La’o Hamutuk

Bulletin  |  Surat Popular  |  Topic index  |  Reports & Announcements  |  Updates
Reference  |   Presentations  |  Mission Statement  |  LH Blog  |  Search  |  Home

Oil in Timor-Leste

By Guteriano Nicolau and Charles Scheiner, La'o Hamutuk
September, 2005

This chapter was written for the Oilwatch Network as part of a book exploring the relationship between petroleum development, economic debt, and ecological debt.  For more information on Oilwatch and its ecological debt campaign, see www.oilwatch.org.

Links to a printer-friendly PDF version of this paper, with appendices, in English or Spanish.

Introduction

For the “developed” world, oil and gas are essential. Every country, especially rich ones, depends on oil to maintain their economy and their lifestyles. On the other hand, many countries with petroleum deposits rely on them as their principal source of income.

In recent decades, humankind has discovered that oil is not the blessing many believed it would be. Oil has become of one the main causes for suffering, political crises, environmental destruction and economic injustice. It often damages security – internal and external, local and global, personal and national. Around the world, many countries are enduring these effects.

Because the potential money from oil exploitation is so large, it attracts greed and corruption, often causing invasion, war and other conflicts. It widens the gap between rich and poor, promoting social jealousy, injustice, and inequality.

Petroleum development is also one of the environment’s worst enemies, destroying communities, livelihoods and habitats as well as disrupting the earth’s climate.

In many countries with oil deposits, from Angola to Aceh to Nigeria to Iraq, political and economic priorities of governments and oil companies from rich countries create a trail of blood and corpses.

Timor-Leste (also called East Timor) is one case among many. It has suffered tremendously partly because if its oil and gas reserves, while receiving no benefits from those reserves. Now that the nation is independent and peaceful, we can learn from its history what greed for oil can do. And the people of Timor-Leste can learn from the experience of others, and perhaps avoid the pitfalls of oil dependency: environmental destruction, war, dictatorship, militarism and economic injustice.


MAP OF TIMOR-LESTE

Clean Slate

As the world’s newest nation, Timor-Leste is inventing its government, economy, and laws. It has no external debt and no war. There is negligible pollution because there is no mining or industry. Crops and livestock are organic because there is no money for fertilizer and pesticides. Chain stores and transnational companies are absent because there are not enough people who can afford their products.

Timor-Leste has just started exploiting its petroleum; projects so far are many miles off the coast, out of sight and mind. This could be an opportunity to do things right, to avoid the “resource curse” that petroleum extraction has inflicted on so many other countries.

Economic pressures are enormous. Timor-Leste’s only significant export is coffee, whose price is at historically low levels. More than three-fourths of the people live by subsistence agriculture. More than 40% of adults cannot read; infant and maternal mortality are an order of magnitude higher than in rich countries. Malaria and tuberculosis are rampant. Only a few people have access to clean water, electricity or telephones. Timor-Leste’s Human Development Index is the worst in Asia, lower than every non-African country except Haiti.1

This endemic underdevelopment stems from centuries of brutal and exploitative foreign domination by Portugal (1520-1942, 1945-1975), Japan (1942-1945), and Indonesia (1975-1999). It was magnified by the systematic destruction Indonesian soldiers and their militia proxies inflicted just before they left after 24 years of brutal occupation that took the lives of 200,000 people, one-third of the pre-invasion population.

From October 1999 until May 2002, Timor-Leste’s 860,000 citizens were governed by the United Nations, which continued to have a Mission until mid-2005. Billions of dollars of international “assistance” poured in, belated conscience money from an international community who sat on their hands for a quarter-century of genocide. During this period, foreign money annually spent on Timor-Leste was three times the country’s GDP. In addition to US$2 billion spent on UN missions, multilateral and bilateral aid averaged $300/Timorese citizen/year, the highest in the world. 2

This “assistance,” half as much as the total Timor-Leste expects to receive from petroleum development over the next 20 years, produced negligible economic development. It never entered the country’s economy, going instead to salaries and costs of international soldiers, advisors and consultants, or to purchase equipment or fuel from abroad. Less than 1% of the UN transitional government’s budget was spent on salaries for Timorese people. 3

Timor-Leste is now independent – whatever that means in this era of globalization. Its citizens can, through their democratic government, make their own decisions about how to govern themselves and improve their lives. But for now, they remain aid-dependent.

During the first year of independence (2002-3), $531 million was spent by the government and aid agencies. The Government budget itself was $84 million, which included $27 million in local revenues and $21 million from petroleum, with the balance from foreign donors. More than five times this amount was spent by the UN, multilateral and bilateral agencies administering their own projects outside of government control, with little impact on the local economy. 4 Aid has been steadily decreasing, with some negative effects on employment and retail business. Unemployment, already high, is increasing.

At present, there is almost no non-oil trade activity. In 2004, Timor-Leste exported products worth just $7 million; 99% of this was coffee, half of which was sold to the United States. During the same period, the country imported $113 million worth of goods, an unsustainable trade deficit. Nearly a third of the imports were fossil fuels, and 53% of all imports came from Indonesia. 5

At this point in its history, it is hard for Timor-Leste to imagine improving its citizens’ lives without selling oil and gas. That path leads to petroleum dependence for two generations, with all the attendant risks and consequences.

Oil and gas revenues will form the great majority of Timor-Leste’s economy and government revenue for a while, but the deposits will be exhausted within the lifetimes of many children alive today. Since the oil and gas reserves are offshore and downstream processing will be done in Australia, hardly any spin-off revenues will enter Timor-Leste, with little secondary economic effect. The Timorese government plans to invest most of the profits in a Petroleum Fund, which should provide revenues after the petroleum is gone. But if that money is mismanaged, squandered or stolen, and if other sectors of the country’s economy are not developed, Timor-Leste’s people will face permanent poverty.

