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The La’o Hamutuk Bulletin  Vol. 8, No. 1: March 2007

English PDF Format | Bahasa Indonesia PDF Format

Table of contents:

Timor-Leste's Petroleum Fund

Link to Petroleum Fund index page

Technical terms in this article are defined in a glossary and are underlined in green the first few times they are used. Most will work as hyperlinks.


 

 

La’o Hamutuk’s João Sarmento tried to visit the bank in New York where Timor-Leste’s Petroleum Fund is deposited, but he was not allowed inside.

Many Third World countries rich in petroleum resources face numerous economic, social, political and security problems. Although their people hope that petroleum development will bring economic miracles, it often brings misery. This is sometimes called the "Paradox of Plenty" or the "Resource Curse."

In 2005, Timor-Leste’s government established a Petroleum Fund to try to keep Timor-Leste from following this path toward disaster. This Act prioritizes sustainable management of Timor-Leste’s petroleum income to benefit both current and future generations, a perspective essential to avoiding the "resource curse." La’o Hamutuk believes that the Petroleum Fund is a positive step toward creating a strong foundation for our nation. The Petroleum Fund Act defines the relationships and responsibilities of public institutions including the Government, Parliament, Central Bank (BPA) and Consultative Council, and implements measures for transparency, oversight and accountability. These will help reduce the risk of our petroleum wealth becoming a curse.

However, the Petroleum Fund Act alone cannot solve the whole problem. There are many causes of the "resource curse" (see La’o Hamutuk Bulletins Vol. 6 No. 4 and Vol. 5, No. 3-4), and the Petroleum Fund only deals with some of them. It will take more than this to put our impoverished, oil-rich nation on the road to prosperity.

During the Petroleum Fund’s first year of operation, some positive things have been done, although not everything has been implemented perfectly. This article will discuss the structure and mechanisms of the Fund, how it has operated up to now, and some of the problems in its design. We will explore how the Fund will help Timor-Leste avoid the resource curse, and suggest some improvements and additional measures which could be taken.

The problem

The resource curse results from many factors: greed, corruption and cronyism in the national government and international oil companies, the desires of powerful countries to control the oil supply to facilitate the flow of oil from Third World countries to advanced industrial countries, weak state institutions and limited transparency and accountability within the government. To compound the problem, worldwide selling prices for oil and gas fluctuate wildly, which means that oil revenues vary from year to year and are impossible to predict.

 

Figure 1: Worldwide oil price variations (WTI)

 
 

Source: http://www.economagic.com
Monthly NSA price of West Texas Intermediate Crude

The natural tendency of most governments (and most people) is to spend all available money. This means spending oil revenues each year as they come in, so that the government has a balanced budget, without a surplus. Income from selling petroleum reserves (sometimes called "rent") comes so easily that policy-makers often neglect more difficult economic development and revenue sources from other sectors.

Furthermore, petroleum is a non-renewable resource. Timor-Leste’s oil and gas will be used up in one or two generations, and if other parts of our economy have not developed, including human and physical infrastructure, we could be worse off than we are today. The country’s self-sufficiency will have been reduced, with less agricultural capability and economic development, but a greater need for imported goods. Today’s government must develop sectors in addition to oil and gas to reduce our dependence on oil revenues and prepare for the future.

Timor-Leste is a young, impoverished country, and our limited economic development thus far has relied on aid from donor countries. For the next few decades, revenue from petroleum will be the Government’s primary source of funds, providing about 95% of Timor-Leste’s government revenues. Although the petroleum income could make it easier to finance government programs, the experiences of other countries suggest that Timor-Leste must be very careful.

Timor-Leste’s domestic security is threatened by soaring unemployment, but oil extraction creates almost no jobs for local people. We need to use oil revenues to fund programs to put people to work, stimulating economic activity which will enhance people’s lives not only in Dili but also in rural areas where most people live.

This is particularly problematic given the social and economic reality in Timor-Leste, where economic activity outside the oil and gas sector is extremely low. Unemployment in Dili, a cause of the current crisis, is about 40%. Our population grows at more than 3% every year, and the Census projects it to double in 25 years. This is important because government expenses – health, education, internal security, etc. – must increase in proportion to the population to provide the same level of services.

Furthermore, Timor-Leste has several limitations related to management of petroleum projects and revenues. Our state institutions are small and powerless in comparison with international oil companies and global economic forces. After centuries of Portuguese neglect and Indonesian corruption and occupation, our people have limited experience with public access to information and the rule of law.

Timor-Leste’s recent crisis demonstrates how difficult it is for both our people and our leaders to make the transition from resistance against a repressive foreign occupation to participation in an independent democracy which serves the people’s interests. During the Indonesian period, it was patriotic for civil servants to steal from or subvert the occupation government in order to support the resistance. Corruption and abuse of power was pervasive, with no consistent application of the rule of law. A Timorese person had no rights and no voice in government policies, which were decided by autocratic Indonesian generals.

Today, government officials and civil servants often lack experience or knowledge about transparency and accountability, which are essential to prevent corruption and abuse of power. We cannot rely on the good intentions of our leaders, but must have legal checks and balances, as well as transparency, so that civil society can ensure that the government serves the interests of the people.

