament. For many reasons, it is appropriate for this law to go through the Parliamentary process:
One of the 2002-2007 Government’s proudest achievements was transcending party differences to achieve a unanimous parliamentary vote for the Petroleum Fund Act. This consensus model should be emulated, not circumvented. Involvement of elected representatives from both the governing parties, and the opposition is essential to provide stability for the future.
Timor-Leste’s young democracy is experiencing a crisis of public confidence in our institutions. Whether justified or not, many citizens and partisans accuse the previous and current Governments of being undemocratic, corrupt, arrogant and secretive. In the energy sector, with its huge amounts of money and temptations to misuse power, it is important to avoid even the appearance of corruption. Parliament’s deliberations are open and involve all political factions, creating an intrinsic debate and restraint on arbitrary authority.
The Council of Ministers, by contrast, meets in secret and only includes people selected by the ruling party or coalition. In order to ensure societal acceptance and stability for this law, as well as to improve the quality of the law by listening to a variety of perspectives, the public Parliamentary process is far superior to the closed Government one.
Timor-Leste is under coalition rule, with the possibility of more frequent changes of Government. In this context, a law passed openly by the people’s elected representatives is more durable than a secretly-debated decision by the Government of the day. Such stability is not only in the interests of Timor-Leste’s people, but will be more attractive to international petroleum companies, purchasers of our petroleum product exports, and others concerned about transparency, accountability, corruption and long-term economic growth.
Parliament has the Constitutional competence to deal with these matters by Law. According to Article 95.1 of the Constitution, “It is incumbent upon the National Parliament to make laws on basic issues of the country’s domestic and foreign policy.” Petroleum activities comprise more than 80% of Timor-Leste’s economy and will provide more than 90% of government revenues within a few years. It is hard to imagine an issue more “basic” to Timor-Leste. This law also deals with foreign policy, in that managing projects in the JPDA involves Australia.
This law may be outside the exclusive competence of Parliament as enumerated in Article 95.2 of the Constitution. It has major implications for (p) tax policy and (q) the budget system. In fact, we believe that the NPA budget should be part of the National Budget, which would help resolve its contradictions with the Petroleum Fund Act. But even if parts of this law are not exclusively within Parliament’s jurisdiction, Parliament still has the competence to pass them.
Under Article 96 of the Constitution, Parliament has the power to authorize the Government to make laws regarding “(d) General rules and regulations for the public service…”, “(e) General bases for the organization of public administration” and “(h) Definition of the bases for a policy on environmental protection and sustainable development,” among other areas. The proposed decree-law clearly covers these matters, yet there is no authorization from Parliament to Government to enact this legislation.
If this decree-law is enacted under Constitution Article 115.1(e), thirteen Members of Parliament could demand a Parliamentary review under Constitution Article 98, possibly suspending its implementation. As this law may be controversial, this is likely to happen if it is adopted without Parliamentary approval. It would be bad for both the nation and the Government if these issues became embroiled in a power struggle between the Council of Ministers and some Members of Parliament.
The preamble to this draft law invokes Constitution Article 115.3 which reserves exclusive competence to the Government on matters which relate to “its own organization and functioning.” This would be a dangerously overbroad interpretation of this concept, opening the way to cronyism and corruption in many areas. Fortunately, Timor-Leste’s legislative practice over the last five years has not followed this model.
Under Constitution Article 115.2(a), the Government is authorized “to submit bills and draft resolutions to the National Parliament.” This would be the best way to enacting the NPA law, as well as the expected law to establish a National Oil Company. The Government should continue revising them, in consultation with advisors from many sectors, experts, the public and others. Then they should be submitted to Parliament for hearings, deliberation, amendment and approval, prior to promulgation by the President. This is the most democratic and Constitutional approach. It is also the only way to get the broad public and political support necessary for the stability of this new legal regime.
The statute contradicts or amends Parliamentary laws, including the Petroleum Fund Act and the Petroleum Act. The NPA law changes structures created by the Timor Sea Treaty, which was approved by Parliament. Only Parliament can change or repeal a decision made by Parliament.
