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East Timor eager to tap resources

By Geoff Hiscock, CNN

Wednesday, May 31, 2006

Australian independent oil and gas company Woodside Petroleum is the Greater Sunrise project operator.

SYDNEY, Australia (CNN) -- When Australia and East Timor signed a treaty on revenue-sharing from oil and gas fields in the Timor Sea in January, there was an expectation that the world's newest nation potentially could get a much-needed $4 billion boost to its coffers.

With oil prices around $70 a barrel and natural gas much in demand, it looked like the impoverished country that shares half an island with Indonesia to the north of Australia would enjoy some extra riches from its barely exploited oil and gas resources.

January 2006 had also seen the start of production at a gas processing plant in Darwin, Australia drawing from East Timor's Bayu-Undan field operated by ConocoPhillips.

But the violence of recent days has increased the risk factor for potential investors and may further delay an increased revenue stream for East Timor.

So far, East Timor has accumulated about $500 million in its petroleum fund -- mainly from the Bayu-Undan field -- out of a potental $15 billion to $25 billion that could flow to it from oil and gas resources over the next 20 years.

On May 22, just a few days before the security situation in the tiny country deteriorated rapidly, East Timor had named the successful bidders for six offshore exploration areas within its part of the Timor Sea. Five of the areas went to Italy's Eni, and the sixth went to India's Reliance Industries.

Production sharing contracts with East Timor's government were due to be signed on June 20, but that date may slip as the country grapples with the current violence.

Also on May 22, Australian oil and gas operator Woodside Petroleum told North American investors in New York that development of the potential jewel in East Timor's resources crown -- the Greater Sunrise field -- was stalled, "pending fiscal, legal and regulatory uncertainty."

That reflects Woodside's disagreement with East Timor over where gas from the field should be processed.

Greater Sunrise is potentially East Timor's richest single field, with an estimated 8 trillion cubic feet of gas and up to 300 million barrels of condensate.

But only 20.1 percent of the key Greater Sunrise reservoir falls within the joint petroleum development area set out in the 2002 Timor Sea Treaty interim agreement between Australia and East Timor. The other 79.9 percent is in a part of the Timor Sea over which Australia claims exclusive jurisdiction.

In contrast, the Bayu-Undan field lies entirely within the 2002 joint development area. East Timor gets 90 percent of revenue from production inside the area, with a potential value of up to $15 billion.

Bayu-Undan, which may have reserves of 400 million barrels of condensate and 3.4 trillion cubic feet of gas, began producing in February 2004. The first processed LNG from Bayu-Undan was shipped from Darwin to Japan in the first quarter of 2006.

East Timor, a former Portuguese colony that was forcibly incorporated by Indonesia in 1975, became an independent nation after a violent separation in 1999 that saw international troops called in to restore security.

It is one of the poorest nations in Southeast Asia, and has been eager to get a much-needed revenue stream from Timor Sea oil and gas fields such as the Greater Sunrise reservoir.

Revenue sharing

But commercialization of the fields has been delayed by disputes with Australia over sea boundaries and how to share government revenues flowing from the various projects.

Under the January treaty, Australia has agreed to share equally with East Timor the upstream revenue from Greater Sunrise.

Australian Foreign Minister Alexander Downer Downer and his East Timor counterpart Jose Ramos-Horta signed the deal in Sydney on January 12.

At the time, Downer hailed the agreement, which he said was based on East Timor's proposal for a "creative solution" to revenue-sharing.

Once this project proceeded, he said it could result in East Timor getting as much as an extra $4 billion in revenue over the life of the field. This would increase East Timor's share of the resource to $10 billion.

The field is located about 450 kilometers (280 miles) from the Australian city of Darwin and 80 kilometers (50 miles) from East Timor's southern coast.

East Timor wants the plant built on its soil, arguing that a pipeline from the field would be commercially feasible.

But Woodside wants to take the gas to the Wickham Point terminal in Darwin, where the Bayu-Undan project operator ConocoPhillips already has its plant.

One aspect of the January 2006 agreement between Australia and East Timor was that it puts on hold for 50 years the countries' competing claims over jurisdiction and maritime boundaries in the Timor Sea.

Those claims have been a sore point in relations between the two countries, with East Timor Prime Minister Mari Alkatiri unhappy at what he saw as Australia's aggressive negotiating approach.