Here are some basic statistics. All money figures are in millions of United States dollars, the legal currency of Timor-Leste.

2005 2010 2050 Comment
Population 6 947,000 1,216,000 3,265,000 Highest growth rate in the world, a fertility rate of eight children per woman.
Land area 7 15,007 km sq 7% of the land is irrigated. Maritime territory is under dispute.
Petroleum GDP 8 $703 $3,135 9 0 These figures follow the government’s assumption of only including the Bayu-Undan oil and gas field. Other actual and potential fields could increase Timor-Leste’s oil revenues by a factor of three or more. The Bayu-Undan field will be exhausted by 2023.
Non-oil GDP $341 $391 ? 2050 depends on how well other sectors of the economy are developed.
Oil percentage of GDP 67% 89% 0% This does not include interest from investing surplus oil revenues in the Petroleum Fund, which will become increasingly significant over time, and may replace oil revenues when the oil runs out.
Domestic non-oil percentage of government revenues 18.5% 10 6.1% Excludes donor contributions. Not all the revenues will be spent; the surplus is invested abroad in a Petroleum Fund. Petroleum Fund interest is not included.

Historical Background

Timor-Leste’s constrained future prospects come from a traumatic past, imposed by foreigners. It’s no coincidence that the new nation is economically dependent; it had political dependence forced upon it for more than 450 years.

In the 16th century, Timor-Leste’s petroleum reserves were worthless. But it had sandalwood, marble, and (later) coffee, which attracted colonial powers. Portuguese traders and missionaries came to Timor-Leste and exploited the natural and human resources. When Portugal left Timor-Leste in 1974, civil war broke out, caused by Portugal’s failure to facilitate self-determination and by Indonesian destabilization.

Indonesia, Timor-Leste’s closest neighbor, is the fourth most populous nation on earth, with 230 times as many people as Timor Leste. For more than a century, Indonesia (formerly the Dutch East Indies) has been a leading global oil and gas exporter, providing vast income to the Netherlands and Royal Dutch Shell. Since then, Exxon, Unocal, Chevron, Texaco and many others have shared in the spoils. In 1965, a U.S.-supported military coup overthrew a nonaligned government, and approximately a million Indonesians were massacred. President/General Suharto’s military dictatorship was firmly in control when Portugal abandoned Timor-Leste a decade later. United States President Richard Nixon dubbed Indonesia “the real prize in Southeast Asia”, and it remained a strong U.S. ally in the Cold War even after Vietnam defeated the United States in April 1975.

Seven months later, Indonesia invaded Timor-Leste with the approval of the U.S., Australia and other western Countries. They killed 50,000 Timorese people, mainly with U.S.-supplied weapons, in the first six months. The next quarter-century of military occupation took around 200,000 lives (one third of the pre-invasion population), nearly all of them civilians. Other human rights violations -- torture, rape, indiscriminate arrests, population displacement, land expropriation, etc. – were pervasive and incessant. Although the United Nations voted nine times to condemn the violation of Timorese people’s right to self-determination, other nations did nothing to end it. Indonesia was too important economically and strategically.

The people of Timor-Leste resisted the occupation and repression for more than a generation. In addition to a small guerilla army in the mountains, the resistance included a large clandestine movement, widespread noncooperation, and diplomatic efforts. Although the rest of the world ignored the atrocities being committed in Timor-Leste, Indonesia was never able to conquer the people’s hearts, and the spirit of ukun rasik ’an (independence) still burned.

This struggle reached its climax in 1999, when political changes in Indonesia allowed the United Nations to conduct a referendum in Timor-Leste. Nearly 80% of the Timorese chose independence. Once again, the thirst for freedom was answered in blood, as militias backed by the Indonesian military conducted a scorched-earth campaign. They killed 1,500 more people, displaced ¾ of the population to the mountains or to Indonesia, destroyed all the infrastructure and burned down 75% of the buildings in the entire country. When an international military force finally arrived, the Indonesian troops left peacefully, having accomplished their mission. Six years later, none of the architects or commanders of these crimes against humanity have been held accountable.

The United Nations governed Timor-Leste beginning in October 1999, and Timor-Leste restored its independence as a sovereign country on May 20, 2002. Today it is the 191st Member of the United Nations, and one of the poorest.

Oil and Gas Reserves

Timor-Leste is blessed, or condemned, because of large deposits of oil and natural gas under the Timor Sea. The on-shore deposits, including oil and gas seeps which have been collected or flared for over a century, are less-well surveyed and probably smaller than those under the sea, where war didn’t interfere with oil exploration. Many of the offshore fields are in disputed territory; this map and chart11 lists the major known fields which should belong to Timor-Leste under current international legal principles.


