East Timor Risks All in Oil Dispute

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East Timor Risks All in Oil Dispute

Tensions between East Timor and Woodside Petroleum mount over oil fields in the Timor Sea.

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.