The NPA will be empowered to contract with international companies for projects which will last for generations. It deserves the strongest, most democratic, and most stable foundation possible, which can only be provided by Parliamentary law.
International experience shows that the petroleum sector, especially in countries which depend on it for most of their revenues, is particularly vulnerable to mismanagement, corruption and abuse of power. Such accusations (true or not) are already a part of Timor-Leste’s political discourse and are likely to increase as onshore and domestic petroleum operations grow. It is therefore important to use the strongest, most transparent, most democratic, most inclusive and most deliberative process to establish the foundations of future petroleum development and regulation.
La’o Hamutuk suggests the following be incorporated into this decree-law to define the mission and general objectives of the NPA:
“The National Petroleum Authority is responsible to manage and regulate petroleum development in Timor-Leste and the Joint Petroleum Development Area with the highest degree of professionalism, good governance and expertise, having regard to the health and safety of all personnel, protection of the environment, economic efficiency, transparency, the development of the institutional and human resource capacity of the Timor-Leste petroleum sector, and good oil field practice, for the benefit of the State of Timor-Leste, companies who invest in our resources, and current and future generations of Timor-Leste and Australian citizens.”
Other legal provisions are necessary to make this system workable, and the enactment of this law without that foundation is likely to lead to legal confusion. Timor-Leste relies on 1999 Indonesian law where no other law has yet been passed. Consequently, this law would not be implementable on its own. (The foundational structure used for the NPA, the instituto publico, is not defined in Timor-Leste or Indonesian law.) Furthermore, many gaps, as elaborated below, have not yet been filled, providing legal loopholes which could enable corruption or worse.
Where other related laws do exist, this draft law often contradicts them. It is inconsistent with parts of the Petroleum Act and the Petroleum Fund Act. In addition, an organic law for the State Secretariat for Natural Resources should be enacted prior to this law. This would define the internal structure of the Secretariat, perhaps incorporating much of the draft NPA law. We elaborate further on these problems in relation to particular articles below.
As La’o Hamutuk has written before, we question the wisdom of widening the mandate for petroleum regulation to the lowest end of the downstream phase without a clear vision and law-based authority. Upstream and downstream (especially marketing, sales and distribution) regulation have different purposes. The former is to provide revenue for the State treasury, while the latter, from a national government perspective, is to ensure energy availability to the people of Timor-Leste. It is unreasonable and inefficient to put them under the same regulators, who will inevitably prioritize certain concerns to the detriment of others.
Furthermore, the Government has almost no experience in regulating the downstream sector, as there has been very little downstream petroleum activity in Timor-Leste, and distribution and retail sales have not been regulated to date. The mandate of NPA should be limited to upstream and mid-stream operations (such as an LNG plant).
In most cases, it’s clear that the NPA will be a regulatory agency, and does not make policy, which is appropriate. Unfortunately, many of the policies it is expected to implement have not yet been made explicit, and we strongly urge the Government and Parliament to adopt legislation spelling out such policies, especially for the midstream and downstream sectors which are not discussed by the Petroleum Act. In addition, the fourth introductory paragraph of the NPA, which reads in part “The Government now creates the NPA in order to establish … the enacted rules and regulations …” seems to imply a policy-making role, which would be better served by a body more accountable to democratically elected officials.
For a regulatory function, the NPA should be staffed entirely by professionals, without political influence. However, as illustrated by the recent public consultation on Technical Regulations for the Designated Authority, it is often difficult to separate rule-making from political decisions.
The draft law does not contain definitions, but uses many terms whose meaning is unclear, making it impossible to administer or enforce in a consistent and predictable manner. Definitions of some terms could be inherited by reference or incorporation from the 2005 Petroleum Act, but others are new and nebulous. Do “derivatives” and “products” of petroleum and natural gas include plastics, butane (e.g. cigarette lighters), fertilizers, petrochemicals, LNG, kerosene and/or asphalt?