MAP OF OIL AND GAS RESERVES

Offshore oil and gas fields closer to Timor-Leste than to any other country

Name of field

Operator+

Location %TL under treaties Status Total oil reserve
million barrels
Total gas reserve
trillion cubic feet
Oil already produced
 
million barrels
Gas already produced
trillion cubic feet
Total carbon in reserve12
million metric tons C
Carbon already released
million metric tons C
Greater Sunrise

Woodside

20% in JPDA13, rest claimed by both countries. 50%14 On hold until boundary or other agreement is finalized. 290 7.7 0 0 233 0
Bayu-Undan

Conoco-Phillips

JPDA 90% Began production in 2004; TL’s principal income. 400 3.4 20 0 135 2
Buffalo

Nexen
(was BHP)

JPDA 90%* In production 1999-2004, now being decommissioned. 31 0 31 0 4 4
Elang-Kakatua

Conoco-Phillips

JPDA 90%* Began production in 1998; nearly exhausted. 56 0 50 0 7 6
Laminaria-Corallina

Woodside

Just outside JPDA; claimed by TL & Australia. Occupied by Australia 0% Began production in 1999; mostly depleted. Australia has taken $1.2 billion in revenues. 210 0 167 0 25 20
TOTAL 61% 987 11.1 268 0 403 31
+ In addition to companies which operate projects, joint venture partners in these fields include Royal Dutch Shell, Santos, Inpex, Osaka Gas, Tokyo Electric, Paladin and Agip.
* These fields started production under the illegal Timor Gap Treaty. The revenue split and ownership has changed twice since 1999.

Many small nations have oil and gas deposits under their soil and seas, but few endured as much suffering and violence even before these resources were extracted. Timor-Leste is a small, poor country. The profits a colonizer can make from coffee, sandalwood and marble are small change;

Timor-Leste is strategically significant only to Australia and Indonesia. But the potential petroleum wealth compelled Indonesia and Australia to go down a criminal path.

Occupation I: Indonesia

As Portugal withdrew, the chaotic situation in Timor-Leste in 1974-5 made it easy for Indonesia to move in, and Cold War politics encouraged Western approval. Economic considerations were also key -- Indonesia and Australia wanted to get their hands on the tens of billions of dollars worth of oil and natural gas in the Timor Sea between Timor-Leste and Australia.

Indonesia and Australia started to divide the Timor Sea in the 1960s, but Timor-Leste’s colonial ruler, Portugal, declined to participate in their boundary discussions, leaving ownership of the most lucrative fields unclear. As Portugal withdrew, Indonesia asked its neighbors and allies what they would do if Indonesia annexed Portuguese Timor. Australia’s ambassador in Jakarta urged his government to support Indonesia’s invasion because he expected Australia to have an easier time negotiating with Indonesia than with an independent Timor-Leste.

He was right. Soon after Indonesia claimed Timor-Leste as its 27th province, it began to negotiate with Australia. The “Timor Gap Treaty” was signed in 1989, as the two foreign ministers clinked champagne glasses flying over the Timor Sea. It created a “zone of cooperation” for joint petroleum development in Timor-Leste’s maritime territory, later called the JPDA. Although the area is closer to occupied Timor-Leste than to Australia, Indonesia gave Australia 50% of the revenues – a concession for Australia’s legitimization of an illegal, brutal occupation. Australia thus became the only democratic country ever to legally accept Indonesia’s annexation of Timor-Leste. Needless to say, the people of Timor-Leste were neither informed nor consulted.

The Timor Gap Treaty came into effect in early 1991. On November 12 of that year, Indonesian soldiers gunned down a peaceful protest at a Dili cemetery, killing more than 271; this massacre was unusual in that it was witnessed by international journalists. Photos and videos of the “Santa Cruz Massacre” were shown around the world, the first glimpse most people had of Indonesian brutality which had already killed one-third of Timor-Leste’s people.

One month later, contracts were awarded for Timor-Leste’s stolen resources. The companies eager for this blood-soaked oil included Royal Dutch Shell, Woodside Petroleum Ltd. (which later became Woodside Australian Energy), Santos, and Phillips Petroleum (later ConocoPhillips), all of whom are still exploring and exploiting Timor-Leste’s maritime petroleum resources. ConocoPhillips’ small Elang Kakatua oil field was the first. Discovered in 1994, it began making money for Indonesia and Australia in July 1998, and is now mostly depleted.

The largest field in the joint area is the Bayu-Undan oil and gas field – 400 million barrels of condensate (liquids) and 3.4 trillion cubic feet of gas. ConocoPhillips and its partners began developing this field in the late 1990s, while it was still stolen territory.

The 1997 Asian Economic Crisis led to the fall of Suharto, creating the space for Timor-Leste to vote for independence. As a result, Indonesia forfeited its never-valid claim to Timor-Leste’s petroleum riches. The occupation of Timor-Leste had been costly to Indonesia; the oil money was just starting to come in when Indonesia left Timor-Leste in 1999. In October 1999, as the smoke was still rising from the destroyed buildings of Timor-Leste and most of its population were refugees, the oil companies decided their development plans for Bayu-Undan. Laminaria-Corallina started production a month later.

Occupation II: Australia

International law and political realities have changed since Indonesia and Australia carved up the seas before and during the Indonesian occupation of Timor-Leste. Under the 1982 UN Convention on the Law of the Sea (UNCLOS), maritime boundaries between nearby states are drawn on the median line, halfway between the coastlines. Under this principle, all of the fields in the above chart belong to Timor-Leste. These principles, rather than agreements signed by other nations over illegally occupied territory, establish the new nation’s rights.

As Timor-Leste’s belated independence became inevitable, Australia continued to lust after revenues from Bayu-Undan, the larger Greater Sunrise gas field, and lucrative Laminaria-Corallina. With support from Woodside and Phillips Petroleum, Australia wanted to continue the Timor Gap Treaty’s joint development area, sharing the revenues with Timor-Leste instead of Indonesia. They also refuse to recognize current international legal principles, preferring obsolete ones which privilege larger countries.

Two months before Timor-Leste’s independence, Australia withdrew from processes for settling maritime boundary disputes using the International Tribunal for the Law of the Sea and the International Court of Justice. Instead, Canberra forced its poor, small neighbor into an unbalanced negotiation where Timor-Leste’s right to a maritime boundary is indefinitely postponed (probably for generations, until all the oil and gas is extracted) in return for a share of the money from the oil and gas. With tremendous human needs and no other source of income, the newborn government felt it could not risk delaying Bayu-Undan, and the UN acquiesced.

