APPEA Address by Ambassador Peter Galbraith

Cabinet Member for Political Affairs and Timor Sea, East Timor Transitional Government

Australian Petroleum Production & Exploration Association Conference & exhibition
Hobart, Tasmania, 9 April 2001

The Timor Sea constitutes a great new frontier for the exploration and exploitation of oil and gas.

Politics, sovereignty and war, as well as science and technology, have shaped the recent history of this area as an oil and gas province, delaying significantly its development and exploitation.

I am here today with Dr. Mari Alkatiri, East Timorís Minister for Economic Affairs and therefore my colleague in Cabinet, to bring you a simple message: the period of instability and uncertainty in East Timor is over. East Timorís future status is settled: when the UN Administration ends, East Timor will be the 21st centuryís first new state.

Although completely devastated by 24 years of brutal occupationÖand the graceless, destructive and murderous exit of the Indonesian authorities in September 1999, East Timor is well on its way to establishing stable democratic institutions and sensible pro-market economic policies.

No industry is more important to East Timor than petroleum. Let me give the scale of its significance.

East Timorís annual recurring budget is $45 million. $45 million to pay for teachersí salaries for 400,000 school children; $45 million to pay the salaries for 3000 policemen, $45 million to maintain 3,500 kilometres of paved roads; $45 million to operate an airport and port; $45 million to cover the expenses of a small army to deter new aggression and militia infiltrations; $45 million to cover the costs of government.

The Bayu-Undan liquids project currently underway will generate $100 million a year for East Timor by the middle of the decade. A gas pipeline could increase the government take to $150 million. Laminaria and Buffalo operating under Australian license, but in an area to which East Timor has a compelling claim to the continental shelf, could generate up to $1 million a day--$365 million a year for East Timor as current oil revenues.

Imagine what this means to a country where every building was burned to the ground, where there are 70 students for every teacher, where teachers have no opportunity to develop further their skills.

By achieving independence so late, East Timor has had the chance to study the experience of other developing and developed countries as they develop their oil and gas industries. East Timor has seen the mistakes others have made and is determined to avoid them.

East Timor understands that oil and gas investments are made for thirty years. Investors require stability and certainty with regard to government policies.

Capricious changes in policies may bring short-term gains, but over the long-term countries pay a high premium for being a political and economic risk.

On behalf of the East Timor Cabinet and legislature, I am here to underline our intention to develop and implement a transparent, stable fiscal and regulatory regime that will be amongst the most modern in the world, and which will enable both the companies and the East Timorese to profit from our resource.

As to existing developments, East Timor had no part in devising the regulatory and fiscal regime now operating in the so-called Timor Gap. This was imposed by Indonesia and Australia without the slightest reference to the interests or concerns of the Timorese people. Nonetheless, the Timorese leadership recognises that companies should not pay the price of an illegal occupation, therefore the Timorese leadership has made a commitment, which I am authorised by the Cabinet to repeat here today to you, that with regard to existing developments, the future East Timor regulatory and fiscal framework will be no more onerous than that in place at the time Indonesia pulled out of East Timor.

The scale of the resources in the Timor Sea is vast: Bayu-Undan holds 3 TCF of gas, Greater Sunrise nearly 10 TCF, Laminaria, Buffalo and Elang Kakatua are producing more than 220,000 barrels per day.

The UN has continued the pre-existing regulatory and fiscal frameworks during its administration and the East Timorese leadership promise a new framework that will be more modern, more stable and more business friendly.

Under the circumstances, I would like to stand before you and declare the Timor Sea open for business. Unfortunately at the moment I am unable to do this, I can not say when it will be open for business.

As you know, UNTAET, acting on behalf of East Timor, and Australia have been negotiating for more than a year on a treaty to govern the resources of the Timor Sea. Some of you may say that there is a perfectly good treaty: the 1989 Timor Gap Treaty between Australia and Indonesia. Indeed some Australian commentators have hailed this treaty as a model for co-operation and joint development between two states. Why not simply substitute East Timor for Indonesia?

The East Timorese and the United Nations have a simple answer: the Indonesian occupation of East Timor was illegal. Since Indonesia was not lawfully in control of East Timor, it had no capacity to make a treaty concerning East Timorís oil and gas.

As the product of an illegal occupation, the Timor Gap Treaty is itself illegal. While the United Nations for practical reasons continued the terms of the treaty for the transitional period, it did so without prejudicing the position of an independent East Timor. More than a year ago, UNTAET, acting at the request of the East Timorese leadership, notified Australia that, as of the independence of East Timor, there would be no treaty or other international instrument covering the area off East Timorís coast. Therefore a new one must be negotiated.

To understand the views of the Timorese, it is important to understand the recent history of the country. At the end of the 15th Century the Portuguese arrived in East Timor and for the next 500 years, the country was a neglected colonial backwater. On April 25, 1974 a peaceful revolution ended 50 years of fascist dictatorship in Portugal. The new government embarked on a policy of rapid de-colonialisation, welcomed by the African colonies but leaving the East Timorese unprepared and, as it turned out, undefended.