Article 2 of the 2005 Petroleum Act defines “petroleum” as all naturally occurring hydrocarbons (including natural gas), but this NPA law apparently considers gas distinct. The Petroleum Act definition excludes products derived from refining, processing or liquefying petroleum, but this law appears to use a different definition. Other terms which should be clarified by specific definitions include “petroleum authorisation” (which may have a broader meaning in this law than in the upstream-limited Petroleum Act), “upstream,” “downstream,” “midstream,” “petroleum operations,” “commercialization,” “derivatives,” and “petroleum products.”
NPA is largely a power unto itself, with the only oversight being provided by the Joint Commission for activities within the JPDA. In Timor-Leste territory, Article 3.1 gives full responsibility to the NPA, with Article 2 loosely defining annual “tutelage” by the Secretary of State for Natural Resources (SERN). The NPA budget is apparently separate from the Government budget and Parliamentary oversight, and there is no provision for independent audit, public information or regular reporting to external authorities.
Under this law, SERN appoints other officials, is the final decision-maker, and is the only recipient of reports and information. Within the NPA itself, the President also chairs the Board of Directors and the Management Committee, and is the external face of the organization. This excessive centralization characterizes much of Timor-Leste’s petroleum legislation, and is dangerous for many reasons. Checks and balances, consultation, and transparency are essential not only among ministries (within Government), but also with other State institutions (President, Parliament, Provedor, judiciary) and with non-governmental actors (business, civil society, local communities).
The NPA Board of Directors should be appointed by diverse sources. In our comments on Article 7.6 below, we propose that SERN appoint one (the President of the NPA), the Parliament appoint one, and the President of the Republic appoint one. Since the Parliament includes a range of political parties and meets in open session, this would be more transparent and democratic than a process run by the SERN and the Council of Ministers, and is essential to ensure broad public and political acceptance for the decisions of the NPA. We also suggest that a different person chair the Board of Directors than the President of the NPA, who could perhaps be a non-voting participant in Board meetings.
Similarly, the Single Auditor should be appointed independently of SERN to provide meaningful accountability, and his/her reports should be provided to the Parliament and public.
It would improve accountability to create an additional oversight/advisory body, analogous to the Petroleum Fund’s Investment Advisory Board or Consultative Council. This would include representatives of various sectors, appointed by diverse organs. It would have the right to access NPA information, including “confidential” information from contractors, and to request the NPA Board or President to take particular actions. If this Advisory Committee believes the NPA is betraying the public trust, it could refer an issue to the Council of Ministers, Provedor, Court, or anti-corruption commission. A body would help implement the principles inherent in this year of Administrative Reform
There would be no need for laws if everybody was well-intentioned and performed their tasks flawlessly – the purpose of conflict-of-interest legislation is to help ensure that human greed or fallibility do not cause serious consequences for the people and the State. Article 7.9 takes a small step toward preventing conflicts of interest, but a much deeper, more comprehensive approach is needed.
Timor-Leste should have a government-wide conflict of interest code, applied to all decision-making officials (including the NPA Board of Directors, Management Committee and Single Auditor). In addition to prohibiting involvement with businesses whose interests overlap their regulatory duties, such a code should require them to declare their assets before starting their service, annually thereafter and when their service is completed.
The draft law contains very little about public consultation or transparency. In previous submissions, La’o Hamutuk has suggested many mechanisms for accountability, openness, developing relations with citizens and communities, and providing information to the public.
We propose a comprehensive, government-wide, legally-binding policy of public information based on the principle that all information should be public unless there is a compelling reason (such as national security) for it to be kept secret. In particular, the protective instincts of petroleum companies, often claimed as “commercial confidentiality,” should not override the rights of citizens to understand the exploitation of our resources and the performance of our public servants, to prevent corruption, collusion and nepotism.
At present, the TSDA publishes annual reports and monthly information about revenues received from petroleum projects and passed on to the governments of Australia and Timor-Leste, and we hope that the NPA will do at least as well, consistent with the goals of the Publish What You Pay campaign and the Extractive Industries Transparency Initiative. This transparency should be written into the NPA statute, rather than left to the good will of its personnel. We also request that the TSDA 2007 annual report be published soon, even if the TSDA has ceased to exist.