Although world oil prices are currently high, they fluctuate unpredictably over a very wide range, having tripled in the first four years of Timor-Leste’s independence, and then fallen 30% over the last six months. Although they will probably increase over decades, they could drop significantly for periods lasting several years. This makes it impossible to predict what Timor-Leste’s oil revenues will be even one year from now.

 

Figure 2: Predictions of annual petroleum revenue
for Timor-Leste

 
 

Sources: RDTL Background Paper (mid-year budget update) for December 2003 Development Partners meeting; RDTL Budget 2006-7

Timor-Leste’s own planning process demonstrates this problem. In November 2003, the Government projected that petroleum revenues in 2004-5 would be $25 million, rising to $34 million in 2005-6 and $58 million in 2006-7.

Today we know that petroleum revenues in 2004-05 were $243 million, 10 times the projection made less than two years before. In 2005-6 they were $403 million (12 times the projection). In July 2006, the Government projected that they will be $643 million for 2006-7 and about $900 million during each of the next three years (see graph). Every month, Timor-Leste’s Government receives more petroleum money than had been expected for this entire year just three years ago.

Although this windfall will help Timor-Leste during its current crisis, our planners and our citizens must not expect it to continue indefinitely. Around the world, countries often overspend when oil revenues are high, and have to borrow to continue government programs when oil prices drop. A Petroleum Fund can help us avoid this trap.

Since 1999, many foreign countries and international institutions advised Timor-Leste on how to manage oil and gas revenues. Although this advice is often helpful, much of it seems motivated by the desire of oil-consuming countries (Timor-Leste’s customers in rich, industrialized nations like Japan, Europe and North America) to ensure stability for their supplies of oil and gas. These supplies are endangered when an oil-exporting country (such as Iraq or Nigeria) collapses into conflict or if their government or citizens become so frustrated at not receiving a fair share of oil benefits that they take their anger out on oil projects.

Timor-Leste’s people will also benefit if our country avoids these problems, but we should remember that our primary purpose for exporting oil and gas is to benefit our own citizens. Therefore, we must analyze and adapt advice from the World Bank and other rich-country-directed organizations to ensure that it meets Timor-Leste’s needs.

Petroleum for Timor-Leste’s economy

Timor-Leste has large petroleum reserves, but our oil and gas production relative to our population is only about one-eighth as much as Norway, Kuwait or Brunei Darussalam. Timor-Leste’s oil and gas are finite and will be depleted during the lifetimes of many people alive today.

Beginning in 2008 and for the next few decades, Timor-Leste will be one of the most petroleum-dependent countries in the world. Based on Government and IMF figures, La’o Hamutuk calculates that 89% of our total economy (Gross Domestic Product or GDP) and 94% of Government revenue will come from oil and gas exports (see La’o Hamutuk Bulletin, Vol. 6 No. 4, November 2005).

With soaring oil prices, Timor-Leste’s Government currently receives more than US$80 million every month in revenues from the Bayu-Undan oil and gas field in the Timor Sea. If the Greater Sunrise field is developed, Timor-Leste will receive even more income starting in 5-10 years, although Australia will take more than its legal share. (See La’o Hamutuk Bulletin, Vol. 7, No. 1, April 2006). Although Bayu-Undan revenues will end around 2025, Greater Sunrise production could last until 2050.

Third World countries which depend on non-renewable resources like oil and gas almost always experience disaster, including poverty, militarism, economic polarization, corruption, environmental destruction and unemployment. This should be a warning to the Government and people of Timor-Leste. A number of measures need to be taken, and the creation of a Petroleum Fund can reduce some of these dangers. The Government of Timor-Leste is learning from others’ experiences, but the lessons are difficult and complicated.

Timor-Leste’s Petroleum Fund?

A Petroleum Fund is a mechanism for making petroleum income more consistent and predictable from year to year, and for saving some of the revenue from petroleum for the time when all Timor-Leste’s oil and gas has been extracted. At that time, interest from investing the Petroleum Fund can continue to pay for Government operations. On the one hand, this is good for financial survival, but on the other hand, this will prolong the period of Timor-Leste’s dependence on oil income, which facilitates neglecting other sectors of our economy.

In principle, Timor-Leste’s Petroleum Fund Act implements Article 139 of the RDTL Constitution, which says that natural resources are owned by the state and are to be used in the national interest, including the establishment of financial reserves. This Act is based on several principles, including wise management for the benefit of both current and future generations, and sound fiscal policy.

All revenues from petroleum development, including royalties (FTP) and taxes, are deposited directly into the Petroleum Fund account as they are received. The Fund is invested in low-risk securities abroad, and all interest received is redeposited into the Petroleum Fund.

 

Figure 3: Annual Petroleum Revenue and Estimated Sustainable Income

 
 

Source: Adapted from Tables 4.2, 5.1 and other information in RDTL Government Budget, 2006-7.