In spite of the abruptness of the Portuguese exit, a young and quite extraordinary generation of Timorese emerged and began to lay the foundations of a new state.

East Timor declared itself independent on November 28, 1975. On December 7, the anniversary of a day that Franklin D Roosevelt said would live in infamy, the Indonesians invaded Dili. On that first day they rounded up 150 Timorese, and the Australian journalist Roger East, marched them one by one to the edge of the Dili wharf and shot them. One of the victims was the Isabel Lobato, the 24-year-old wife of the Fretilin leader Nicolau Lobato. She was taken to the wharf with her infant son in her arms; and only at the last moment was the baby spared.

Houses along the waterfront became torture centres and execution sites. Two months ago, the IMF representative in Dili dug a hole in his back yard for a septic tank. Six bodies were found from those terrible days. In all up to 200,000 Timorese were murdered or otherwise died during the 24 years of Indonesian occupation.

Indonesianís occupation of East Timor was condemned by the United Nations Security Council and by the United Nations General Assembly, which affirmed East Timorís right to self-determination. Only one country, Australia, ever recognised the incorporation of East Timor into Indonesia.

That recognition was, of course, an essential precondition for the negotiation of the Timor Gap Treaty.

In 1972 Australia and Indonesia concluded a sea boundary, which as you can see, is much closer to Indonesia than Australia. The underlying principle to this boundary is the principle of law that a state is entitled to a seabed reflecting the natural prolongation of its continental shelf. Already by 1972, this principle was being overtaken by a separate principle, namely that each state is entitled to a 200 mile continental shelf, without regard to underlying features, and when states opposite each other are less than 400 miles apart, the seabed boundary should be along the median line between the two coasts (a separate rule applies to states with adjacent coasts, as I will explain later)

Portugal declined to agree on a seabed boundary on the continental shelf principle, and the resulting space between the points agreed by Indonesia and Australia became known as the Timor Gap.

In 1981, immediately after Australia became the only country to recognise Indonesiaís possession of East Timor as lawful, the two countries began negotiations to close the Gap. Australia had hoped to connect the points, i.e. close the gap by continuing the 1972 boundary.

Indonesia now insisted on a midpoint. The midpoint principle had been incorporated into the soon-to-be-adopted Law of the Sea Convention. In addition, the International Court of Justice had ruled in favour of the midpoint in a series of cases.

Neither side budged and after 8 years, they compromised with the Timor Gap Treaty. This treaty, which most of you will be familiar with, established a regime that was applied to an area contained within the limits of the overlapping claims by Indonesia and Australia to sovereignty over a 200 mile continental shelf and the boundaries established in the 1972 treaty. This area was divided into three zones and in the central zone, Zone of Co-operation A (ZOCA) the petroleum resources were to be jointly developed by Indonesia and Australia. Each state would have the right to 50% of the royalties and would apply its own system to collect taxes.

The question arises: if the Courts and the Law of the Sea favour a midpoint, why didnít Indonesia ask the International Court of Justice to define a maritime boundary between Australia and Indonesia?

Indonesia could not go to court because the first issue that would be raised (not by Australia but by Portugal) would be the illegality of Indonesiaís occupation of East Timor.

From all this it is obvious that East Timor feels that it has a perfectly justified right to claim what it considers part of the countryís natural resources which it is entitled to under international law.

Recent cases have affirmed even more strongly the midpoint principle.

As far as the lateral boundaries are concerned, it was natural that the delimitation agreed between Australia and Indonesia in 1972 would favour the two negotiating states and in the process, Portugalís interests would be squeezed as much as possible.

In the 1972 treaty the principle of equidistance was used to establish the lateral boundaries instead of the generally accepted principle that lateral boundaries should be perpendicular to the general direction of the coast.

It is interesting to note that this is recognised in the 1972 treaty, as it envisages that should Portugal become a party to it, the points used to establish the boundaries could be moved (A16>15 ; A17>18). These correspond more or less to the perpendiculars to the general direction of the coast.

As significant as the revenues will be for East Timor, the amounts pale in comparison to the downstream benefits accruing to Australiaóand in particular the Northern Territory-- from the development of East Timorís gas. The respected Centre for International Economics has prepared a study for the Northern Territory Government, Woodside, and Methanex on the expected economic impact of just the gas from Sunrise and the Methanex methanol project. According to the study, this development package will entail capital expenditures of $4.7 billion generating 2800 jobs mostly for the Northern Territory, generating $1.032 billion in additional revenue for NT, or a total of $1994 for every man, woman and child in the territory. By the time the Sunrise/Methanex project is fully operational in 2012-2013 it will add annually $1.015 billion to Australiaís GDP, of which $885 million will go to the Northern Territory. The increase in annual household consumption in the NT from these projects alone will be $420, or more than the average (per capita) income of an East Timorese. By contrast, the annual benefit to East Timor from its resources in Sunrise will only be in the range of $50-100 million, and considerably less were it to accept the 1972 Indonesia-Australia boundary treaty as defining the limits of East Timorís entitlement.

