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Excerpts relating to Timor Sea oil from
RDTL Sector Investment Program
Natural Resources and Environment

November 2003

Links to:

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RDTL background paper

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World Bank background paper

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Mid-year Budget Update

Presented at December 2003 Timor Leste Development Partners Meeting by the RDTL Ministries of Development and Environment; Agriculture, Forestry and Fisheries; Transport, Communications and Public Works

II. DEVELOPMENT OF THE PETROLEUM AND MINERALS SECTOR

Goals and Strategic Objectives

As set out in the National Development Plan (NDP), the goal is to manage minerals, energy and extractive activities in a consistent, fair, environmentally sustainable, transparent and timely fashion. The guiding principles to this are sustainability, efficiency of resource use and equity.

The Government has set out its strategy for achieving these objectives in the NDP, in its Strategic Plan1 and in the Annual Action Plans of the Division of Energy and Mineral Resources (EMR) in the Ministry of Development and Environment (MDE). The approach, for both minerals and petroleum, is to create as quickly as possible an enabling environment that will encourage the domestic and foreign private sector to invest. With successful creation of an environment conducive to private investment, the role of the Government will then be limited to oversight and regulation and to continued investment promotion.

In formulating its strategy for offshore development of resources, the Government decided to proceed immediately to invite investors to bid on exploration and revenue sharing contracts based on existing information. Partnerships have been established with international private companies to initiate the exploration and exploitation of these resources. Contractual arrangements have been established with Conoco Phillips (for the Bayu Undan field) and with Woodside (Greater Sunrise field). As a result of the off shore program, the petroleum sector is expected to be the main source of revenues for Timor-Leste within the next five years, generating $80 120 million of revenues annually during the decade 2005 to 2014. In addition to these revenues, careful management and development of this sector can bring other benefits, including job creation, skills development, institution building and foreign direct investment.

In the case of the on shore and near shore resources, the Government has decided to adopt a phased approached, first investing in more sophisticated seismic/exploration information, the results of which, if promising, could be shared with potential private investors. The judgment of the Government was that better information would reduce commercial risks for the investors and would enhance the prospects for revenue sharing arrangements with investors that would be favorable to the country.

The Enabling Environment for Investment

Priority is being given to the creation of an enabling environment for private investment. The main elements of the environment rest on three pillars:

bulletEstablishing the legal and regulatory framework.
bulletStrengthening institutional and individual capacities to manage the sectors. This is primarily to ensure that the government departments have the skills and competence necessary to implement the legislation, to promote development in the sector, and to oversee management of all activities and investors in the sector.
bulletStrengthening the institutions responsible for managing and promoting investment in the sector. This includes collecting information in order to reduce the risks faced by investors.

The legal and regulatory framework. Work on the legal and regulatory framework is well advanced (Table 2). Priority was given to the development of the mining law because of its potential impact on job creation in the economy (and therefore stability and poverty reduction). There has also been steady progress on the petroleum laws. As a result, all the basic legislation has been prepared and current expectations are that this legislative package will be promulgated by mid 2004.

Table 2: Legislation in the Petroleum and Mining Sector

Brief Name of Initiative

Objective

Status

Sustainable Mining Law

Sustainable management of minerals

Drafted during 2002. Pending Cabinet approval.

Petroleum Code

Comprehensive code for on‑shore and off‑shore exploration and development

Drafted in 2003. Scheduled to be promulgated by April 2004

Mining system and procedures

To clarify operating systems and procedures under the new Mining Law. Covers license, job creation, royalties, responsibilities, etc

Largely completed by MDE. Implementation awaits promulgation of the Law.

Petroleum system and procedures

To clarify systems and procedures for implementing the Petroleum Code. Covers license, job creation', royalties, responsibilities, etc.

Largely prepared by MDE and the Designated Authority (DA). Implementation awaits promulgation of the Code.

Development of institutional capacities. The expectation is that the environment for private investment can be established within the next few years. The Government's role would then be limited to oversight, regulation and investment promotion. The respective roles of various government agencies in the development of the petroleum and minerals sector, along with related downstream responsibilities for energy use, are set out in Table 3. The Division of Energy and Mineral Resources (EMR) in the Ministry of Development and Environment (MDE) has primary responsibility for regulation and promotion of on shore petroleum and minerals. The EMR is now fully functional, although limited in terms of staff numbers and capacity.

Table 3: Key Roles in the Petroleum and Mining Sector

Role/function

Ministry/ department

Division

Sub-Division

Private sector or NGO

Preparations of treaties, international law, boundaries

Timor Sea Office

 

 

 

Management of off‑shore petroleum

Designated Authority

 

 

All exploitation will be with private sector

On‑shore petroleum management

MDE

EMR

Energy

All exploitation will be with private sector

Minerals management

MDE

 

 

All exploitation will be with private sector

Groundwater protection and management

MDE

EMR

 

 

Renewable energies ‑ excluding hydropower

MDE

EMR

 

Role for private sector to be determined

Power generation sector management

Ministry of Transportation, Communications, and Public Works

 

 

Generation will be by private sector

Individual capacity building in the petroleum and minerals sectors. With support from USAID, the Government has launched an intensive program to build individual capacities within the agencies responsible for the petroleum and mining sector. This program has been supplemented with help from UNTAET and UNMISET in placing of two full time international advisers. Most capacity has been built through formal training courses, much of it outside of the country.