Fourteen hours after the birth of the Democratic Republic of Timor-Leste on May 20, 2002, it signed the Timor Sea Treaty with Australia – continuing the joint development area with a 50-50 revenue split, even though the entire area is on Timor-Leste’s side of the median line.

One of the first laws the new nation enacted was a “Maritime Zones Act,” asserting their sovereign right to maritime territory. Areas east and west of the JPDA are claimed by both countries, but Australia refuses even to talk about where a permanent boundary should be. Although the Timor Sea Treaty is “without prejudice” to a future maritime boundary determination, Australia continues to act as if fields outside the JPDA are in its territory, even those which are closer to Timor-Leste.

Bayu-Undan offshore development was uninterrupted. Liquids production started in 2004, with gas being pumped back into the ground and condensate being loaded on tankers from a floating platform. A gas pipeline is being constructed to Darwin, Australia, giving Australia most of the jobs and all the downstream revenues. There, the gas will be liquefied and shipped to Japan. Production will peak around 2010, and the field will be exhausted by 2023. The project is already two-thirds of Timor-Leste’s GDP, supplying four-fifths of its government income.

From 1999 through 2005, Australia has taken in more than US $1.2 billion15 from Laminaria-Corallina, an oil field much closer to Timor-Leste. This field, just outside the JPDA and claimed by both countries, is nearly exhausted. Timor-Leste has protested this theft of its resources, but Australia will not discuss the issue.

In defiance of Timor-Leste’s claims, Australia signed new contracts for most of the contested territory adjacent to the JPDA. When Australia puts such areas up for bid, they advise companies that “East Timor has declared an exclusive economic zone and continental shelf extending two hundred nautical miles from its baselines which includes this release area. Australia does not accept the East Timorese claim to the extent that it overlaps areas over which Australia exerts jurisdiction. Australia has exercised exclusive sovereign rights over this area for an extended period of time, and has notified East Timor that it will continue to do so.” 16 As Australia continues to profit from past complicity with Indonesia's crimes, Timor-Leste citizens have formed the “Movement Against the Occupation of the Timor Sea” to demand that their southern neighbor respect their rights, as their northern neighbor finally had to.

Greater Sunrise, the largest field closer to Timor-Leste than to Australia, is 20% inside the JPDA and 80% outside. In 1972, Australia and Indonesia (without Portugal’s participation), assigned the 80% area to Australia. Woodside has long had a contract to develop Sunrise, but has barely started because ownership is contested. After several false starts and rumored agreements, Sunrise development was officially suspended at the end of 2004, while Timor-Leste and Australia work out their differences. They have reportedly settled on a 50-50 split of upstream revenues (an improvement over the 18% that Australia was initially willing to share with Timor-Leste), but are deadlocked over who will make development decisions.

Timor-Leste’s government wants a pipeline from Sunrise to the south coast of Timor-Leste, where an LNG plant would be built. The new nation’s first major industrial facility nation would provide jobs (although the highest-skilled, best-paying ones will go to foreigners), tax revenues, gas for domestic use, and a model for other projects. It will also bring pollution and dangers of accident, corruption, destruction of local communities, poisoned agriculture and disrupted fisheries. Although the benefits and risks for Timor-Leste have not yet been fully studied, government leaders are trying to convince the reluctant oil companies it is in their economic interest. Australia, having used the Bayu-Undan LNG plant to spur development in its sparsely populated Northern Territory, sees another such facility for Greater Sunrise as an economic boon.

Social and environmental impacts

Up to now, significant Petroleum development in Timor-Leste has been far offshore, out of sight and out of mind. As a result, it has little detectable social or environmental impact, and the only economic impact has been from tax revenues and royalties.

Although Timorese fishermen have harvested the resources of the sea for centuries, they have small boats and rarely go far from land. Local people also collect shellfish and aquatic plants from the shore.

They believe that the wealth from the sea must be managed sustainably for future generations, and Timor-Leste’s small population, lack of an export capability, and limited technology have helped enforce that ethic. A significant oil spill could endanger near-shore ecosystems, and the growing population and economic and cultural shifts could extend the fisheries out to sea.

In addition, Timor-Leste is considering selling fishing rights to other countries to diversify its economic base; as offshore oil developments increase, this will be increasingly at risk. The Timor-Leste government hired a Chinese/Norwegian consortium to do offshore seismic prospecting. Although the work was completed without known incident in early 2005, concerns were raised that environmental safeguards were inadequate.

Small-scale, on-shore oil and gas development in Timor-Leste goes back to the Portuguese era, with oil seeps being harvested for community use, while flaming gas seeps provided spiritual inspiration. A few small refineries, now abandoned, produced gasoline and kerosene for local use, with no exports or large projects. Timor-Leste hopes to explore and exploit its on-shore oil and gas in the coming decades. Although onshore reserves are commercial significant, they are probably smaller than those under the sea. Given their potentially larger impact on local environment and communities, some have suggested that onshore projects be delayed as Timor-Leste gains experience in managing offshore ones, but the government has rejected this idea. If Timor-Leste is able to attract the Sunrise gas liquification plant, environmental and social dangers will escalate further.

Timor-Leste has a monsoonal climate, with five months of daily downpours alternating with seven months of almost no rain. Its residents primarily collect wood for cooking or to boil water (almost no water is potable without being boiled). Combined with slash-and-burn agriculture and deforestation by Indonesian soldiers as a counter-insurgency tactic, much of the country’s indigenous forests have been destroyed. Erosion is a significant problem, as is flooding and landslides, creating further problems for the very limited transportation infrastructure. Environmentally-related illnesses, especially malaria, dengue fever and tuberculosis, are widespread.