Both East Timor and Australia, and in particular its Northern Territory, have a lot to gain by concluding a Treaty to facilitate the development of the vast oil and gas resources of the Timor Sea. Like any negotiation, this requires compromises. East Timor recognises that resolving the issue of sovereignty in the Timor Sea Ė making a seabed delimitation--is difficult for Australia, and certainly will be very time consuming. East Timor is therefore prepared to enter an interim agreement provided it has the same -or nearly the same- economic benefits as if there were an actual maritime delimitation done in accordance with international law.

East Timor is a desperately poor country. Australian children go to school in classrooms connected to the Internet. East Timorese schools donít have electricity; thanks to the Indonesian organised orgy of violence, many still do not have roofs.

Neither Mari Alkatiri nor I can bring back East Timor a treaty that would give East Timor less economic benefit than that which it is entitled under international law. This does not simply mean a share of the revenue, but also the ability to design and implement a tax and petroleum regime suited to East Timorís particular circumstances. And if there is any doubt about our entitlement, we are prepared to have our position examined, and if necessary decided, in any neutral forum.

Even without addressing the issues of seabed delimitation, it is obvious that negotiating a treaty takes a long time. In March 2000, UNTAET, acting on behalf of East Timor, formally informed Australia that as of independence there would be no arrangement in place and that we were prepared to begin negotiations for a post independence treaty. Formal talks for such a treaty began in Dili in October and were followed by two informal rounds in November and December in Cairns. Our Cabinet met after each meeting and revised our negotiating position in line with the progress we felt had been made. We were ready to resume talks in January, and these new talks were held last week in Melbourne. Obviously, I cannot and will not comment on the substance of these talks; other than to say they were full and frank.

I am however concerned that time is running out for reaching a treaty in time for independence. Our real deadline is not East Timorís independence day, expected late this year or early next, but July 15. On that day our electoral campaign begins for the August 30 elections of a Constituent Assembly. Our current Cabinet which represents the East Timorese political leadership will be replaced by a technocratic cabinet that will obviously have no mandate to negotiate on such a critical matter as East Timorís economic future. While the new government should be in place by mid September, its first preoccupation will be the writing of the Constitution of the new country for which just three months allotted. And like any new government handling a sensitive foreign policy matter, the new East Timorese Cabinet will want to review matters before proceeding. Unfortunately, by time we are organised, Australia is likely to be in its own campaign period, and by time that is over, East Timor will, we hope, be on the doorstep of independence.

In summary, we see a great opportunity for East Timor and Australia in the Timor Sea. With East Timor the petroleum industry has a partner that promises a reliable, stable, and exploitation-friendly future. The uncertainty about East Timorís future is over and we promise a regulatory regime that is transparent, straightforward, and honest.

Only one hurdle remainsóthe need for a treaty. Without a legal arrangement that resolves the status of the Timor Sea there can be no pipeline to bring gas ashore from Bayu-Undan or Greater Sunrise. Without unitisation, the development of Greater Sunrise can not begin. While these matters may be capable of being settled independently of an overall treaty, they cannot be settled before there is such a treaty.

I realise many key investors are looking to have greater clarity by mid year. Mari Alkatiri and I are prepared, as we have been for the last year, to continuously negotiate with the Australian government to resolve these matters. We also recognise, however, we may have to wait and that both Australia and East Timor may lose important markets. Mari Alkatiri has, however, asked me to remind you that the Timorese people are a patient people, and, when it comes to their rights, a very determined people. For 24 years, they fought the worldís fourth largest country, matching handmade weapons against the latest weaponry. In the end the Timorese prevailed.

And, without a treaty based on international law, the East Timorese are prepared to wait patiently for their rights. And there may be advantages to waiting. Because of the 2000 meter deep Timor Trough, it is currently technologically possible only to pipe gas to Darwin even though East Timor is much closer. Thus the Northern Territory, not East Timor, is the prime beneficiary of East Timor gas. In the future it may be possible to pipe gas to East Timor, thus giving East Timor the downstream benefits of its own resource. Further, floating LNG is just over the horizon and the long-term prospects for gas markets are very good. Indeed LNG may develop the kind of spot market that might make gas prices uniformly high.

Speaking on behalf of Mari Alkatiri, myself, and the entire East Timor Transitional Government, we would like to see a new treaty substantively negotiated by the July 15 deadline. Obviously, to do so is a tall order. But, we have the advantage of the enormous goodwill that exists between the two countries both at the governmental level and between the East Timorese and Australian peoples. In the case of developing Timor Sea gas, goodwill is also matched by self-interest.

For our part, we will be creative and we will work without stop in our effort to reach a treaty, if at all possible.