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Bounty versus Boundaries: The pursuit of equity and certainty over and down under the Timor Sea

By Jim Mellor for CIITT (Independent Information Center for the Timor Sea, East Timor)
August 2002

Click here to read complete paper (PDF, 79 pages)

Executive Summary

As of July 2002, a proposed new and permanent Timor Sea Treaty (TST) is still awaiting ratification by the governments of East Timor and Australia. The new agreement is largely based upon the terms and conditions of a previous and longstanding 1989 Timor Gap Treaty for joint commercial development between Australia and Indonesia. While the most visible change to the terms and conditions is an increase from 50 % to 90% of the net production sales royalties that East Timor will receive from the area as currently defined, other more subtle and complex modifications impact upon their shares to the far greater residual economic benefits that petroleum development creates.

Both the old and new agreements are ‘provisional arrangements of a practical nature’ as allowed by the United Nations Convention on the Law of the Sea (UNCLOS) in situations where two countries wish to pursue the commercial exploitation of seabed resources in contested areas where they have not yet reached final settlement on seabed boundaries.

The pending treaty documents signed on May 20, 2002 indicate that no progress has been made by the East Timorese to advance their enduring desire to delimit new maritime and seabed boundaries with Australia. The perimeters of the zone of joint cooperation described by both old and new treaties remain unchanged. East Timor has pursued finalisation of borders and boundaries with neighbour Australia that will cement their status as a freestanding independent nation, and deems that any fair allocation of the petroleum resources taken from the seabed of the Timor Sea should be the logical consequence of such an agreement rather than an issue to be independently negotiated.

In discussions and formal negotiations with Australia spanning 2˝ years, East Timor had therefore consistently sought a new and permanent Timor Sea agreement with Australia that would incorporate both objectives: final boundaries and a consequent protocol for joint commercial development. As the basis for determining their seabed boundaries, they have applied the widely accepted solution provided by the 1982 Law of the Sea convention, which strongly indicates that a notional median line of equidistance should divide the sea and seabed between East Timor and Australia. This solution has been regularly tested and validated over the years through arbitral tribunals and the International Court of Justice.

While ratification on the one hand will secure faster access to the primary source of available income that East Timor requires in order to become economically sustainable, the agreement appears likely to inhibit East Timor’s future efforts to settle boundaries. It will also leave the ownership of other large petroleum reserves in and around the area covered by the treaty unresolved and risks increasing contestation over any of the economic benefits that might result from their development.

The inability to fully resolve these differences between our two countries holds risks for both. The lack of a complete and confirmed national identity, the perception that a neighbour may be benefiting from some of the resources that the people of East Timor feel they own, and the inability to use those resources to move forward from the marginal existence the pending agreement will allow and advance human development and economic self-reliance could destabilise their tenuous foothold on democracy.

An unstable East Timor, as a close neighbour with whom our history is intertwined, could disrupt the already tenuous relationships in our region and threaten our own security, particularly if we are seen by our neighbours to be a precipitating cause. If East Timor is unstable or even becomes a failed state, Australia could face a flow and the associated costs of refugees and be expected by the Australian and international community to bear a greater responsibility for increased humanitarian aid and assistance and provide continued peacekeeping and civil security assistance.

Australians, already well endowed with natural, mineral and petroleum resource and wealth, may be seen as unnecessarily selfish and opportunistic by our regional neighbours and the international community as the reasonable nature and basis of East Timor’s position becomes more public. And the international recognition for the support that Australia has extended to East Timor since the end of 1999 could be eroded.

The converging commercial, economic, political, legal and circumstantial issues and interests between East Timor and Australia concerning the search for agreement on Timor Sea development and boundaries are by themselves complex. The confidential nature of bilateral negotiations between countries and the expectations of industry partners for commercial-in confidence make access to information for East Timorese and Australians more difficult and are obstacles to understanding.

The author has nonetheless sought to identify, review and analyse the multi-faceted issues and dynamics of the Timor Sea, and the negotiations, underlying history and relationships that have so far impeded progress towards the settlement of boundaries between East Timor and Australia, as the basis for making recommendations towards resolution. The paper therefore follows a chronological format based upon time periods during which defining issues emerged that cumulatively explain the status of negotiations today.

What conditions have impeded boundary settlement between East Timor and Australia?

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Commercial imperatives: Petroleum production was finally starting following over ten years of exploration and commercial development in the area of joint development at the same time that East Timor began the transition to independence. This has meant that Australia and East Timor have spent most of the last two 2˝ years responding to the pressing need to satisfy the requirements of oil companies holding Petroleum Sharing Contracts in the area and their need for legal, regulatory and fiscal certainty in order to protect billions of dollars worth of investment in development by their shareholders.

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The competing demands of nation building: East Timor has been slowly emerging from a period of extreme crisis following the ballot for independence in 1999, has only recently adopted a Constitution and the mechanisms of governance and still lacks a comprehensive legislative framework to provide a basis for dealing with the complex boundary and development issues at issue with Australia in the Timor Sea.