Each year, the Parliament will transfer (withdraw) money from the Petroleum Fund to fill any shortfall in the Government budget, making up the difference between expected Government expenses and revenue from other sources. For the Fund to continue into the future, the amount withdrawn each year should be less than the Estimated Sustainable Income (ESI) which is calculated as the amount which could be taken out each year without depleting the long-term balance of the Fund. For the current fiscal year (2006-7), the Government has estimated the sustainable income at $283.3 million, more than the $259.7 million budgeted to be withdrawn from the Fund.

This graph shows projected revenues from the Bayu-Undan field (dashed line) and ESI (solid line) for the next twenty years. These are approximate estimates, since nobody knows what global oil prices or global interest rates will be in the future. However, we can see that even though petroleum revenues end by 2025, the Fund will continue to yield a sustainable income of more than $300 million per year.

On the advice of the World Bank and the IMF, the Government established a petroleum savings policy, even before the Petroleum Fund was designed. Public consultation on the Petroleum Fund concept and proposed law began in October 2004, and Parliament passed the act on 20 June 2005. It was soon promulgated by the President, and the Fund began operating in September.

Timor-Leste’s Petroleum Fund is modeled on the success of Norway in managing its own petroleum revenues, although Timor-Leste and Norway have great social, economic, political and historical differences (see table). Since the Timor-Leste Petroleum Fund Act has additional provisions for transparency and accountability, the Timor-Leste Government refers to it as "Norway Plus." However, Timor-Leste’s fund lacks some of the best features of Norway’s, such as requirements that the fund be invested ethically (avoiding socially harmful investments) and having a specific legislative process for spending money from the Fund..

Former Prime Minister Mari Alkatiri, who led the creation of the Petroleum Fund, called its enactment an extremely important step for the future of the nation: "Good management of the revenue from petroleum is very important in order to ensure sustainable economic growth, the reduction of poverty and political stability in the future for the people of Timor-Leste. This policy will make it easier for us to use these funds responsibly as well as to save for the future."

The World Bank also views the creation of the Petroleum Fund as a success of the Government of Timor-Leste, and is optimistic that revenue from oil and gas will not be wasted and will continue to provide a guarantee for future generations.

The Petroleum Fund Act defines the management and roles of various actors, including the Government, Parliament, auditing agency, Investment Advisory Board and Central Bank (Banking and Payments Authority). This Act also provides for mechanisms for transparency and accountability, such as a way that people outside government can participate via the Petroleum Fund Consultative Council.

The Petroleum Fund Consultative Council (PFCC) provides oversight by the people of Timor-Leste about how the money is used. Before Parliament can approve Government plans to withdraw money from the Petroleum Fund, it must seek advice from the PFCC. This Council includes representatives from various sectors of our society. Civil society elected its two representatives in February 2006 — Thomas Freitas from Luta Hamutuk and Maria Dias from Rede Feto. In August 2006, Parliament chose Antero Benedito da Silva and Nuno Rodrigues as their representatives, and others on the Council include Francisco Monteiro (nominated by President of the Republic Xanana Gusmão), Aurelio Guterres, (nominated by President of Parliament Lu-Olo), Oscar Lima (nominated by the business sector), and Reverend Francisco Vasconcelos (nominated by religious institutions). Mari Alkatiri serves on the Council in his capacity as a former Prime Minister.

Although the Council should have begun operating in March 2006, many of the appointments were late, delaying the start until November. As a result, the Council could not provide the legally-required advice in August, when Parliament approved the state budget for the current fiscal year 2006-2007.

Another important aspect of the Petroleum Fund Act is defining how the money will be invested and who is responsible to manage it. The Government is required to manage the Petroleum Fund prudently, based on principles of good governance and for the benefit of both current and future generations.

The Government is responsible for all aspects of management, carried out by the Ministry of Planning and Finance (MoPF). In July 2005, this Ministry signed a management agreement with the Banking and Payments Authority (BPA) giving the BPA responsibility for operational management of the Fund.

Before setting investment policies, the Finance Ministry must request input from the Investment Advisory Board (IAB). This board includes the Treasury Director (Manuel Monteiro), the BPA Head (Abraão Vasconselos), two investment experts appointed by the Finance Minister (Sigurd Klakeg, BPA Fiscal and Petroleum Fund Advisor, and Tørres Trovik, Norwegian Petroleum Directorate) and one other Ministerial appointee (Cristino Gusmão, MoPF Director of Macroeconomics).

The management agreement authorizes the BPA to manage the Fund and to make arrangements for investments under guidelines and policies established by the Ministry of Planning and Finance. The BPA has to submit a report on the Petroleum Fund every three months. The report goes to the Minister within 20 days of the end of the quarter, and is published within 20 days after that.

For now, the Government of Timor-Leste has adopted an investment strategy of investing all Petroleum Fund money in United States government securities, through the Federal Reserve Bank of New York. This means that Timor-Leste does not have to deal with currency exchange rates or enter into competitive international financial markets. We accept a lower rate of return to avoid risky investments. As the BPA acknowledges, international financial markets are very complex and Timor-Leste does not yet have the human resources to understand them, so we should wait before diversifying how the Fund is invested.

Every year, the Government must provide Parliament with an annual report concerning the Petroleum Fund. This includes the results of the financial audit, receipts and withdrawals, the balance sheet, the development and activities of the Petroleum Fund and the advice of the Investment Advisory Board. As of this writing, this report has not been published.

