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The La’o Hamutuk Bulletin Vol. 8, No. 2: June 2007


English PDF Format  | Bahasa Indonesia PDF Format

Table of contents:

Restructuring Petroleum Regulation in Timor-Leste

As La’o Hamutuk has often written, petroleum development is one of the most important elements of Timor-Leste’s future. If done well, it can bring revenues and development to our country, but if done poorly it will inflict a "resource curse" on current and future generations. The amounts of money involved and potential for corruption, collusion and nepotism are so large that transparency and accountability are essential if the people of Timor-Leste are to benefit from our petroleum resources.

Unfortunately, recent draft laws contain many loopholes and avenues for corruption and other curses, and contradict the Government’s often-stated support for transparency and accountability. If passed as proposed, these laws would make it easy for a small number of people to get rich off Timor-Leste’s oil and gas resources, leaving the rest of our population in poverty.

The Timor-Leste government is restructuring its regulation of the petroleum sector, including creation of the PETROTIL national oil company of Timor-Leste. In addition, the Timor Sea Designated Authority (TSDA) will merge with the National Directorate of Oil and Gas (Direcçăo Nacional do Petróleo e Gás - DNPG) to become a single agency of the Timor-Leste government. A National Council on Energy Policy will oversee the new regulatory agency, as well as establishing Timor-Leste’s national energy policy (generation, import and distribution to domestic consumers and international customers). The laws also implement other changes involving regulation and policy-making for the petroleum sector. All agencies and functions established by the new legislation remain under the Ministry of Natural Resources, Minerals and Energy Policy (MNRMEP).

The Government has held many closed meetings on these proposed changes, including in the Council of Ministers, since September 2006. Internal disagreements, especially concerning whether Brazilian models are appropriate for Timor-Leste, delayed their adoption. Some officials said there should be studies by independent experts, as well as public information and consultation before such far-reaching legislation is adopted, and that these laws should not be enacted without Parliamentary approval.

In late March 2007, the Ministry (MNRMEP) circulated three proposed decree-laws for a 15-day public consultation. They cover the entire energy sector, from exploration and production (upstream) to transportation, storage, refining, distribution and commercialization (downstream). They have much broader scope than the 2005 Timor-Leste Petroleum Act and JPDA Petroleum Mining Code, which cover upstream activities only. The construction of downstream projects and the operation of a national oil company will involve billions of dollars in investment, revenues and expenditures. Without special attention to transparency, independent oversight, and checks and balances, such activities are particularly vulnerable to corruption and cronyism.

Such fundamental new laws should require Parliamentary authorization under RDTL Constitution articles 95 and 96, and the legality of implementing them by decree-law, without Parliament, is questionable.

The Ministry posted the draft decree-laws and explanatory information on the internet and asked for comments by 5 April 2007. La’o Hamutuk submitted our initial analysis, and we were later told unofficially that the deadline had been extended. However, some in the current government still hope to enact these laws prior to the upcoming Parliamentary election.

In summary, the three decree-laws will:

Combine the TSDA and DNPG into a new National Petroleum Regulatory Authority
(Autoridade Reguladora Nacional do Petróleo, Gás Natural e Biocombustíveis - ARNP)

The TSDA was created by the 2002 Timor Sea Treaty between Australia and Timor-Leste as a bi-national agency to oversee upstream oil and gas projects in the Joint Petroleum Development Area (JPDA), including Bayu-Undan, Elang-Kakatua and part of Greater Sunrise. The treaty specified that the TSDA would become part of the RDTL Government by April 2006. Both countries agreed to delay this until 2 July 2007, and it could be extended further, so there is no need to hastily enact new legislation.

The proposed laws replace the TSDA with a National Petroleum Regulatory Authority (ARNP) which will be responsible for administering and managing upstream and downstream projects in both the joint development area (JPDA) and Timor-Leste’s exclusive offshore and onshore territory. The new Authority would also absorb the functions of Timor-Leste’s National Directorate of Oil and Gas (DNPG).

The ARNP would be an administrative-type instituto publico, operating under the Ministry (MNRMEP), the National Council on Energy Policy (see below), and the JPDA Joint Commission (which includes one member each from Australia and Timor-Leste). All members of the ARNP are appointed by the MNRMEP.

In addition to contracting for and regulating upstream and downstream petroleum operations, the ARNP would regulate and supervise all activities relating to the national fuel supply, including bio-diesel and other bio-fuels as well as petroleum and natural gas. According to the position paper, all legislative measures necessary to implement the ARNP were to be in place by 1 April 2007.