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Problems with interim agreements: The terms of the new agreement created additional commercial complications when first introduced in July 2001 and have the potential to reduce the benefits received by East Timor compared to Australia and as previously enjoyed by Indonesia. The attention required in response detracted significantly from consideration of boundary issues.

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Most importantly, lack of a willing partner: Australia has not yet demonstrated the same enthusiasm as East Timor for reaching a timely and final settlement of seabed and boundary issues. Without shared motivation and a common goal, the hallmark of any good faith negotiations, or a willingness to allow impartial arbitration in their absence, it will not be possible to find a resolution that both East Timorese and Australians can accept as durable.

What are the reasons for Australia’s apparent lack of enthusiasm for a boundary settlement?

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Australia is not subject to the same desire or need to establish its national identity.

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Australia is not beset by the same unstable circumstances as East Timor nor does it depend upon the petroleum from the Timor Sea as its only source of significant income. (See Appendix B)

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Australia has already secured and enjoys the benefits of the petroleum resources made available by the existing and proposed commercial treaty agreement. This includes not only those from within the area of joint development but also those that by definition fall immediately outside and into waters and seabed exclusively under the control of Australia, now contested by East Timor.

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Australia secured those rights and benefits under the circumstances of an earlier time, and under the UN conventions and laws that then existed but have now changed and evolved.

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Australia negotiated those rights and benefits with Indonesia in large part based upon the argument that their seabed extends to the edge of their continental shelf calculated to span almost 85% of the distance from its land mass to the coast of East and West Timor

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Australia’s continental shelf argument has never been objectively tested or validated outside of the constraints of closed bilateral negotiations where a range of other factors can influence outcomes.

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Objective testing of Australia’s continental shelf argument in a boundary settlement under current conventions and prevailing laws, whether by impartial international conciliation, arbitration or disputation, is more likely to favour East Timor’s median line of equidistance solution.

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Australia has argued that any change to a median seabed boundary with East Timor that differs from the compromise settlement they reached with Indonesia in 1972 based upon their continental shelf argument will provide Indonesia with a basis to re-open negotiation of their boundaries.

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Any change to the median boundary based upon and validated by current conventions and laws strengthens the legal basis and increases the likelihood that the lateral perimeters of the current development will change.

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Any change to the lateral boundaries is more likely to increase East Timor’s seabed area and decrease Australia’s in an area where far larger petroleum reserves and potential income exist.

How has Australia sought to protect its position?

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Australia has focused on forging a commercial development treaty that does not address any of the outstanding boundary issues.

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Although the commercial development treaty is ‘without prejudice’ as required under UNCLOS regarding the future delimitation of boundaries, the treaty extends for at least 30 years and provides no imperative, incentives, framework or mechanisms for advancing boundary settlement.

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Australia has supported a requirement by the oil companies that East Timor and Australia must come to an agreement on terms to unify the conditions of the largest of the known petroleum fields in the area, Greater Sunrise. The field straddles the eastern and most contentious boundary of the development area and 80% currently falls within Australian waters. Agreement is sought by year’s end and likely after Treaty ratification despite that fact that project developers do not have markets established, are divided over production options and will not produce oil until at least 2006/7. Together with a ratified treaty, agreement on unitisation is a disincentive to boundary settlement and may diminish East Timor’s ability to recover revenues in the unlikely case that a settlement on delimited boundaries is reached with Australia in future.

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The treaty fails to take into account the variance between East Timor’s and Australia’s boundary claims by providing a trust or escrow mechanism into which funds derived from development in contested areas can be placed until boundaries are ultimately determined.

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There is some precedent to indicate that international tribunals or the International Court of Justice will decline to rule on changes to boundaries that are already reached by agreement in commercial development treaties.

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Australia has taken steps to foreclose certain options for compulsory dispute settlement by arbitral tribunals and the ICJ that would otherwise be afforded to East Timor under UNCLOS.

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Australia continues to prepare a submission to the UN Commission on the Limits of the Continental Shelf by the end of 2004 that seeks to reinforce its continental shelf argument and claims to the resources held within the seabed, thereby extending its Maritime Jurisdiction from 11 to 16.5 million sq. kilometres.

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In an apparent trade-off for an increase in East Timor’s share of net royalties, Australia has negotiated modifications to the 1989 Treaty that diminish guarantees for East Timorese participation in the far more lucrative upstream and downstream economic benefits from petroleum development when compared to those enjoyed by Indonesia.

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Under the same basis, Australia has negotiated new terms absent of previous guarantees that diminish East Timor’s entitlement to training and employment related to development.

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Australia has also not assured the inclusion of any mechanism within the agreements themselves that would obligate a progressive building of East Timor’s capacity to participate and gain an increasing share of employment and development benefits. Under terms with Indonesia, these were equally shared relative to the 50:50 division of revenues.

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When the taxation and fiscal terms of the July 2001 framework arrangement that forms the basis for the current Treaty were rejected by the operator of the Bayu Undan fields, ready to being production after spending well over A$ 2 billion on preparations, Australia and East Timor both participated in direct negotiations with them to resolve the problems. East Timor agreed to conditions in December that Australia has not yet accepted, linking it to all other JPDA projects.