The impact of petroleum development from land displacement, spills and pollution could be significant. Timor-Leste has little food security and a fragile agricultural system; any disruption could exacerbate malnutrition or cause famine. The country is not yet capable of managing chronic existing environmental problems, raising doubts that they can deal with the acute dangers from petroleum projects.

Timor-Leste has virtually no experience with responsible government administration, industrial projects, or environmental protection. In its haste to develop its oil reserves, it enacted legislation to manage petroleum projects. The 2005 Petroleum Act, which defines the relationship between oil companies and the government, has many loopholes. Environmental impact assessments are inadequate, landowners and community rights can be easily transgressed, sacred or ecologically sensitive areas are not protected. Government authority in relation to the companies resides in a single individual, without transparency, oversight, or checks and balances. Timor-Leste seems to be listening to advice from the petroleum industry, but learning little from the experiences of people who are living with the negative impacts of such development.

Managing the money

In contrast with the scant information or attention given to managing petroleum companies, Timor-Leste has had public discussion about how to manage money from its oil and gas reserves. The current international focus on “transparency and accountability,” combined with a perception that corruption within Timor-Leste’s government is a greater danger than malfeasance by petroleum companies, has drawn great attention to these issues.

In 2005, the government established a Petroleum Fund. The Fund provides for revenues from oil and gas to be invested abroad, so that the interest can be spent “for the benefit of future generations” after the oil and gas is exhausted. Although this is a laudable concept, it is not a proven one. Timor-Leste based its Petroleum Fund on that of Norway, which was a rich country with long-established integrity and professionalism in government before it received oil revenues. To date, no petroleum-rich countries whose people were not already rich have avoided the “resource curse” by using an oil fund.

The Timorese people have high expectations from this Fund, believing that it will be used to develop the country and eradicate poverty, to expand social services, increase domestic investment, create jobs, and build infrastructure. For its part, the government says it wants to do this, highlighting education, health and agriculture as requiring financing.

However, the Petroleum Fund Law is full of loopholes. This law does designate how the money is to be spent, it simply is used to fill any deficit in the government budget. Although sustainable levels are recommended, there is no prohibition on spending oil money as quickly at it comes in. There is no requirement that it be used to develop other sectors of the economy, and provisions for transparency and accountability are not as strong as they need to be.

The majority of Timor-Leste’s people are rural farmers. Most outside the capital have not received substantial information regarding the oil fund. Because of the lack of information, the people are alienated from decisions about how the fund will be managed, and fear a continuation of the pattern of opacity, corruption and arbitrary decisions established during the Indonesian occupation. Other oil-producing countries have bad experiences with poor planning, corruption, collusion and nepotism, which may well be repeated in Timor-Leste.

Timor-Leste’s economy and government will be dominated and dependent on oil revenues for the next several decades. None of the petroleum legislation requires that other sectors of the economy, such as tourism and agriculture, be developed, a mistake which has had disastrous consequences elsewhere.

Financial Debt

Timor-Leste is fortunate; it began its life as a nation with no external debt, and the current government is committed not to borrow money.

It was not an easy decision. Prior to independence, a National Plan was developed with heavy influence from World Bank and other foreign consultants. The Plan establishes public services at a very low level (health care and education are greatly reduced from the last few years of Indonesia’s occupation; the entire budget is less than $100 per citizen), and the free trade, privatization and fee-for-service biases of the IFIs come through in many places. The Bank also established a financing mechanism to enforce these conditions; money from donors can be blocked unless the Bank is satisfied that the Plan is being followed.

Foreign donors were asked to contribute money to implement the Plan until oil revenues were adequate. The authors of the National Plan based their projected need for donor contributions on ConocoPhillips’ timetable for Bayu-Undan. But Bayu-Undan, like many large projects, started production started nearly a year behind schedule.

With declining international donations, Timor-Leste found itself facing a $129 million budget shortfall for 2004-2006. The World Bank hastened to offer “concessional” loans to fill the gap, but the government declined. Several months of debate and uncertainty ensued, although the decision not to borrow was eventually borne out by rising oil prices and further cuts in the meager government budget. At present, the government budget has a surplus (which is put into the Petroleum Fund), which will probably continue for the next 40-50 years, until the oil and gas is exhausted.

In many countries, the temptation to borrow against future oil revenues has proved irresistible. Timor-Leste’s Petroleum Fund law partly guards against this, by saying that money in the Fund cannot be used as security for borrowing. However, potential lenders will know that the Fund money will fill any deficit in the government budget, and that debt repayment would come out of that budget. So even with a technical prohibition on using the Fund as collateral, they could be confident that Fund money would be available for debt service.

Although the international financial institutions failed to make Timor-Leste into a debtor nation, they still have extraordinary power, including detailed oversight of the government budget and policies. The World Bank, for example, pays the Prime Minister’s advisors on oil issues; the IMF hired the foreign architect of the Petroleum Fund and designed the central bank (Banking and Payments Authority) which will manage it. Unsustainably low levels of public services have been implemented at the Bank’s suggestion. In effect, the World Bank has imposed the restrictions of structural adjustment on Timor-Leste, even though the country has never borrowed money, let alone rescheduled or defaulted on a payment.