Petroleum receipts and the government budget

The people of Timor-Leste hope that revenue from Timor Sea oil will be used wisely for national development, helping to eradicate poverty. Although we have already received a thousand million dollars from this sector, it has had little real impact on development. Nearly all the money has been invested in the United States, and very little has been spent to support Timor-Leste. In Fiscal Year 2005-6, the Government spent $84.6 million of petroleum revenues, and it plans to spend $260 million from the Petroleum Fund this year, but during the first half of this fiscal year (July–December 2006), no money was transferred from the Petroleum Fund.

Figure 5 shows the total balance of the Petroleum Fund at the end of each quarter through 2006, when it contained just over one billion U.S. dollars ($1,011,763,807). Revenues increased significantly starting in December 2006, after the Bayu-Undan project had paid back the oil companies’ investment in the project and began paying "profit oil" taxes.

Figure 5: Balance in the Petroleum Fund

 

Figure 6: Quarterly income to the Petroleum Fund

 

Source: Petroleum Fund Quarterly Reports from the BPA.

 

Source: Petroleum Fund Quarterly Reports from the BPA.

 

Figure 6 illustrates where the revenue deposited into the Petroleum Fund during each quarter comes from. Most of the revenue comes from taxes paid by petroleum companies to the Timor-Leste Government, while some is from royalties paid to the Timor Sea Designated Authority (TSDA), 90% of which go to Timor-Leste. Investment earnings are an increasing part of the Fund’s income.
  

Figure 7: 2006-7 RDTL Combined Sources Budget
($452 million total)

 
 

Source: RDTL Government Budget, 2006-7

Donor support for Timor-Leste is declining, although it increased somewhat in 2006-7 because of the current crisis. This year donations will total $146 million (most of which goes for projects run by agencies from the donor countries), and it is expected to drop off sharply over the next few years. Since Timor-Leste’s non-oil economy is not yet well-developed, domestic taxes provide only $39 million, so that revenues transferred from the Petroleum Fund are the primary source of income ($260 million of the $452 million Combined Sources Budget).

If we compare the current year with last year and plans for the next three, we can see that the budget has almost doubled, with the increase being funded by a transfer from the Petroleum Fund. However, since the Estimated Sustainable Income for this year is $283 million, even this large transfer is allowed under the Petroleum Fund Act.

Independent of the Petroleum Fund, the Government has problems with budget execution, and has been unable to spend much of the money approved to implement its programs, and the population at large does not receive planned services. This problem will get harder as revenues and budget grow.

Before Timor-Leste had a Petroleum Fund, the Government spent tax revenue from petroleum directly, although some was saved in a "Timor Gap Account" established for this purpose in 2001. This account received FTP (royalty) receipts from Elang-Kakatua and Bayu Undan, accumulating $205 million which was transferred into the new Petroleum Fund in September 2005, and the Timor Gap Account was closed. Between 2002 and 2005, the Government spent $247 million in petroleum income, plus $85 million in fiscal year 2005-6 which did not go through the fund.

The Government’s savings policy, written into the Petroleum Fund Act, is to limit annual expenditures of petroleum money to no more than the Estimated Sustainable Income (ESI). Each year, the ESI is estimated at 3% of the value of the Petroleum Fund plus future revenues which will come from selling oil and gas from fields which already have an approved development plan. This derives from considering the nation’s "petroleum wealth" as including both dollars in the Fund and oil and gas still in the ground. In this view, extracting and selling the oil (and collecting oil revenues) is a process of converting Timor-Leste’s assets from one form to another, rather than the creation of new wealth.

However, Timor-Leste’s population (and the need for government services) is currently growing at 3.2% per year, and the available money per capita will drop by half in 25 years. In 2050, when Greater Sunrise and Bayu-Undan have all been extracted, the sustainable income from the Petroleum Fund for each of Timor-Leste’s three million citizens will be less than it is today, even though today’s ESI calculation does not include Greater Sunrise (because it does not yet have a development plan). By 2100, it is projected to be half of its 2050 level.

Under the Petroleum Fund Act, Parliament must approve the amount transferred by the Government from the Petroleum Fund each year, as part of the national budget. Before this approval is given, Government must provide Parliament with a report calculating the ESI for the previous and current year, verified by an independent auditor. Parliament must consult with the Petroleum Fund Consultative Council. If the transfer recommended is larger than the ESI, the Government must provide a detailed justification.

 

Figure 9: Where the Combined Sources Budget revenue comes from

 
 

Source: RDTL Government Budget, 2006-7

For this fiscal year, which started in July 2006, the new Government headed by José Ramos-Horta increased the budget to carry out crisis recovery programs. The total budget (excluding $136 million in donor-managed projects) is $316 million, of which $260 million will be transferred from the Petroleum Fund (see Figures 7 and 8).

Although this is the first year the Petroleum Fund Act has been in effect, the budget approval process has already violated the procedures in the Act. This is a result of the ongoing crises in Timor-Leste and Dili, because the Petroleum Fund Consultative Council was not yet functioning, and because the Government failed to provide Parliament with audited estimates of the sustainable income.