The report therefore finds and recommends that Australia:

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Recognise first and foremost that for East Timor the settling of boundaries with Australia holds far greater significance than solely the allocation of petroleum resources and revenues or advancing a boundary claim simply to improve their negotiating position.

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Recognise the imbalance in the conditions and circumstances between East Timor and Australia that make it difficult for both countries to negotiate on equal footing.

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Recognise that East Timor must also negotiate boundaries with Indonesia that will inevitably involve or impact upon Australia and their current agreements with Indonesia, and therefore provide a basis for their possible re-negotiation. Accept therefore that boundary adjustment with Indonesia is not a justification to avoid settlement with East Timor.

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Recognise that the current tax and fiscal scheme agreement between East Timor and Phillips Petroleum remains a further obstacle to and distraction from negotiations to settle boundaries. If Australia is unwilling to endorse the agreement as it currently stands, the ratification and unitisation agreement process should be suspended until a new agreement can be negotiated that is acceptable to all parties.

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Recognise that withholding East Timor’s future funds in escrow at a time when desperately needed and while Australia continues to realise substantial income for contested areas around the JPDA, places undue pressure on East Timor during negotiations. Acknowledge this inequity by releasing escrow funds to East Timor. Likewise encourage Phillips Petroleum to release their upfront contribution to Bayu-Undan if they have not already done so.

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Recognise that the Bayu-Undan agreement between Phillips and East Timor was reached under the terms of the July 5, 2001 MOU-TSA that enabled them to stand apart from all other projects. Break therefore the subsequent link that Australia established between Bayu-Undan and all other current Timor Sea developments and remove the requirement that all conditions must first be satisfied.

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Recognise that the entry into force of the current agreement may inhibit future boundary settlement and does not provide East Timor with adequate guarantees for participation in all aspects of petroleum development. Suspend ratification until such time as the terms and conditions of the current Treaty or a supplemental agreement can be amended or drafted to provide:
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a clear framework with agreed guidelines for prioritising the final settlement of ocean and seabed boundaries using all available avenues as a shared goal for both countries

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a definitive timeframe not to exceed five years in which boundaries will either be settled by negotiation or referred to impartial international arbitration

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an escrow or trust into which revenues generated from areas where boundary claims overlap are withheld from each country until such time as there is final settlement

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guarantees for East Timorese levels of participation in all aspects of petroleum development beyond revenues earned from taxation and production royalties

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a progressive and benchmarked system for increasing the skill capacity of and employment opportunities for East Timorese over the life span of the agreement

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an accompanying method for granting financial compensation or compensation-in-kind to East Timor in lieu of the capacity to attain the guaranteed levels of participation and to be graduated in accordance with the reaching of established benchmarks.

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Recognise that, while Australia engages in a national debate about access to Timor Gas for domestic markets and to advance Australia’s economic, social and industrial health, East Timor has similar or greater needs and the TST makes no provision to address them. Amend therefore the TST to incorporate terms that facilitate East Timor’s direct access to and use of their Timor Sea gas as they see fit, or otherwise provide compensation-in-kind.

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Recognise that agreement on unitisation of the Greater Sunrise field directly impacts upon future boundary settlement and resource allocation and could prevent East Timor from recovering or enjoying their due and proportional entitlements and benefits. Incorporate therefore within the unitisation agreement amended terms reached by an amended treaty or supplemental agreement.

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Recognise that the Greater Sunrise project is in the early design development stage, does not yet have an agreement on development plans between industry partners, has not yet secured any sales commitments or letters of intent from potential customers and that there is no indication that the project or the cost of the gas generated will be competitive and commercially viable. Suspend therefore the current December 31, 2002 deadline to reach agreement until all other obstacles have been sufficiently addressed to warrant consideration and after the treaty agreement is amended.

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Recognise that Australia’s withdrawal in March from the compulsory dispute resolutions afforded under the provisions of UNCLOS have severely limited East Timor’s options to achieve a timely settlement of boundary issues and are increasingly seen as a provocative action that is not justified under the conditions of imbalance that exist between East Timor and Australia. Reinstate therefore adherence to all of the four choices of procedure available for resolution of disputes as afforded by UNCLOS.

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Recognise that acceptance of all of these recommendations does not necessarily guarantee a timely resolution of boundaries with East Timor. Offer East Timor therefore a commitment to submit within a year the boundary claims of both countries to Conciliation as provided under UNCLOS, Part XV, Article 284, for analysis and non-binding recommendations as to the appropriate solution under prevailing provisions of UNCLOS and relevant precedents established under common international law. Subsequently use the analysis and recommendations to further bilateral negotiations.

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Recognise that Australia’s submission regarding its continental shelf claim to UNCLOS by the end of 2004 will further delay progress on boundary settlement with East Timor. Agreed, therefore, to excise the areas below East Timor and the adjoining areas of current boundaries with Indonesia if an agreement in principle on final boundaries has not yet been reached with East Timor, and

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Recognise that Article 83 of the United Nations Law of the Sea calls on countries involved with negotiations not to act in a way that jeopardises or hampers final delimitation of seabed boundaries.

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua D. Alberto Ricardo, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
email: 
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