Ecological Debt

Timor-Leste’s contribution to global climate change is miniscule, largely due to poverty and lack of industrialization. In 2004 the country burned about 600,000 barrels17 of petroleum products, releasing about 70,000 tons of carbon into the atmosphere. Per capita, this is less than one-twentieth of global average fossil fuel consumption, although it will increase if the country becomes more developed.

Because of Timor-Leste’s small land area and few remaining forests, its vegetation is not a major carbon sink, although its ocean area (yet to be agreed upon) would help.

Timor-Leste’s undersea petroleum reserves contain about 400 million tons of carbon. They will be burned in Japan and other countries over about four decades, returning carbon to the atmosphere at a rate 140 times higher than current fuel consumption in Timor-Leste. People in rich countries and transnational energy companies will reap most of the benefits which accompany this degradation of the atmosphere, although Timor-Leste will receive a share.

Carbon dioxide which results from burning fuel is a greenhouse gas, but methane (natural gas) has more drastic effects on the atmosphere. If any of Timor-Leste’s thousand trillion cubic feet of natural gas escapes while it is being extracted, re-injected, transported or liquified, its effect on the global climate would be 23 times worse than if it was burned at its intended destination.

In 2003, the United Nations Development Program and the Timor-Leste government hosted the “First National Workshop on Climate Change.” The two-day conference included much discussion about global impacts of fossil fuel consumption and ways it could be reduced worldwide. Once activist observed that the most effective contribution Timor-Leste could make toward reducing global warming would be to leave its fossil fuels in the ground, and asked if the country could receive financial incentives comparable to the revenues it would receive from selling them. The experts agreed that this was impossible, far beyond current international consensus on how to deal with the threat of climate change, even though it would only cost about one-third of the value of the oil and gas, since costs of extraction and company profits need not be compensated. However, in addition to the political obstacles, it could be difficult to evaluate how much gas and oil is not being extracted.

The workshop also discussed the local effects of climate change on Timor-Leste. A drier wet season and wetter dry season would impact on agriculture, much of which is not irrigated. More intense and more frequent storms, including cyclones, could increase the occurrence of floods and landslides, damaging the population and infrastructure. Because most of Timor-Leste (except the capital, Dili) is well above sea level, rising ocean levels would not have a huge immediate impact, although temperature increases might eventually require farming to migrate upwards. (A few days later, one Timorese activist joked that rising sea levels would improve economic justice in Timor-Leste, as many who live along the coast are relatively affluent compared with the bulk of the people who live by subsistence agriculture in the hills and mountains.)

Ecological debt is not only about climate change. Timor-Leste’s physical and human environment was seriously damaged many times over the last century by bombing, burning, forest clearing, property destruction, and other tactics inflicted by Indonesia and previous occupiers. foreign military forces. Although it is difficult to see who benefited from this aside from a few Indonesian soldiers, political leaders and businessmen, it is clear who was harmed, and the debt should be paid.

For Timor-Leste, the oil and gas under its territory has done little. While Australia and Indonesia have pocketed taxes and royalties, international oil companies have made billions. By September 2005, Timor-Leste’s government had received approximately $80 million from oil royalties,18 in addition to $262 million in oil-related taxes. Over the next four decades revenues to Timor-Leste from oil and gas could total $25-30 billion.19 This is a fraction of what Timor-Leste should receive as just compensation for the suffering Timor-Leste experienced from international crimes.

Calculating monetary compensation to human death and suffering is morally and practically difficult, but a number could give some idea what the Timorese people are owed by those who committed crimes against them. Some courts assess triple damages for willful and illegal acts. Punitive damages, to deter similar crimes in the future, are often much larger.

A very crude calculation puts the damage inflicted by Indonesia against the Timorese people at more than $58 billion. Using the same methodology, Portugal and Japan are liable for $8 and $13 billion respectively. Each of these occupations were malevolent and illegal, so triple damages would be the minimum appropriate reparations. Therefore, the people of Timor-Leste are owed more than $235 billion dollars by former colonial rulers and their allies. Australia, the United States, Britain and other nations who provided military, diplomatic or political support to Indonesia’s occupation must share the responsibility for damages. This includes not only bringing individual perpetrators to justice and paying reparations to the nation, but also providing compensation to the victims and their families.

Compensation owed to Timor-Leste by foreign occupiers

Occupier

start

end

months

 displacement

 deaths

 home destruction

 arrest/ torture/ rape

 imprisonment

 

Portugal

Jan-1901

Jul-1975

5053

              1,000

              30,000

                 100

            200

              100

 

Japan

Feb-1942

Aug-1945

42

            50,000

              50,000

              1,000

          1,000

           1,000

 

Civil war

Jul-1975

Sep-1975

2

            10,000

                1,500

              1,000

          3,000

           4,000

 

Indonesia occupation

Dec-1975

Jan-1985

109

           300,000

            190,000

            60,000

        15,000

          21,000

 

Indonesia occupation

Jan-1985

May-1999

172

            30,000

              10,000

              5,000

          1,000

              500

 

Indonesia pre-ballot

May-1999

Oct-1999

5

            50,000

                  300

                 100

            300

              300

 

Indonesia post-ballot

Oct-1999

Oct-2000

12

           500,000

                1,200

            70,000

              -  

                -  

 

 

        

 

Cash value per event or month

 

$100

$250,000

$20,000

$3,000

$200

 DEBT 

 

 

 

 

 per month

 

 

 

 per month

 total 

Portugal

1550-1975

  

$505,302,632

$7,500,000,000

$2,000,000

$600,000

$101,060,526

$8,108,963,158

Japan

1942-45

  

$210,032,895

$12,500,000,000

$20,000,000

$3,000,000

$8,401,316

$12,741,434,211

Civil war

1975

  