Partial Transparency

Transparency and accountability are essential to democracy. Transparency includes the right of citizens to obtain information about the Petroleum Fund and other petroleum activities. In managing revenue from petroleum, transparency and accountability are key because the large amounts of money invite misuse that could deprive Timor-Leste’s people of their money, so that it benefits only local elites and international oil companies. The Petroleum Fund Act moves our nation toward accountability and transparency in managing our oil revenues.

This problem is recognized internationally. Over the last few years, global civil society has initiated the Publish What You Pay (PWYP) campaign to demand that oil companies make public the payments they make to governments. At the same time, the British government and the World Bank began the Extractive Industries Transparency Initiative (EITI), which says governments should publish what they receive from the companies and require the companies to do the same. Prime Minister Mari Alkatiri addressed EITI conferences in Europe in 2003 and 2005, and La’o Hamutuk sent representatives to these conferences in 2005 and 2006.

Although Dr. Alkatiri and Petroleum Minister José Teixeira have repeatedly expressed the Government’s support for EITI principles, these principles have not been incorporated into the Petroleum Fund Act or any other RDTL law. Neither the Government nor the oil companies are required to publish the date, amount and reason for each payment, and the Petroleum Fund reports from the BPA only list each quarter’s total "taxpayer receipts."

In Timor-Leste, civil society has worked hard to monitor and advocate for transparency and to prevent the misuse of these funds. Nevertheless, so far the public in Timor-Leste has only received information from one source, the Government, as the oil companies are not required to make this information public and decline to do so voluntarily. Even worse, the Government’s new model Production Sharing Contract makes it illegal for companies to release such information without asking the Government’s permission. Section 15.2(e) of the contracts just signed with Eni and Reliance says that "Except with the consent of the Ministry, or as required by law or the rules of a recognised stock exchange, a Contractor may not sell or disclose any such data, information and records."

Separate reporting from two sources is critical, so that they can be checked against each other. As we have suggested before and as EITI recommends, Timor-Leste should require oil companies operating in our territory to publish how much they pay in taxes, royalties and other fees to the government. The government needs to implement its promise to EITI with legal requirements, following the process that EITI has developed.

The BPA has already published six Petroleum Fund quarterly reports in Tetum, Portuguese and English. This is an important part of transparency, although these reports contain the minimum information required by law and do not spell out the payers or details of petroleum revenue. So far the Government has not produced any annual reports or audit reports for the Petroleum Fund, even though it is been in operation for more than a year and the Petroleum Fund Consultative Council has requested this information.

Both Government and civil society need to continue and expand public education about petroleum revenues across the entire country, especially to the rural population. So far, most information is limited to Dili, and people in the districts do not have access to accurate information about the Petroleum Fund. This gives rise to some suspicions about where the money is going.

In summary, the Petroleum Fund is an important and visionary step towards helping Timor-Leste avoid the resource curse and protecting our petroleum birthright for future generations. But it is only one of many necessary steps, and it needs continuing close attention both from those responsible for managing it and from all the Timorese people.

Glossary

Audit: An examination of financial records or analysis carried out by an expert (auditor) who is independent of the people who prepared the records. The Auditor certifies that the records are accurate, and reports on any inconsistencies or differences from accepted accounting practices. Audits can be internal (done by the agency which prepared the records) or external (done by someone from outside the agency). Audit reports are often made public.

Banking and Payments Authority (BPA): The Central Bank of Timor-Leste, a semi-independent government agency which is responsible for managing Government assets and regulating the banking sector. The BPA also manages investments and operations of the Petroleum Fund, reporting on its activities.

Estimated Sustainable Income (ESI): A projection of the maximum amount of money can be withdrawn from the Petroleum Fund each year for the indefinite future (that is, sustainably). The ESI is calculated by adding the total value of the Petroleum Fund and the petroleum reserves still in the ground (only those with an approved development plan are counted) and estimating how much interest will be earned by investing that amount.

Federal Reserve Bank of New York: Part of the Federal Reserve system which serves as the central bank of the United States. The Timor-Leste Petroleum Fund is deposited in this bank, which is the equivalent of lending the money to the United States Government.

Fiscal Year: A twelve-month period used for budgeting and financial management purposes, which may or may not be the same as the calendar year. Timor-Leste’s fiscal year currently runs from 1 July to 30 June.

Government bond: A type of investment which involves lending money to a government. Bonds can be short or long term, and can return fixed interest rates or fluctuate over time in response to market forces.

Investment: Financial investment is lending money to a government or company (such as by depositing in a bank or purchasing a stock or bond), in order to receive a return on investment (interest or dividends). For some investments, the value of the principal (the amount invested) may also increase or decrease over time. It is also possible to invest in the human or physical capital of a country, such as through education, preventive health care or infrastructure, but the Timor-Leste Petroleum Fund is restricted to financial investments.

Investment Advisory Board (IAB): Advises the Ministry of Planning and Finance regarding investment policies for the Petroleum Fund money.

Non-Renewable Resource: A natural resource, such as petroleum, which is not replaced as it is used and will eventually run out. This is different from a renewable resource, such as water or fish, which can replenish itself.

