East Timor Risks All in Oil Dispute
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East Timor Risks All in Oil Dispute

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East Timor appears ready to roll the dice in its dispute with Woodside Petroleum over construction of a liquefied natural gas plant. If East Timor’s move backfires, it could potentially spoil its resource sharing agreements in the Timor Sea with Australia, redraw maritime boundaries and cast doubts over the ability of East Timor’s capital city of Dili to keep its word.

Arrangements negotiated in 2007 set a deadline of February 23 for plans to be finalized regarding the development of the Greater Sunrise field, including the plant.

Dili must decide whether to proceed with the plant’s construction on East Timorese soil, as it prefers, or follow Woodside’s lead and have it built on a floating pontoon. Dili, however, appears unlikely to budge, which could prompt Woodside to walk out.

At first glance the dispute appears to be a typical battle –between political and business interests over the development of natural resources in which a government is demanding a larger slice of the cake than initially agreed to.

But the oil and gas industry has changed dramatically since 2007 when the Treaty on Certain Maritime Arrangements in the Timor Sea (CMATS) was signed. CMATS was supposed to guarantee the percentage split on revenue between Australia and East Timor for the next 50 years.

According to CMATS, revenue from the Joint Development Area (JPDA) in the Timor Sea was to be split with East Timor receiving 90 percent and Australia being paid the balance.

Geographically overlapping with the JPDA is the Greater Sunrise field, of which 80 percent lies outside the JPDA. Revenues generated in the field are to be shared evenly under the Sunrise International Utilization Agreement (IUA).

If the deals were scrapped, so the thinking goes, East Timor could pick up the lot with the fields lying within its exclusive economic zone. But it would lack the capability needed to retrieve the oil and gas from under the seabed. Further, given the radical changes within the oil and gas industry finding any new partner would not be easy.

By far the greatest change to impact the industry – and East Timor’s bargaining position – is “fracking”.

Fracking is industry slang for hydraulic fracturing, whereby liquid is pumped into rock formations, widening the cracks and increasing the flow of oil and gas contained therein. Through fracking, oil and gas once trapped in shale deposits are being accessed and, importantly, fields once thought spent are being re-opened.

Thanks to fracking, the United States is expected to become the world’s largest oil producer within five years, overtaking Saudi Arabia. Countries like Australia, Canada and Russia also stand to benefit substantially from their massive shale deposits.

Pricewaterhouse Coopers (PwC) has warned that fracking could depress the price of oil by up to 40 percent of what it could potentially reach by 2035. Meanwhile fracking in the US has led to an oversupply of liquefied natural gas, resulting in a significant price drop between 2008 and 2012.

Oil is currently trading at about U.S. $100 per barrel, compared with a record peak of $US145 a barrel in July 2008. At that time, many believed the U.S. would run out of the precious commodity and face increased exposure to the political volatility of the Middle East.

Dili and the East Timorese government of Xanana Gusmao have followed the line toed by small countries around the world hoping to maximize revenue from bigger fuel-starved nations hunting down every deposit of crude oil when prices were at record highs.

However, substantially lower prices and increased market volatility have made companies more risk adverse. Whether the East Timorese like it or not, their politically volatile country is hardly a priority for international investors.

Politics aside, Woodside’s preference for a floating platform is also based on the technical difficulties associated with constructing pipelines through deep sea trenches. Meanwhile, East Timor wants it constructed on home soil as a matter of pride, jobs and votes.

Professor Damien Kingsbury, Director of the Centre for Citizenship, Development and Human Rights at Deakin University, follows the issue closely and said that neither side is likely to budge enough for the project to proceed.

“This will then allow the East Timorese government to cancel the agreement with Woodside and trigger the right of the East Timorese government to terminate the CMATS treaty, throwing open the issue of boundaries between the two countries,” he said.

There are no guarantees that re-negotiating the treaty would give East Timor a better deal. Further, Australia and East Timor could both miss a critical investment opportunity if the planned Sunrise project is not developed in the short-term.

At the end of the day, East Timor has assumed a proactive position by renegotiating its sometimes turbulent relationship with Australia and Woodside Petroleum. If it’s not careful it might end up in a much worse position than it bargained for.

Comments
3
Antonio Temes
February 26, 2013 at 23:35

The article seems a biased and selfish view regarding Australian interests and sustained in uncorrect information.

Kanes
February 21, 2013 at 10:35

What if East Timor replaces Woodside Petroleum with China Petroleum? If it brings more money for ET, why not?

Charles Scheiner
February 21, 2013 at 08:39

Unfortunately, this article repeats many of the errors in the blog on which it is based. Here are the most important:

There has never been a maritime boundary between Timor-Leste (East Timor) and Australia, largely because Australia has refused to allow overlapping claims to be resolved by judicial processes or through negotiation. Therefore, there is nothing to “redraw.”
Article 12.2 the CMATS treaty sets February 23, 2013 as the first date on which either Timor-Leste or Australia can give notice to terminate most of that treaty, including the clause which prohibits discussion or other methods to establish a maritime boundary, if the regulatory bodies of the two nations have not yet approved a development plan for the Sunrise field (and such a plan has not been approved). Both Australia and Timor-Leste agreed to this article when they signed and ratified the treaty. Implementing Article 12.2 would not undercut any agreement or understanding between the two governments.
The 90-10 split of revenues from the JPDA is in the 2002 Timor Sea Treaty and 2003 Sunrise International Unitization Agreement, not CMATS.  “Scrapping” (i.e., terminating through a mutually agreed process) CMATS does not affect this sharing. However, if future negotiations lead to a permanent maritime boundary consistent with current international legal principles (a median line between the coastlines), most or all of the Sunrise and Bayu-Undan fields would like in Timor-Leste’s territory. This could change who the companies pay their taxes to,  but would not affect the terms of the contracts from the companies’ perspectives.
The Greater Sunrise contracts for Woodside and its partners, signed with a binational agency in 2003, would not be affected by terminating the CMATS Treaty, which was written many years later. The Government of Timor-Leste has consistently said it will comply with all terms of all contracts and treaties it has signed and ratified. Timor-Leste does not break its word, nor is it “politically volatile.”
Restarting processes to resolve maritime boundaries is not a high-risk venture for Timor-Leste or anyone else. Article 12.3 of the CMATS Treaty states that it will come back into force, including the 50-50 sharing of Sunrise upstream revenues, if production starts from Greater Sunrise.  Discussions with the joint venture and Australia about development plans are continuing, and when they agree on how and where the Sunrise gas should be liquefied, the project will continue and CMATS will be re-activated.
The two nations may have agreed on a maritime boundary by then or reached consensus on other changes to their petroleum agreements. It is both normal and legal (under the Vienna Convention on Treaties) for both parties to any agreement, at any time, to be able to modify it by mutual consent. What is abnormal is the CMATS gag rule on maritime boundary discussions – and this week marks the date both governments decided that it could be removed.

Readers of the Diplomat can find more accurate and comprehensive coverage of this evolving issue, including the texts of relevant documents and commentary from many perspectives, at http://www.laohamutuk.org/Oil/Boundary/CMATSindex.htm.

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