$2,039,474

$375,000,000

$20,000,000

$9,000,000

$1,631,579

$407,671,053

Indonesia occupation

1975-85

  

$3,275,328,947

$47,500,000,000

$1,200,000,000

$45,000,000

$458,546,053

$52,478,875,000

Indonesia occupation

1985-99

  

$516,315,789

$2,500,000,000

$100,000,000

$3,000,000

$17,210,526

$3,136,526,316

Indonesia pre-ballot

1999

  

$29,582,237

$75,000,000

$2,000,000

$900,000

$301,974

$107,784,211

Indonesia post-ballot

1999-2000

  

$350,986,842

$300,000,000

$1,400,000,000

$0

$0

$2,050,986,842

Total Indonesia

1975-2000

       

$57,774,172,368

 TOTAL 

 

 

 

$4,889,588,816

$70,750,000,000

$2,744,000,000

$61,500,000

$587,151,974

$79,032,240,789

Conclusion

As a new nation, Timor-Leste is facing many decisions about its future. One of the most critical is how and whether to develop its large undersea reserves of oil and natural gas. With almost no other sources of revenue to develop its economy and social services, the nation has few options.

Timor-Leste’s one million citizens believe that their petroleum reserves can provide a way out of the poverty, disease and illiteracy they have inherited from centuries of colonialism and decades of foreign military occupation. They hope to avoid the path followed by so many other similar nations, where oil and gas development brings suffering -- where corruption, violence, mismanagement and environmental devastation far outweigh any benefits. They have the advantage of knowing what went wrong in other countries, and the disadvantage of having no good models to follow.

A realist would advise Timor-Leste to find another way to meet the needs of its people. A realist would say that the risks and damages from petroleum development are worse than the benefits that could be provided by its revenues. A realist would empathize with the desperate situation of the people, but would say that extracting oil and gas will only make things worse, at it has done in so many places.

But the Timorese are not realists. They struggled for more than a generation against a brutal enemy 200 times their size, even though one-third of their people were killed. They had no international support for their struggle, and no chance of militarily defeating their Indonesian occupier. But today they are free, albeit, at a tremendous price.

Perhaps the people of Timor-Leste can beat the resource curse as well. This will be an more difficult struggle than the one against the Indonesian occupation, and the costs could be as high.

Today, Timor-Leste’s leaders should be strategizing for this battle, but the appear to underestimate the difficulty they are facing. It is up to their people to educate them and hold them accountable.


Notes:

1 UNDP, Human Development Report 2005, page 22. http://hdr.undp.org/reports/global/2005/

2 Ibid, page 170, Figure 5.4.

3 The $563 million UN transitional government budget for FY 2001 is analyzed in the April 2001 La’o Hamutuk Bulletin. Timorese UN staff were paid a total of $5.5 million, an average of $240/month. The average salary of an international UN staffer in Timor-Leste was more than 30 times this amount. www.laohamutuk.org/Bulletin/2001/Apr/bulletinv2n1.html

4 After independence, a smaller UN mission supported the Timorese government, with a two-year budget of $517 million, of which 0.8% paid local salaries. For a breakdown of this and other public sector spending in Timor-Leste during 2002-3, see the May 2003 La’o Hamutuk Bulletin. http://www.laohamutuk.org/Bulletin/2003/May/bulletinv4n2.html

5 Democratic Republic of Timor-Leste (RDTL) Ministry of Planning and Finances, Timor Leste Overseas Trade Statistics, 2004 (published March 2005). Figures for the first eight months of 2005 show the same patterns. http://dne.mopf.gov.tp/trade.html

6 United Nations World Population Prospects, 2004 revision, page 44. http://www.un.org/esa/population/publications/WPP2004/2004Highlights_finalrevised.pdf

7 CIA World Factbook, 2005. http://www.cia.gov/cia/publications/factbook/geos/tt.html

8 RDTL Combined Sources Budget, as presented to the Development Partners Conference in April 2005, page 26. Extrapolated to 2010 based on projected oil revenues (page 40) and adjusted for increase in projected oil price since the document was written. The remaining figures in this table are taken or calculated from data in this document. http://www.mopf.gov.tl/tldpm/RDTL Planning Documents and Publications/Background Paper/RDTL Background Paper april 2005 - English.pdf

9 The RDTL Budget document was based on a projected 2010 oil price of $38/barrel, but in September 2005, NYMEX futures predicted $61.4 (http://futures.tradingcharts.com/chart/CO/C0). If oil production rates are as expected, government revenue from petroleum will be more than $3,100 million in 2010. Since no downstream or spin-off revenues come to Timor-Leste, only taxes and royalties are included.

10 Government revenues for 2005 are $206 million, including $36 million from domestic revenues, $159 million from petroleum, and $11 million from donors. RDTL Combined Sources Budget, page 10.

11 Map and data from La’o Hamutuk, which compiled them from government and industry sources.

12 Carbon tonnage based on conversion factors supplied by OilWatch: 117,340 metric tons carbon per million barrels of oil; 25,900,000 tC per trillion cubic feet of natural gas.

13 JPDA is the Joint Petroleum Development Area, which was shared 50-50 between Indonesia and Australia under the illegal 1989 Timor Gap Treaty. Since Timor-Leste’s independence, it is shared 90% to Timor-Leste and 10% to Australia.

14 As of September 2005, no agreement has been approved on a permanent maritime boundary, unitization agreement, or other allocation of Greater Sunrise between Timor-Leste and Australia, although they have been negotiating since 2001. A 50-50 revenue split has been reported, but other rumored deals have collapsed in previous years.

15 Calculated by La’o Hamutuk based on sales and tax figures in Woodside’s annual and quarterly filings with the Australian Stock Exchange.