Petroleum: Liquid or gaseous hydrocarbons found in the ground. For this article, we use the words "oil" and "petroleum" to include crude oil, natural gas, condensate and other marketable substances which are found with them.

Petroleum Fund Account: An account in the Federal Reserve Bank of New York that was opened on 9 September 2005 with a transfer from the Timor Gap Account. Oil companies and others responsible for making payments into the Petroleum Fund make deposits directly into this account.

Petroleum Fund Act: The law regulating how the Government manages petroleum-related income using the Petroleum Fund.

Petroleum Fund Consultative Council (PFCC): An advisory body which includes former Government leaders and representatives of various sectors of society. It provides advice to the Parliament concerning the Petroleum Fund before Parliament makes any decisions about withdrawing money from the Fund.

Principal: An amount of money used for investment, on which interest is paid.

Timor Sea Designated Authority (TSDA): A bi-national Australia/Timor-Leste government agency established by the 2002 Timor Sea Treaty to regulate petroleum projects within the Joint Petroleum Development Area (JPDA) of the Timor Sea, including the Bayu-Undan oil and gas field (in production since 2004), part of the larger Greater Sunrise field (which could begin production in about five years), and the smaller Elang-Kakatua oil field (in production since 1998, almost depleted). The TSDA is two-thirds controlled by Timor-Leste and acts like a government for purposes of contracting with and managing oil company operations in the JPDA.

Timor-Leste and Norway Petroleum Funds

Timor-Leste officials and the World Bank claim that our Petroleum Fund is one of the best one in the world, based on the Norwegian model. They call it "Norway Plus." This table summarizes some of the similarities and differences between the Timor-Leste and Norway Petroleum Funds.

 

Timor-Leste’s Petroleum Fund

Norway’s “Government Pension Fund” (formerly the “Government Petroleum Fund”)

Transparency

Timor-Leste requires the Central Bank to report on the Petroleum Fund operation every quarter, plus an annual report to the Ministry of Finance and to the public. Timor-Leste obliges the Finance Ministry to publish the audit report.

Norway publishes audited quarterly and annual reports of the Petroleum Fund, prepared by Norges Bank and “certified by Central Bank Audit.”

Deposits

All petroleum revenues to the Government are deposited directly into the Petroleum Fund by the petroleum companies and the TSDA.

Some revenues are deposited directly to the Fund, but most are paid into a government account, with the surplus after filling the budget deficit transferred from the government to the Fund.

Ethical Guidelines for investment

Timor-Leste doesn’t have Ethical Guidelines. To date, all fund money has been invested in the Federal Reserve Bank of the United States.

Ethical Guidelines prohibit investing fund money in companies that produce nuclear weapons, landmines, or anti-personnel weapons, or which contribute to gross violations of human rights or environmental damage. The Guidelines barred the Fund from investing in an oil company operating in illegally occupied Western Sahara, although it still invests in companies operating in Burma. A Council on Ethics advises the Ministry of Finance on investments to avoid for ethical reasons.

Petroleum Fund Consultative Council

The Petroleum Fund Consultative Council advises Parliament about transfers from the Fund. The Council includes eminent persons and representatives of different sectors of society.

Norway has no Consultative Council although the Norwegian Parliament is more responsive to citizens than Timor-Leste’s, so there are many ways for people, including eminent persons, to give input into how the fund money is spent.

Investment Advisory Board

The Investment Advisory Board advises the Ministry of Finance in designing the investment strategy.

The Investment Strategy Council is similar to the IAB.

Decision to withdraw money

Timor-Leste does not require a specific resolution of Parliament to withdraw money from the Fund. The withdrawal is approved automatically when the Government budget is passed.

Parliament must pass a specific resolution for each withdrawal  from the Petroleum Fund. However, some oil revenues are deposited directly into a government account and may be spent before the surplus is transferred into the fund.

Amount to be withdrawn

Timor-Leste transfers money from its Petroleum Fund to the government budget each year to meet the deficit between planned expenditures and non-oil income. If this amount is greater than the Estimated Sustainable Income of the Petroleum Fund, additional information and procedures must be followed. The ESI is based on the expected investment income (3%) on the combined total of the fund balance and petroleum reserves under contract but not yet extracted.

Norway also uses money from its Fund to fill the annual government budget deficit. Budget Policy Guidelines require that no more than the expected real return (4%) of the Fund’s investment should be spent in a given year. This is lower than Timor-Leste’s ESI, but would not work for Timor-Leste today because Norway’s fund has had much more time to accumulate principal.

Rationale for fund

Timor-Leste’s Petroleum Fund allows the money earned from selling oil and gas to finance government services for current and future generations, yielding the same amount of money every year even after the petroleum is exhausted. Timor-Leste’s population is young and growing rapidly.

Like Timor-Leste, Norway is receiving revenue from petroleum faster that it can be usefully spent. However, Norway’s population is stable and aging. The government intends to use the fund to pay retirement pensions for older people as they leave the work force, an expense which is expected to triple over the next 35 years as petroleum production declines. Norway’s slow rate of population growth and long life expectancy means that fewer workers will be paying into the pension fund to cover the increased number of retirees.