Create a National Council on Energy Policy
(Conselho Nacional de Política Energética - CNPE)

A new National Council on Energy Policy is created by this legislative package. It will be an advisory body, with oversight responsibilities over the ARNP, including approval of its budget. Like the ARNP, the CNPE is under the MNRMEP. The CNPE will establish policies for Timor-Leste regarding energy production, consumption and distribution. It normally meets twice a year and has nine members, including four Ministers and representatives from civil society and the Petroleum Fund Consultative Council. People with petroleum expertise from universities and the private sector are also included.

Create a Timor-Leste National Oil Company
(Empresa Nacional de Petróleo, Gás e Energia de Timor-Leste - PETROTIL)

This statute implements the creation of a state-owned (national) oil company as envisioned in the final version of the 2005 Petroleum Act. Also under the MNRMEP, PETROTIL could participate in all aspects of upstream and downstream exploration, onshore and offshore, as well as production and domestic and international and distribution.

Public consultation

The three draft decree-laws were available only in Portuguese and the time was very short. La’o Hamutuk and others protested that the "consultation" was not designed to receive public input. The Petroleum Fund Consultative Council wrote to the Ministry, and the Core Group on Transparency (a coalition of NGOs) held a press conference objecting to the process. La’o Hamutuk submitted nine pages of testimony to the government; attorney Joseph Bell from Revenue Watch wrote the only other substantive submission. The main points of La’o Hamutuk’s submission include:

  • This initial submission only discusses general issues. The time, notice, language and media used for this public consultation make it impossible to get meaningful input from Timor-Leste’s population or outside experts, and the consultation should be extended or re-opened. La’o Hamutuk, after seeking advice from international experts, will provide a section-by-section analysis of the draft laws if more time is available. The topics covered by these laws are crucial to determining whether Timor-Leste will suffer or escape the "resource curse," and they need more careful consideration and two-way communication to implement the Constitutionally-guaranteed right that "every citizen has the right to participate in the political life and public affairs of the country."
  • Major legislation should not be enacted during a social and political crisis or just before a national election. There is no reason these decree-laws need to be passed in such a rushed manner, and a newly-elected government could decide to change them. Their adoption should be delayed until people have the time and information to focus on them. Many important laws – about pensions, CMATS ratification, clemency/amnesty and military service – are being passed while people are distracted by the crisis, undermining democratic principles.
  • This legislation covers topics which have never been discussed in Parliament. It should not be enacted as decree-laws, which are not submitted to Parliament. Both legally and ethically, the National Oil Company and the regulation of downstream activities must be based on laws enacted by our elected Parliament Members in open session, not by the Council of Ministers in secret meetings.
  • These draft laws prioritize money for the oil industry ahead of the needs and rights of our population, and appear designed to benefit businesses and people in rich countries, such as the shareholders of international oil companies, more than Timor-Leste’s citizens. Several provisions protect economic actors, but no public hearings would protect our people.
  • These draft laws endanger our environment. The National Council on Energy Policy is dominated by people with petroleum expertise, which will make it difficult for Timor-Leste to explore options for alternate energy. The draft laws contain no environmental safeguards, and the CNPE will prioritize burning fuels, rather than using clean, renewable, sustainable resources like wind, solar energy, tides, waves and deep seas.
  • These draft laws excessively concentrate power in the Ministry of Natural Resources, Minerals and Energy Policy. This increases the risk of corruption, abuse of power and maladministration. The oversight powers of the National Council on Energy Policy are ambiguously defined. Placing energy policy and the national oil company under the direction of the same people responsible for ensuring the flow of oil revenues (more than 90% of government income) is a structural conflict of interest which will reduce attention given to non-revenue concerns. No provisions exist for checks and balances, independent oversight, or enforcing consideration of critical issues which might interfere with revenue flows.
  • These draft laws totally fail to implement the Government’s stated commitment to transparency and accountability (including the Extractive Industries Transparency Initiative), and could undermine existing steps toward adopting these principles. These draft laws allow conflicts of interest and contain almost no safeguards against corruption.
  • The National Petroleum Regulatory Authority (ARNP) draft law violates the 2005 Petroleum Fund Act’s requirement that all Government revenues from petroleum activities be deposited directly into the Petroleum Fund.
  • National oil companies, which La’o Hamutuk supports in principle, bring risks as well as benefits, since they are not accountable to outside investors, other governments, or stock exchange rules. The proposed national oil company (PETROTIL) statutes contain no requirements for transparency or protection against these dangers. In places like Ecuador and Nigeria, national oil companies have proven far less accountable than foreign private companies, and even those often violate human and environmental rights, or engage in corruption.

In mid-April, La’o Hamutuk was informed unofficially that the Government accepted our recommendation for more time for discussion, and that further submissions would be continue to be received. Many Timorese government officials and advisors told La’o Hamutuk that they appreciate our input, as it help them advocate for a more open process during internal discussions.