Development of On-shore Oil and Gas in the Medium-Term

For the immediate future, priority is being given to the above mentioned initiatives aimed at consolidating capacity building and institutional development at the national level to improve technical and managerial supervision of on shore petroleum sector. The Government has opted to not enter into any mid- or long-term oil or gas production contracts until the Petroleum Law is in force. It will use the intervening period to increase its capacity and knowledge and implement several demonstration projects. The proposed program for the medium term centers on the following:

bulletStrengthening capacities to enforce and disseminate the Petroleum Code, through a demonstration project and associated training.
bulletPilot projects to exploit and utilize hydro carbon reserves (capped wells and seeps) in order to demonstrate the technical and economic feasibility of this exploitation.
bulletAdditional seismic surveys of on shore petroleum deposits.
bulletImproved resource inventories, and data and information management systems, based on GIS and computer mapping.
bulletPreparation of a sectoral investment promotional package (giving details on known reserves; clarifying the roles, responsibilities of investors; clarifying protection of investors; and clarifying royalty agreements) and an associated promotional event.

Petroleum law demonstration project. The regulatory framework that will allow investors to apply for licenses to investigate in onshore exploration will not in place until the Petroleum Law is promulgated (scheduled for April 2004).2 The challenge is this process is to develop legislation, rules, state participation and fiscal packages that will maximize the economic rent while at the same time attracting venture capital for the exploration and exploitation on valuable resources. Work is in progress on the formulation of efficient concession rules and fiscal packages suited for onshore exploration, and it is important that this proceeds at a deliberate pace to establish an efficient and competent capacity to facilitate development of the industry. The process will obviously take some time, but in view of the urgency to obtain some on shore production to support power generation a Petroleum Law Demonstration Project is proposed. This would basically have three objectives: (a) test the draft Petroleum Law and associated regulations to determine whether it will achieve the objectives of attracting venture capital and maximizing economic rent; (b) generate further exploration and exploitation which will provide better indication of prospects to potential investors in later exploration areas; and (c) produce oil for power generation substituting for costly oil imports.

In a short timeframe, a "pilot" license can be used to test a business model for each phase of development, including: prospecting, exploration, field development, transportation, cessation and clean up. The Government believes that acreage that includes an "old" discovery well will probably be sufficiently attractive that an oil company will accept a reasonable work program to initiate production as well as firming up exploration prospects within a limited time frame.

In the licensing phase the most appropriate type of commercial and fiscal arrangements can be tested. These include the bidding system, cash payment up front, resource rent taxes, royalties and production taxes, corporate income tax and production sharing. Other aspects can also be tested during the initial license period, including: the structure and length of exploration phase; the structure on the work commitments both for seismic and drilling work programs; exploration drilling permits; relinquishment rules; area fees; data acquisition and sharing; and safety and environmental issues. Other issues that may be examined under the proposed program include: commercially declarations; upfront plan for development and operation (PDO); annual production permits; extended studies at mid life of the field; plan for cessation of the field prior to the shut down; and the plan for clean up and removal of installations.

Expansion of the seismic exploration program. The Government recognizes that firming up drillable prospects will require modern seismic surveys that can be costly and time consuming. Assuming that the results of the on going PetroChina study are favorable, the Government would carry out further exploration in parallel with the development of the Petroleum Law and associated licensing procedures. This process will reduce the time needed to develop identifiable sources of on shore oil and gas. Improved data would also enhance the response to an initial licensing round. The Government is therefore proposing to build on the PetroChina study with further data collection, including retaining consultants to assist with: (a) design of a 2D seismic acquisition program to firm up prospectivity; (b) soliciting bids for seismic exploration; (c) supervision and quality control during seismic acquisition; (c) seismic interpretation; (d) selection of prospective areas for promotion; and (e) reporting and analysis.

Petroleum data management contract. As noted earlier, primary responsibility for development of onshore oil and gas resources rests with the Oil and Gas Directorate within the Ministry of Development and Environment. Capacities for effective management of the on shore program are very limited at this time; the Government attaches a high priority to the further development of these capacities. This program is built around the following components: institutional development consisting of the establishment of a Petroleum Resource Management system and a GIS, complete with map digitizing and computer hardware and software and associated training and technical assistance.