16 Release of Offshore Petroleum Exploration Areas 2005, Australia, Guidance Notes for Applicants. http://www1.industry.gov.au/acreagereleases2005/html/guidance.htm

17 Derived from RDTL Overseas Trade Statistics, op. cit, based on import of $36,757,000 worth of fuel in 2004.

18 Timor Sea Designated Authority website report on Petroleum related revenue, http://www.timorseada.org/ftp.php

19 RDTL Budget, April 2005, op. cit., page 40, puts expected total Bayu-Undan revenues to Timor-Leste at $4.9 billion, which current oil price projections would increase to around $8 billion. Sunrise and other fields could yield twice again as much.



Supplemental information on Timor-Leste’s legal situation
with regard to environment and human rights

Although it has been independent for only three years, Timor-Leste is gradually signing and ratifying many international conventions involved with human rights, economic rights, the environment and other issues. These treaties are very important for small, new nations which rely on international law for their protection, and for the future of Timor-Leste’s people. After enduring centuries of colonization and military occupation, with destruction of our environment and countless violations of our human rights, Timor-Leste’s people hope that such experiences will never be repeated. Even as they resisted the Indonesian military occupation, their real struggle was to end human rights violations and to secure economic, social and political rights.

Timor-Leste has already signed and ratified the following international conventions to demonstrate their hopes for peace, justice and the rule of law:

  • International Convention on Civil and Political Rights and Second Optional Protocol.
  • International Convention on Economic, Social and Cultural Rights.
  • Rome Statue of the International Criminal Court
  • Convention on Elimination Discrimination Against Woman (CEDAW) and Optional Protocol.
  • International Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment.
  • Convention on Rights of the Child, and optional protocol on the sale of Children, Child Prostitution and Child Pornography.
  • International Convention on the Protection of the Rights of all Migrant Workers.

These rights are also guaranteed by Timor-Leste’s Constitution, but some are concerned that they are not being respected. Law have already been passed regarding defamation, immigration and other areas which violate constitutional rights, and the new court system is not functioning effectively to enforce the constitution and the rule of law. In addition, basic legislation to implement political, economic, social, cultural and civil rights have not yet been passed. Although the Timor-Leste Constitution discusses basic human rights, it does not specifically protect indigenous rights. Because of the pervasive repression of the Indonesian occupation, there are very few people still living traditional lifestyles on their traditional lands, and their interests are not represented effectively in public and political debates.

The Constitution also gives the State the responsibility to defend the environment and promote sustainable economic development. (Article 61.3: “O Estado deve promover acções de defesa do meio ambiente e salvaguardar o desenvolvimento sustentável da economia.”) The state is also charged with responsibility to protect the environment and preserve natural resources.

Timor-Leste has signed or will shortly sign the Biodiversity Convention and the Convention on Climate Change, but ratification may not take place until 2006. When ratified, these international Conventions will help protect Timor-Leste’s local environment, as well as the small nation doing its part to protect the global environment, showing its commitment to international principles and legal processes. They will also allow Timor-Leste to receive benefits from the Carbon Fund.

Timor-Leste is creating its entire body of domestic law, gradually replacing Indonesian and United Nations laws. Up to now, the environmental legislation has not been written. The Petroleum Act, passed in mid 2005, is weak on protecting the environment, which could cause problems for Timor-Leste. As other laws are written, they could be better or they could follow this discouraging model.

La’o Hamutuk is concerned that the underlying commitment to the environment and human rights in Timor-Leste’s Constitution and international conventions ratified by the country not be fulfilled. Timor-Leste’s experience over the last few years indicates that the involvement of non-state actors -- including oil companies, foreign governments, International Financial Institutions such as World Bank and IMF -- often constrains Timor-Leste’s ability to implement its principles. In addition, centuries of colonialism and occupation, including the UN transitional government from 1999-2002, have set patterns of arbitrariness and corruption where the contents of laws or treaties were frequently violated with impunity. Timor-Leste is trying not to follow that model, but it is deeply ingrained.

Although public “consultations” were held regarding drafts of Timor-Leste’s petroleum laws, the laws as enacted include many dangerous loopholes, omissions, conflicts of interest and other fundamental problems. Most of the suggestions from civil society were ignored, and the regime gives virtually all decision-making authority to the Ministry of Petroleum. That Ministry is also responsible to approve proposals to minimize or clean up environmental damage. The Ministry evaluates and approves contracts with oil companies, supervises the companies, and is also in charge of resolving disputes. Most of its decisions cannot be reviewed by or appealed to other authorities, and many are not even required to be made public. The Ministry’s principal responsibility is to facilitate petroleum development, an inherent conflict of interest because they will be reluctant to slow petroleum development, and protecting the nation or implementing international conventions will get lower priority.

The Petroleum laws are also problematic with regard to transparency and human rights. Although Timor-Leste’s government has endorsed the Extractive Industries Transparency Initiative (EITI), the laws actually prohibit companies from releasing information to the public without permission of the government. In addition, the weak state of Timor-Leste’s judicial system and the long history of human rights violations, often with impunity, gives little confidence that human and community rights will be respected regarding petroleum development.

Timor-Leste’s ratification of international human rights and ecological conventions is an important first step. But it will take much more work to ensure that the rights and protections guaranteed by these conventions are actually respected in the nation. Potential negative consequences of oil company activities are only a few of the obstacles to sustainable development in which all Timor-Leste citizens can enjoy their independence and freedom.

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: 
info@laohamutuk.org    Web: http://www.laohamutuk.org    Blog: laohamutuk.blogspot.com