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Gabinete do Primeiro-Ministro

Nation Building in Timor-Leste

Keynote Presentation by Timor-Leste Prime Minister Dr. Mari Alkatiri

SEAAOC Conference, Darwin
June 2004

I thank you very much for the opportunity to deliver this keynote address on the issue of “Nation Building in Timor-Leste”. Timor-Leste recently celebrated its second anniversary of independence after 24 long years of struggle for freedom. Following the UN ballot in 1999 and subsequent militia violence we inherited a nation that had been laid to waste. Most vital infrastructure and institutions had been completely destroyed.

The UN transitional administration and our development partners have made great efforts to start the rebuilding process. Since the restoration of independence in 2002 my government has been building national institutions from the ground up. A major focus has been putting in place the capacity to manage our petroleum resources and revenues from them, which will be the basis for our reconstruction and development for decades to come.

In the near and long term, Timor-Leste’s economy will be almost entirely dependent on revenue from petroleum in the Timor Sea. Our resources in the Timor Sea will play a vital role in helping to rebuild our nation and address the many challenges associated with entrenched poverty and under-development. I will therefore take this opportunity to talk about how my government is building a sound economic base and long-term stability in the form of our proposed Petroleum Fund. I will also outline our efforts to put in place transparent and accountable regulations for this vital sector.

Timor-Leste is highly prospective for petroleum in onshore and offshore areas. We have seen a tremendous amount of interest recently from the petroleum industry in developing our onshore and offshore petroleum. Therefore, I will also describe the legal framework that Timor-Leste is establishing to facilitate development of its resources. In particular, I will outline the framework and program that is being put in place for pre-exploration seismic data gathering which we intend to commence within the coming months and to be completed by mid-2005, when the first exploration licenses should be issued.

First, though, I would like to outline our perspective on an issue that you have certainly read about recently in the media: the question of Timor-Leste’s maritime boundaries.

Determining future maritime boundaries between Australia and East Timor

A key element of nation building is the right to delineate the extent of a nation’s resources area so that we can develop and plan for the future.

Upon the restoration of our independence in May 2002, Timor-Leste claimed its international maritime entitlement through our Maritime Zones Act which includes a claim to resources in the Timor Sea including vast petroleum resources.

Neither Timor-Leste nor any of its previous legitimate administrators ever agreed to delimit its maritime boundaries with its neighbors – including Australia. There have never been maritime boundaries applicable to the territory that is now Timor-Leste. I often hear and read about Timor-Leste wanting to change its boundaries with Australia. There are not and there have never been any boundaries to be changed. There are boundaries to be established.

The establishment of maritime boundaries is an integral part of Timor-Leste’s right to self determination. We are very close to finalizing our land border with Indonesia, but we are yet to determine the extent of our maritime resources. We are seeking to put in place the most stable and secure basis for the development of the Timor Sea – a permanent maritime boundary. A permanent maritime boundary will not only be a good outcome for our new nation – it will give investors genuine security and stability.

The issue of security and stability for investors has always been a priority for us. Our agreement to the Timor Sea Treaty was greatly influenced by the need for the investors in the Bayu-Undan project to obtain legal and fiscal certainty to continue with their investments. The Treaty was in the best interest of our people, and it was our recognition of the interests of investors.

In April this year, Timor-Leste and Australian officials met in Dili for the first round of talks on maritime boundaries. Despite our request for monthly meetings, we were only able to get agreement to have the next meeting scheduled for September this year. As someone recently commented, rice and corn crops can be planted and either harvested or fail for our people within that time.

I cannot overstate the importance to Timor-Leste of these talks and of making progress towards reaching agreement on maritime boundaries. To give you a sense of the stakes for our country: under current temporary petroleum development agreements with Australia, Timor-Leste will most likely receive revenues in the order of US $4 billion over the next generation. However, the vast majority of international experts are of the view that a permanent maritime boundary set according to international law would give Timor-Leste significantly greater resources in the Timor Sea – providing revenues potentially in the order of US $12 billion over the same time based on known reserves.

Despite what has been quoted in the media lately, Timor-Leste does not claim these resources because we are poor. Timor-Leste claims these resources because it is our international legal right. Timor-Leste would prefer to support itself from revenues from its petroleum resources, rather than relying on the generosity of international donors. The people of Timor-Leste fought a generation for recognition of our political independence, and we will fight for our economic independence. And as I will outline in a moment, Timor-Leste will soon take a step towards our economic independence. As is our sovereign right, Timor-Leste will initiate the exploitation of our resources with an pre-exploration invitation to the petroleum industry.