History

Timor-Leste started its petroleum development when the country had just restored its independence, the public institutions and officials are inexperienced, democracy is fragile, rule of law is weak and non-oil economic development is very limited. This will cause Timor-Leste to depend on petroleum for most of our economy and over 90% of our government budget as donations decline.

Norway started its petroleum development after decades of peaceful, democratic rule and with a well-developed, diversified economy and strong state institutions. Norway’s petroleum revenues, although much larger than Timor-Leste’s, pay for less than 10% of the government budget.

Comparison of Timor-Leste and Norway
(currency amounts in U.S. dollars)

 

Timor-Leste

Norway

Current population (2006)

1.1 million

4.6 million

Estimated population in 2050

3.0 million

5.4 million

Percent of population under age 15 (2004)

43%

20%

Average life expectancy for people born in 2004

59 years

80 years

Number of years of peaceful, democratic self-government

4

102 (except for Nazi occupation 1940-45)

Gross Domestic Product (GDP)

$370 million

$207,000 million

GDP per capita

$340

$45,000

UNDP Human Development Index Rank (2006)

142 of 177 countries

1 of 177 countries

Data below is projected for the current year’s budgetFiscal year 2006-7Calendar year 2007
Expected petroleum revenues (net) during this year

$644 million

$59,600 million

Percentage of GDP from petroleum

63%

22%

Non-petroleum gov’t revenues (including donor budgetary support)

$56 million

$104,000 million

Government expenditures (excluding donor-managed projects)

$316 million

$113,000 million

Petroleum money used for government expenditures

$260 million

$9,300 million

Percentage of government budget paid with petroleum money

82%

8%

Petroleum revenues deposited into petroleum fund (net)

$384 million

$50,300 million

Interest earned on petroleum fund investments (redeposited)

$40 million

$12,900 million

Increase in petroleum fund during the year

$424 million

$63,200 million

Balance in petroleum fund at end of year

$1074 million

$418,000 million

Sources: UN World Population Prospects 2004, CIA World Factbook, RDTL Budget FY 2006-7, Norway Budget 2007, UNDP Human Development Report 2006, Timor-Leste Petroleum Fund quarterly reports, RDTL Census 2004 Population Projections

Return Our Natural Resources

In October 2006, Santina Soares from La’o Hamutuk’s staff attended the International Oilwatch Forum in Coca, Ecuador. The meeting was organized by the Secretariat of Oilwatch International in Ecuador, and participants came from 22 natural resource-rich countries from every continent, as well as Ecuadorian indigenous people. Oilwatch is an international network which was founded in 1996 in Quito, Ecuador as a network of groups in tropical forest countries who are resisting oil industry activities, fighting against the greed of oil hegemony, challenging abysmal underdevelopment accompanied by a rich elite, and opposing environmental damage and social degradation which results from human greed and companies and individuals who exploit people’s natural resources.

The 2006 Oilwatch Forum activities began with a "Toxic Tour" to visit and learn about the negative impact of oil and gas exploitation. The Tour started from Lago Agrio in the Amazon jungle, one of the areas of oil exploitation in Ecuador.

After the Toxic Tour, participants held a three-day conference in Coca to examine issues around oil exploitation in tropical countries and listen to testimony from people with direct experience of the social, economic and environmental damage and human rights impacts of oil operations. The indigenous people in the conference described their protests to the company; the government usually cooperates with the company and responds with much violence. When participants arrived in Coca, they started with a march to the city with indigenous people and other activists saying "give back our natural resources." They continue to protest because they believe that oil does not improve their lives, so they want to stop oil industry activity. At the conference, La’o Hamutuk’s representative shared information about the development of petroleum in Timor-Leste.

The following important issues were discussed in the conference, and are strategies of the global Oilwatch movement in each country and region, as well as the international secretariat.

The negative impact of oil development on economic social, environmental and human rights

Ecuador is a country rich in natural resources. In the Amazonia area there are still many forests and protected areas, although there are also many oil activities. Since the 1970s the oil industry has extracted more than two thousand million barrels of crude oil from the Ecuadorian Amazon. Texaco (now ChevronTexaco) was the main company here. When they pulled out many years ago and transferred their operations to the state company PetroEcuador, they left an environmental disaster, and local people and Oilwatch activists continue to demand that they clean up and remediate their mess.

During the Toxic Tour we learned that natural resources do not always bring social and economic wealth to the people and the country as promised. Around the areas of operation, education facilities, health care facilities and infrastructure remain poor and there is obvious damage of technology and bad practices like flaring gas, pollution, contamination, and abandoned equipment and facilities. The evaluation teams are not independent, and often have bias and manipulated results. Remediation of environmental damage is insufficient.

The environment, air, and other ecosystems around oil activities have been destroyed, and nearby communities have asked the company to clean up the water which has been contaminated by oil and gas which they just throw everywhere. During the conference in Coca, many affected people gave speeches and testimonies. For instance, Marina from Susufindi, who works with indigenous communities, said "we found it very difficult to deal with the company; our water was contaminated but the community drank it, and they got sick; our animals also died. Then we asked the company to remediate, but the company lied about the toxic effects of their contamination. We can do nothing because we are afraid of the company."