La’o Hamutuk is continuing to analyze the draft laws and will make a more detailed submission. During the same period, economist Martin Sandbu, the World Bank and others have echoed many of our concerns, which were also raised by several civil society members at a public meeting with Minister Jose Teixeira organized by Luta Hamutuk on 1 June.

As we proceed with our analysis, La’o Hamutuk has become concerned about the PETROTIL statute which allows its staff and board to divide PETROTIL profits among themselves. In addition to violating the Petroleum Fund Act, this unlocks the door to stealing public resources for private gain. If PETROTIL belongs to the State and People of Timor-Leste, its income should go to the public treasury, not to a few individuals selected by the Minister for Natural Resources.

Following Fretilin’s loss in the second round of the Presidential election, some in Government tried to get the Council of Ministers to try to pass these decree-laws right away. Fortunately, this did not happen, and the Ministry’s drafting team is revising the laws based on input received so far, and new versions are expected to be available in July.

With support from Oxfam and the Revenue Watch Institute, La’o Hamutuk has translated the March versions of the draft laws into English and Bahasa Indonesia to widen public awareness, and we encourage the Timor-Leste public and their international supporters to submit their views to the Ministry of Natural Resources, Minerals and Energy Policy in their office in the Fomento Building or by email to mnrmep@bigpond.com as soon as possible.

Link to La'o Hamutuk index page on proposed restructuring legislation  with texts of draft laws, further information, translations and commentary.

Link to detailed La'o Hamutuk submission on these draft laws, July 2007, and related Bulletin article.


CMATS: Timor-Leste’s 50 Year Loss of Sovereignty

Early this year the legislatures of Australia and Timor-Leste ratified two agreements on the Timor Sea – the Certain Maritime Arrangements in the Timor Sea Treaty (CMATS) and the International Unitization Agreement (IUA) for Greater Sunrise. CMATS was signed by the foreign ministers of both countries on 12 January 2006, but was only brought to their Parliaments in 2007. Meanwhile, the International Unitization Agreement was signed in 2003, but the Government of Timor-Leste never submitted it to Parliament, forcing the two parties to begin new negotiations in 2005.

Click on map above to see it larger.

In Timor-Leste

Dili’s ratification of these agreements took place behind closed doors, without public consultation on this critical national issue. La’o Hamutuk wrote to the National Parliament of Timor-Leste in March 2006 and again in January 2007, suggesting that the two countries should improve the agreements before they were ratified. However, our submissions were not addressed, and on 20 February 2007 Timor-Leste’s Parliament damaged our national interest by ratifying these agreements. (See La’o Hamutuk Bulletin Vol. 7, No. 1, April 2006, for a detailed analysis of the CMATS agreements.)

Parliament has stated that it will not surrender a drop of Timor’s sea to foreign powers, but Parliament’s ratification of CMATS contradicts Parliament’s position, especially the law on Maritime Boundaries they passed in October 2002.

The ratification process for these agreements received little public attention because of the crisis that has beset Timor-Leste for the past year. This has meant that an issue that is key to our struggle for complete independence has passed by without the public discussion which should take place in a democratic country.

In Australia

On 7 February 2007 the Government of Australia forwarded this agreement to its Parliament and their Joint Standing Committee on Treaties for study. The Government also forwarded a National Interest Analysis, which includes incorrect data and faulty logic.

Although the Australian Parliament accepted oral and written submissions, this process was merely a formality. On 23 February 2007, Australian Foreign Minister Alexander Downer announced that this agreement was being put into effect without Parliamentary ratification, invoking Australia’s "National Interest Exception" to normal legislative process. Mr. Downer wrote the Parliament’s Treaties Committee that "this is an opportunity to ratify CMATS and IUA before presidential and parliamentary elections in upcoming months." Australia is clearly exploiting the crisis in Timor-Leste, seeing elections here not as a positive mechanism for peaceful democratic change, but as a threat to its ambitions in the Timor Sea. In a country that claims to be a modern democracy, it is shocking that Australia’s elected Parliament is so readily ignored.

La’o Hamutuk, together with the East Timor and Indonesia Action Network (ETAN/USA), Timor Sea Justice Campaign (TSJC/Australia), and other interested organizations and individuals filed submissions with the Australian Parliament. La’o Hamutuk recognized that Parliament must protect Australia’s national interests, but we encouraged them to listen to the voices of other people and to consider legal and moral perspectives which reinforce Australia’s interests. This is important for Australia to keep its credibility as a democratic nation which respects the rule of law and the sovereignty of neighboring states.

The CMATS Treaty is better than Australia had offered in 2004, increasing Timor-Leste’s share of upstream (extraction) revenues from 42% to 60% from oil and gas fields it should own under international legal principles. Australia continues to occupy other oil fields in Timor-Leste’s part of the Timor Sea, including Laminaria-Corallina and Buffalo, as well as future discoveries in the area.