We acknowledge the value to the petroleum industry of maritime boundaries. We know that maritime boundaries are the best means to ensure stability for further investments in the Timor Sea.

Sadly, the outlook after the April round of negotiations is quite hopeless in our view. The Australian response with respect to our claim on the lateral boundaries – where the vast wealth of the resources and revenues are – was that the lateral boundaries are non-negotiable beyond the current JPDA limits. These lines have no relevance other than given in the temporary Timor Sea Treaty, which is a temporary treaty, pending the settling of the permanent maritime boundaries between our two countries. Australia takes this position in spite of the fact that the Treaty specifically states that it shall not prejudice the rights of the two countries relating to seabed delimitation. Further as I said earlier, they are not willing to meet more frequently than every six months on other negotiations. This alone has signaled to many of us the lack of seriousness or commitment to resolving this issue.

Beyond the importance to Timor-Leste of the resources at issue, the unfairness of the Australian position is this: One, Australia is actively depleting the resources in dispute, including the Buffalo, Laminaria and Corallina fields. And two, Australia refuses to have a neutral third party resolve our dispute. This suggests an uncertainty about the strength of Australia’s legal case.

Building a sound economic base and long term stability: The proposed Timor-Leste Petroleum Fund

The Timor-Leste Government is currently building on the principles implemented by the United Nations in building a framework for managing the modest amount of revenues that have begun to come to us from the Timor Sea.

In designing this framework, we are seeking to implement the principle of inter-generational equity. It is the aim of my government to preserve for the next generation the wealth from our oil and gas resources.

Timor-Leste has in place an interim petroleum revenue management policy of saving the royalties from the Joint Petroleum Development Area. All payments received are also published annually and accounted for in the national budget for full transparency.

However, we are now looking to introduce a permanent petroleum fund for the management of our oil and gas wealth. It will be based on the model adopted by Norway with additional safeguards. We call this model “Norway-plus”.

The key principle governing the management of this petroleum fund will be that only the sustainable income from our petroleum wealth will be available for current expenditure. Sustainable income is the revenue roughly equivalent to the real interest rate on the estimated wealth that is both in the seabed and in the fund. This principle would mean that the fund would retain, on average, about half the petroleum revenue earned each year.

Revenue from the JPDA is expected to be very volatile over the next 20 years. In some years we will earn in the hundreds of millions, in others much less than that. As a result, in some years we will need to save nearly all of the revenue, while in others we will need to use most of it. The essential point is that, if we want to generate sufficient capital to earn income for future generations, we will need to save an average of 50 per cent of our revenue from the Timor Sea.

In designing this fund, the emphasis is very much on having capital available for the future. This means our investment strategy will be low risk, and the funds will be invested internationally. Government investment for our domestic needs will come from the National Budget.

This fund will be subjected to a full set of transparency and accountability measures. It will have oversight from a board of prominent citizens, which will be required to report to the National Parliament on how much revenue has been retained in the fund.I would now like to turn to the legal framework that Timor-Leste is establishing to facilitate investment in, and development of, its resources.

Establishing a legal framework to develop our petroleum resources

Regulatory regime:

The current petroleum regime in Timor-Leste is more complex than in most countries. This is unsatisfactory for my government and also for the industry. It reflects the fact that part of Timor-Leste’s petroleum lies in an area that is subject to a provisional arrangement with Australia – that is the Timor Sea Treaty which established the Joint Petroleum Development Area, or JPDA.

Regulatory and fiscal regimes for both Timor-Leste’s JPDA and non-JPDA areas are currently being drafted with technical assistance from experts from many countries, and from within the petroleum industry.

The working group has considered petroleum regimes in other countries, with a view to creating a petroleum regime for Timor-Leste that is internationally competitive, stable, transparent and fair. A key feature of the contractual arrangements will be a “pro-forma” production sharing contract (PSC) for the JPDA, and potentially for outside the JPDA.

The regime for awarding petroleum development rights in both the JPDA and non-JPDA areas will be based on competition between companies. It is contemplated that such rights will be awarded after a competitive bidding process. The Ministry of Development and Environment of the Timor-Leste Government, or the Timor Sea Designated Authority will be obligated to consider all bids. If the Ministry or the Designated Authority wished to grant rights to explore for or exploit petroleum without a bidding process, it would have to publish an explanation for doing so.

