Timor-Leste has sovereign rights over significant petroleum resources in the Timor Sea. It is estimated that revenues in the vicinity of US$15 billion could become available to Timor-Leste over the coming decades under agreements on maritime boundaries with Australia and Indonesia that are consistent with international law. This amount is almost three times the estimated US$5 billion that Timor-Leste expects to receive under current interim arrangements signed with Australia.
The most important of these interim agreements is the Timor Sea Treaty, signed by Timor-Leste and Australia on 20 May 2002, which created the Joint Petroleum Development Area (JDPA). Under the Treaty Timor-Leste 90 per cent of all production in the area is subject to Timor-Leste's taxation.
The most significant resource in the JPDA is the Bayu-Undan field, which is estimated to be worth around US$5 billion in revenue to Timor-Leste. Almost all of the estimated revenue to Timor-Leste from the Timor Sea under the Treaty will come from this field. ConocoPhillips, one of the largest petroleum companies in the world, is developing the Bayu-Undan field.
How Timor-Leste earns revenue from the Timor Sea
The Timor-Leste Government receives two streams of revenue from the petroleum fields in the JDPA. These are tax revenue and royalty payments.
Tax revenue is gained by levying company tax, value-added tax (VAT) and withholding tax on the companies operating in the JDPA. So far, this is mainly coming from companies working on the Bayu-Undan development.
There are many companies currently working on the Bayu-Undan development. These include petroleum companies - ConocoPhillips and its partners - as well as companies engaged in building the platforms and related infrastructure.
The Government also gets royalty payments, called first tranche petroleum (FTP), from the Bayu-Undan field. These are payments that the Government receives when the petroleum companies sell the Government's share of petroleum on the Government's behalf.
In budget year 2004-05, Timor-Leste is expected to receive US$140.9 million in tax and royalty revenue from the Timor Sea. It is estimated that the Bayu-Undan field will generate revenue for Timor-Leste of about US$200 million per year over its 20-year life, compared with Timor-Leste's annual budget expenditure for 2003-04 of US$74 million. It is important to remember that large petroleum projects involve uncertainty and risk. The Government can try to estimate the amount of revenue it will receive from petroleum, but the actual amount is likely to vary considerably. Many factors - including changes in world oil prices and improvements in technology or technical difficulties - will influence the amount of petroleum revenue that Timor-Leste will receive in coming years.
As noted above, if the Timor-Leste Government succeeds in establishing permanent maritime boundaries with Australia and Indonesia in accordance with international law, substantially more petroleum resources are likely to become available to Timor-Leste.
Spending and saving Timor Sea revenue
Prime Minister Mari Alkatiri is committed to ensuring that the revenue from Timor-Leste's petroleum resources is managed responsibly and transparently.
There are many examples around the world of nations that are rich in petroleum or other minerals but that have been unable to utilize their wealth for the benefit of their populations.
The Timor-Leste Government intends to spend petroleum revenue on essential public services, such as schools, hospitals and roads. But the Government also plans to save a significant share of the revenue so that future generations will benefit from Timor-Leste's natural endowments.
At present, the Government is continuing the petroleum revenue savings policy established under UNTAET. Under this policy, the Government spends the tax revenue from petroleum projects as part of its regular budget, but saves the royalty payments. This is a temporary policy.
From 1 July 2005, a permanent Petroleum Fund will be in place for the management of petroleum revenue.
Under this policy, the Government will put all revenue from petroleum, both tax revenue and royalty payments, into the Petroleum Fund. In any budget year, the Government should only withdraw an amount equal to the estimated sustainable income from total petroleum wealth, both in the ground and in the fund.
Any withdrawals from the Fund must be approved by the National Parliament. The Government is required to submit estimates of the sustainable income when making these withdrawals. The Fund's operations will have oversight from a Consultative Council of eminent persons. The fund and payments into it by companies will be subject to independent audits. To find out more see the draft Timor-Leste Petroleum Fund Act.