Although the improvement of sharing upstream revenues is important, the treaty could have been made less unfavorable to Timor-Leste through further negotiations. It should not have been rushed into force during a crisis, just prior to elections in both countries.

Under CMATS, Australia retains great power to determine the development plan for the Greater Sunrise field, which must be approved within six years for the treaty to remain in effect. If the Government of Timor-Leste fails to convince Woodside Petroleum Company and the Government of Australia to bring the gas pipeline and liquefaction (LNG) plant to Timor-Leste, it will lose even more. An LNG plant in Timor-Leste would be a major industrial project, providing tax income from the downstream process and the opportunity to jump-start other parts of our economy. Such a project would help integrate our country into regional oil and gas development, including future fields in Timor-Leste, Indonesian and Australian waters.

CMATS results from an unfair process, and responds to the interests of international oil companies and the Australian Government. The deferral of maritime borders for 50 years is based on commercial considerations, because the oil and gas will be exhausted by then. And this agreement provides fiscal and legal stability demanded by Woodside Petroleum to quickly develop the Sunrise project, although it not clear that immediate development of this project is in Timor-Leste’s national interest.

Although people from around the world have supported Timor-Leste’s people’s demand for a maritime boundary to complete our independence struggle, Australia refused to respond to this concern. Rather than recognize our sovereignty, the Australian Government will only negotiate about revenue sharing. Australia’s lack of good will to negotiate fairly with its new neighbor ignores voices of civil society on both sides of the Timor Sea, raising questions about Australia’s democracy.

Australia’s National Interests

The Australian Government provided an analysis to its Parliament about its national interests regarding CMATS. According to their analysis "It is in Australia’s interest to create a long-term stable legal environment for the exploration and exploitation of petroleum resources in the Timor Sea between Australia and East Timor, without prejudicing either country’s maritime claims in the Timor Sea." We agree, but emphasize that legal stability must also include a maritime boundary based on median lines, according to current international legal principles.

La’o Hamutuk also agrees with their analysis that economic stability in Timor-Leste is in Australian’s best interest. But by taking 50% of Greater Sunrise and occupying other areas in Timor Sea, Australia’s actions contradict both countries’ interests. Economic stability in Timor-Leste can best be achieved by respecting our sovereignty and enabling us to benefit from all phases of developing our resources, rather than simply receiving cash. This is essential to the future sustainability of Timor-Leste’s economy.

Australia justifies its position by saying that Australia has helped Timor-Leste since 1999, but Australian aid during that period totals less than the $1,400 million the Australian government has taken from the Laminaria-Corallina fields.

Conclusion

CMATS is a product of an unfair process, and that Australia has demonstrated its disrespect for democracy in both countries and for our national independence. Under this treaty, Australia has 50 years to explore for future fields in the Timor Sea, while we are forbidden from seeking maritime boundaries or using impartial third-party arbitration. Timor-Leste surrenders our sovereignty for 50 years, until all the oil and gas in the Timor Sea has been extracted and sold.


Political Parties Debate How to Manage Petroleum Revenues

On 21 June 2007, La’o Hamutuk organized a debate among the fourteen political parties and coalitions contesting the 30 June parliamentary election. Ten parties (Undertim, CNRT, PR, PDC, UDT, PD, PST, PSD/ASDT, FRETILIN and PUN) attended, as well as more than 200 members of the audience.

Each party was asked to describe its plans for managing petroleum income if they are elected to Parliament. Some had clear, detailed policies, while others stated generalities and platitudes. A few appeared to be intentionally evasive.

This was followed by questions from a panel of NGO experts regarding such issues as planning for the post-petroleum era, petroleum dependency, transparency, corruption prevention, sustainable levels of spending and diversifying Timor-Leste’s economy. These issues are crucial for a government which receives 94% of its revenues from oil and gas, resources which will be exhausted within two generations. Although some parties had obviously considered them carefully, others needed the occasion of this debate to encourage them to consider ways to avoid the "resource curse."

Lita Sarmento from the NGO Forum and National Elections Commission opened the program.Panelists Julino Ximenes (HAK Association) and Santina Soares (La'o Hamutuk)
Fernanda Borges, Partido Unidade NacionalJose Teixeira, FretilinEstanislau Saldanha, Partidu Republikanu and Alfredo Pires, CNRT

After the election, La’o Hamutuk will publish written and video materials describing the commitments of the parties which are elected into Government, so that they can be held accountable to their promises.

The debate was organized by La’o Hamutuk in collaboration with the Timor-Leste NGO Forum and the National University Student Solidarity Council (KSUTL). Oxfam Australia provided financial support.