The Ministry and the Designated Authority may grant rights only to companies that have the financial capability, and technical knowledge and ability, to carry out the authorized activities concerned. In choosing between companies so qualified, they are mandated to consider required proposals relating to the training and preferential employment of Timor-Leste nationals, and to the use of Timor-Leste goods and services, as well as relating to the protection of the marine environment, and occupational health and safety.

Petroleum companies will not be required to pay “signing bonuses” to the Ministry or the Designated Authority when they receive authorizations. The draft laws and contracts include various measures – including provision for auditing and arbitration of disputes – that are designed to ensure that Timor-Leste’s petroleum is exploited in a fair and transparent manner.

The Ministry and the Designated Authority will be required to exercise their powers and discharge their functions so as to promote the sustainable and long-term economic development of Timor-Leste (and Australia, in the case of the Designated Authority). They must also give due consideration to concerns of petroleum companies and other interested parties. The Timor-Leste regulatory law sets out ethical obligations and limitations (for example, regarding the disclosure of information, conflict of interest, corrupt practices, etc.) with respect to Government officials so as to ensure that they exercise their functions in a fair and transparent manner.

Both the JPDA and non-JPDA regimes contemplate petroleum companies making their books and accounts available for auditing.

It is expected that the working group will finalize these draft laws in the coming months. They will then be made available for public comment – including, importantly, from the petroleum industry – and then submitted to the Council of Ministers and Parliament thereafter. We expect these laws to be passed by the end of the year.

While these laws are being drafted, an interim regime applies to petroleum exploration and development in the JPDA.

But there has also been a tremendous amount of interest expressed by the petroleum industry in exploring for and developing Timor-Leste’s resources in areas outside the JPDA. Therefore, I am pleased to announce that the Timor-Leste Government will soon open bidding for pre-exploration seismic data acquisition rights in Timor-Leste in onshore and some of our offshore areas.

Pre-exploration data acquisition rights:

Recent petroleum geology expert surveys, as well as previously existing seismic survey data, have been acquired by our government and analyzed by technical advisers working within our Ministry of Development and Environment.

Their assessment is that there is potential for the existence of highly prospective hydrocarbon deposits in some areas both onshore and offshore Timor-Leste. We have therefore decided to grant rights to conduct seismic data acquisition surveys in both onshore, and in offshore areas. Although the planned survey areas are large, they will not cover all of the area in which Timor-Leste has exclusive rights to resources under international law.

The proposed seismic data acquisition surveys will be on a commercial basis at the risk and cost of the contractor. The contractor or contractors will be selected on a competitive tender basis. The terms and conditions for the areas proposed to be advertised are now practically finalized. In preparing the survey Terms of Reference, we have sought and obtained the advice of a number of leading international consultants and contractors in the industry. Within weeks the terms of reference for this bidding round, together with an information package, will be available to the seismic contracting industry.

The offshore areas will be the first to be advertised for bids, whilst the onshore area will be advertised later due to the need for additional technical advice with respect to the terms and conditions. We still hope, however, to launch the bidding rounds for both onshore and offshore at the same time and are aiming towards that.

Naturally, my Government takes into account the fact that Australia has made jurisdictional claims in some areas of the Timor Sea. We will fully observe international law in relation to all petroleum activities, including the obligation to exercise restraint in any areas where Australia’s claims may conflict with Timor-Leste’s. However, we are determined to begin acquiring further knowledge of the prospects of our resources.

I look forward to hearing the perspective of the petroleum industry on this pre-exploration bidding round. Already, interest is mounting from within the industry. As I have already said, this is just the start of acquiring greater knowledge of our resources in the Timor Sea, as well as on our onshore territory. The Designated Authority also has plans to undertake further and more thorough seismic work in the vacant areas of the JPDA, with a view to ultimately attracting more exploration and development in the area.

I have said many times that the petroleum resources in the Timor Sea are critical to our future as a nation. We regard it as extremely important to approach the exploitation of these resources in a responsible and sustainable way. Before we can do that we have the responsibility to put in place the legal and commercial framework to acquire further information relating to the existence and quantity of such resources. That way we can develop a petroleum industry in the model I outlined earlier to create a sustainable and economically independent future for our young nation.

We strive to do this because we have an obligation to this generation and future generations of Timorese to utilize the resources that belong to our nation and our people wisely. In doing so, our aim is to eradicate poverty, develop our people’s potential and create a sustainable future for them.

I hope that many of you attending this conference will take the opportunity to meet with our representatives here at SEAAOC to find out more about these opportunities in Timor-Leste. We look forward to working with industry in our efforts to achieve a prosperous Timor-Leste.

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua D. Alberto Ricardo, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
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