The NPA is expected to be in operation three weeks from today, regardless of whether or not this decree-law has been promulgated, according to Article 32. It has no budget, no Board of Directors, no President, no personnel, no regulations and no mandate. Yet the existing TSDA structure for overseeing Bayu-Undan and other projects will “cease to exist on June 30, 2008.” This creates a dangerous regulatory gap which could have disastrous consequences for consumers, citizens and the environment. We pray that ConocoPhillips and other companies will be on good behavior during the weeks and months before the NPA is able to effectively carry out its tasks.
The draft law creates a public institute (instituto público). Although we do not understand all the implications of such a structure, it is less integrated with the Government than a government department, such as the current National Directorate of Petroleum and Gas (DNPG). We hope that the wording can be made clear, and urge that the need for such an autonomous agency be carefully considered.
The NPA appears intended to exist in a virtual institutional vacuum. We suggest that it should be able to utilize the organs of the State – the courts, the Prosecutor-General, the Provedor for Human Rights and Justice, the Inspector-General, Banking and Payments Authority, Parliament, local government and other ministries to support and implement its regulatory responsibilities. The draft law should be more specific about when and how the NPA interacts with other organs in order to clarify their responsibilities so that the NPA can rely on them.
Since the principal purpose of the proposed National Petroleum Authority (NPA) is to effectively manage the State’s petroleum resources “for the benefit of the people of Timor-Leste as a whole,” a semi-autonomous agency may not be the best way to represent the perspective of a democratically-elected Parliament and Government. To advance that goal, we suggest including a mechanism for oversight by Parliament in Article 2, rather than only by the Secretariat (SERN).
The budget of NPA should be part of the State budget, (just as the budget for the Public Institute for Equipment Management is part of the budget of the Ministry of Infrastructure), rather than being approved and implemented independently, The NPA should not receive revenues from sources other than those described in Article 17(d), the State budget. Articles 17(a), (b), (c), (f) and (g) violate the Petroleum Fund Act's Article 6.1, which requires that all income “…from any Petroleum Operations, including prospecting or exploration for, and development, exploitation, transportation, sale or export of petroleum, and other activities relating thereto;… from direct or indirect participation of Timor-Leste in Petroleum Operations;… relating directly to petroleum resources” be deposited directly into the Petroleum Fund.
Furthermore, all NPA expenditures should be authorized as part of the State budget, although the NPA Board of Directors should manage its portion of the State Budget and make the smaller allocations within Parliament-approved categorical expenditures.
We do not need to tell the drafters of this legislation that petroleum development in countries similar to Timor-Leste often brings a resource curse. Some of this arises from mismanagement or theft of revenues, but an equally dangerous component comes from the fact that commercial companies exist to serve their stockholders rather than the people of the countries where they operate. It is the responsibility of Timor-Leste’s Government, assigned to the NPA, to look after the needs and well-being of our citizens.
Article 3.1 includes 18 clauses about the jurisdiction of the NPA, nearly all of which relate to business activities of the industry. We strongly believe that regulation of the petroleum industry needs to be more comprehensive, including such responsibilities as protecting and restoring the environment (an afterthought in 3.1(j)), providing for sustainability, safeguarding worker health and safety, land rights, human rights, inter-generational equity and guaranteeing company responsibility for decommissioning. Most of these are recognized (albeit sometimes inadequately) in the Petroleum Act and the Model Production Sharing Contract, but Article 3 of the draft NPA decree-law omits many. Since the NPA will inherit petroleum-sector regulatory responsibilities currently exclusively assigned to the Secretariat, we are troubled that it prioritizes short-term, commercial concerns over long-term, public interests. Commercial companies will watch out for their own economic wishes, but who else will protect the land and people of Timor-Leste?
Conclusion
La’o Hamutuk thanks the Secretary of State for Natural Resources and others involved in this process for your consideration of our suggestions. We remain ready to provide further information, clarification and ideas, and look forward to continuing collaboration so that Timor-Leste can enact the best legal regime possible to manage this dominant, lucrative and perilous aspect of our nation.
The second part of this submission is an article-by-article commentary on the draft law.