These is the reality which faces people who live in areas rich in natural resources, because their economic development remains poor, while they suffer from the exploitation of their resources.

Indigenous people

Indigenous people are often marginalized from development activities. It is often difficult for them to relocate, adapt and survive with a new situation. But they have to leave because the company and government have signed a contract for oil and gas extraction without consulting with local people. If there is consultation it does not include two-way communication. The compensation often does not meet the people’s needs. The people cannot demand their rights because they lack knowledge and information,

Militarization

Militarization is a tool often used by companies to provide security around the oil facilities; usually the company cooperates with government to protect the company, not the people. The involvement of military is often justified to ensure national stability. Resource-rich countries like Ecuador and elsewhere in Latin America, Indonesia and Malaysia have also experienced militarization. Many local people have been killed when they get angry with the company or when they demand that the company take responsibility for any disaster. The Oilwatch participants experienced it when one group of us rode bicycles from Quito to Lago Agrio, and were hassled when they met the military. Because the military makes visitors go through a long process of investigation and inquiry before they enter Lago Agrio, another group who flew into Lago Agrio airport also encountered soldiers who were providing security. When we visited the oil sites in Amazonia, near the border with Colombia, there was also tight military security.

Environmental Reparation

Environmental reparation was an important topic discussed by Oilwatch members. Particularly, environmental reparation is very important to local people who are directly affected by oil and gas exploitation. We agreed that environmental reparation should be obligated by contract, and we have written a legal paper to advocate for a mechanism to compensate those who suffer damage to their environment, health, water, pollution, waste disposal and decommissioning. In some people’s experience, the oil exploitation has been finished, but the community still cannot use their land and water, and the company just leaves the gas flaring.

Alternative Energy

Alternative energy is important, so that we do not depend only on oil and gas; it can also minimize the negative risk. Alternative energy is promoted by one Oilwatch member based in Thailand, the Campaign for Alternative Industry Network (CAIN).

What can Timor-Leste learn from other Oilwatch members?

Timor-Leste is a new nation which just gained its independence, therefore we need to learn a lot from other countries’ experiences, so we will make wise policy decisions to benefit all Timorese people. These experiences can also teach us how to avoid some of the negative impacts. We have not yet experienced these consequences from oil activities because the projects are far out to sea in the Joint Petroleum Development Area (JPDA), but we should be careful with other areas in Timor-Leste’s exclusive maritime jurisdiction which will be exploited soon under new contracts between companies and our government. In the future, onshore activities will be even more dangerous.

Timor-Leste civil society should be proactive and continue to organize ourselves and encourage our government to manage our resources properly to benefit all people of Timor-Leste. The power of local movements from other countries is a valuable reference for our own future.


Public Meeting on the CMATS Treaty

On 18 January 2007, La’o Hamutuk organized a public discussion on the CMATS Treaty between the government of Timor-Leste and the government of Australia. The panelists were Mr. José Teixeira (Minister for Natural Resources), Mr. Elizário Ferreira (Member of Parliament, FRETILIN), Mr. Francisco Monteiro (Natural Resource Adviser in the President’s Office) and Ms. Santina Soares (La’o Hamutuk).

In his presentation, Mr. Teixeira highlighted some important points of the Treaty alongside with certain reasons or considerations behind the Treaty. Ms. Soares responded that the Treaty brings more benefits to the government of Australia and international oil companies rather than Timor-Leste. Mr. Monteiro pointed that certain sections of the Agreement are really bad for Timor-Leste. One of the weak points of the Treaty is that CMATS has no provision whatsoever to establish a maritime boundary between the two countries. In the end, Ms. Soares and Mr. Monteiro urged the National Parliament to cautiously review the Agreement before ratifying it.

The meeting was attended by more than 53 people from local NGOs, universities, the National Parliament, local media, the TSDA, and foreign diplomats. It was obvious that many people were not well-informed about the CMATS Treaty.

Since oil and gas in the Timor Sea is a national issue, La’o Hamutuk suggests that every part of Timor-Leste society should be informed about the issue and encouraged to participate in the processes of negotiation and legislation by the government of Timor-Leste and the government of Australia. La’o Hamutuk believes that before Timor-Leste’s parliament ratifies this arrangement, the Government and Parliament should conduct socialization and consultation with people of this country to solicit their ideas regarding the Treaty.

On 14 February 2007, La’o Hamutuk wrote an open letter to Timor-Leste’s National Parliament, urging them to study the CMATS Treaty carefully before signing it, and recommending that Parliament ask the Prime Minister to renegotiate parts of it with Australia. The following week, Parliament ratified the Treaty after very little discussion, with 48 votes in favor. On 23 February, Timor-Leste and Australia formally exchanged notes to put the CMATS Treaty and the Sunrise International Unitization Agreement into force, although Australia’s Parliament is continuing to inquire about the Treaty.

Link to La'o Hamutuk index page on CMATS agreement

Link to La'o Hamutuk Bulletin article on CMATS ratification, June 2007.