Oil well rehabilitation demonstration project. The risk involved in rehabilitating wells that have produced oil and gas in the past, or drilling a well close by the existing wells, to reproduce their original success, is significantly lower than a wild cat exploration well. There is one well in the Suai province which has continued to leak oil and gas since it was capped in 1975. This well is equipped with wellhead facilities. The continuing oil leakage is a strong indication of possible production. This may be tapped by re engineering the wellhead and passing the oil into a separator. Consultants have prepared a project proposal to rehabilitate this well and use the oil locally for power generation substituting for costly diesel fuel. The indicative cost of the project is about $220,000. The rehabilitation would also eliminate the current environmental pollution resulting from the current leaks, and help to establish the profile of the onshore oil and gas status of Timor-Leste.3 The scope of the proposed project includes:

bulletA field survey by oil field production technicians to measure and assess the engineering requirements for wellhead replacement.
bulletInstallation of a new wellhead, separator and ancillaries and flow test the well.
bulletAssessment of the subsurface geology and reservoir.4

Gas seep harvest demonstration project. As noted earlier, gas resources are not yet clearly established through exploitation surveys; however, there are several well known, and apparently prolific, gas seeps that have been burning for decades. There is some confidence they will continue to produce gas for many years. There are many others that are known about, but have not been separately identified in the various overview studies. If a seep is harvested, 1 cu ft/second of gas produced could usefully support 250 kW of generation plant for a period at least equivalent to its service life of up to 25 years. Gas seeps represent a valuable local resource that fits the scale of energy consumption in Timor Leste. Any use of seep gas also has an environmental benefit. If it can be used in a generator to substitute for diesel, the particulates and greenhouse gas (GHG) emissions are reduced.5 Energy can be extracted for secondary use as electricity or process use. Gas seeps that are not burning are venting methane directly. Converting methane to C02 reduces GHG emissions. The proposed demonstration project would attempt to harvest a gas seep and use the gas for power generation on a very small scale.6 The indicative cost of the project is $220,000. A suitable location for this is the Aliambata district, where gas seeps are well-known and have been burning with flames between a half and one meter long for many decades. The project activities would comprise a simple test to assess flowing gas volumes of the seeps that are currently burning at Aliambata and a permanent vessel for seep harvest can be constructed and set up on more permanent foundations with a separator.

Even if on- and near-shore resources are not considered to be commercial for export purposes, the above projects would help determine the feasibility of using modest quantities of oil and gas for power generation, particularly for load centers on the South coast located close to the resources and where transportation costs from the Dili oil import terminal are high. This would reduce import costs and save foreign currency reserves.

Further Development of the Minerals Industry

Although the petroleum sector has been given priority, the Government recognizes that the minerals sector is important for income and job generation, and its further development cannot be delayed indefinitely. Government support for this sector will therefore start up in FY2005/06. The proposed capacity building program in the minerals sector focuses on the following areas:

bulletFurther strengthening of the legal/regulatory framework.
bulletCapacity building of MDE officials in the areas of basic geology, resource management and resource registration systems.
bulletStrengthened capacity to enforce and disseminate the Mining Law, through a demonstration project and associated training.
bulletEstablishment of required institutions, including a geological survey department, GIS and library systems, health and safety standards, and geological museum.

Management and Promotion of Private Investment

Once the data collection and analysis is complete, and an improved operating environment is in place, the Government will be in a stronger position to attract private sector investment on favorable terms. The Government intends to promote private investment through a series of sectoral development programs, including investment packages and promotion events, for example, targeting the entire minerals sector, or targeting a specific mineral. The investment packages will provide information on reserves, the legal and regulatory environment including protection for investors, royalties and taxation and on the roles and responsibilities of the private investor. In carrying out this program, steps will be taken to optimize technology and knowledge transfer, and to create local employment.

Private investment will then be promoted through a series of sectoral development programs, including investment packages and promotion events, for example targeting the entire minerals sector, or targeting a specific mineral.

Notes

[1] Strategic Planning for the Development of Natural & Mineral Resources Sector in Timor‑Leste, Industry, Mineral and Tourism Division, October 2001.

[2]  In the Joint Shared Petroleum Area (JSPA) a temporary arrangement has been established.

[3] If the oil well is proved to be productive, a power plant associated with the rehabilitation of the oil well could be installed to generate power with oil and gas produced from the well. Preliminary survey indicates the output from the oil well rehabilitation could support a power plant of 400 kW that would be sufficient to serve the surrounding community. See the draft SIP for the Power Sector for further discussion.

[4] Since the original well records and subsurface reservoir information are missing, the project would include relevant expertise for this work. From piecemeal information in UN reports, surface geology and interviews with local people, it may be possible to restore the geological model that led to the drilling of the well. This may have important implications for further exploration in the area.

[5] Such a program may qualify Timor‑Leste for significant cash payments from the Carbon Fund managed by the World Bank. See Chapter VI for more details.

[6] A power plant associated with the seep harvest at Aliambata could be installed to generate power with gas harvested from the site. Preliminary survey indicates the seep harvest could support a power plant of 300 kW. See the draft SIP for the Power Sector for more information.

The Timor-Leste Institute for Development Monitoring and Analysis (Lao 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
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