Timor-Leste: Renewed Uncertainty Over Oil


James Cotton

Timor-Leste (or East Timor) began its independent existence under United Nations auspices. Though much reduced in numbers, the UN mission UNMISET will stay until May 2005, at which time the capacity of East Timor's institutions to operate autonomously will be decisively tested. Economic viability remains the chief goal of those institutions. And without predictable oil and gas revenues from the Timor Sea, East Timor's future would be bleak. With impasse now reached between Australia and East Timor on ownership and exploitation rules, the Woodside Petroleum venture to extract hydrocarbons from the Sunrise field has been placed on hold, threatening East Timor's future revenues.

In September 2003, negotiations were convened between Australia and East Timor on the permanent delimitation of the seabed boundary between the two states. Currently the exploitation of the hydrocarbon resources of the area is conducted under the provisional 'Timor Sea Treaty' of May 2003. It has been apparent for some time that Australia is in no hurry to conclude such a permanent agreement.

Dili maintains international law is on its side. According to the 'Timor Sea Office' web-site maintained by the office of the prime minister, international law entitles East Timor to an Exclusive Economic Zone (EEZ) delimited by the line of equidistance with Australia, giving Timor-Leste most of the undersea gas and oil, including the richest deposits of the Sunrise field. There are some doubts that the issue is so clear. Whereas the line of equidistance can be drawn on a map, the lateral boundaries are much less easy to define, and both are needed to delimit an EEZ. According to some legal opinion, a negotiation between East Timor and Indonesia of their seabed claims might well produce lateral lines close to those found in the current treaty. And Indonesia would eventually have to be involved in any negotiation. Indeed, though Timor-Leste delimited much (but not all) of its land boundary with its former occupier through an agreement signed in June 2004, no joint maritime boundaries have yet been established. A possible ironic consequence of the current controversy might even be to establish an Indonesian claim to some of the disputed resources, further delaying exploitation. And with the release, in November 2004, of the last of the defendants in the trial of Indonesian military and officials charged with crimes against humanity committed in East Timor in 1999 (former Governor Abilio Soares) there are some grounds for the view that Indonesian institutions cannot be anticipated to operate in favour of East Timor's interests.

Partly as a result of charges by the opposition party during the 2004 Australian federal election campaign of government bad faith in its conduct of the East Timor negotiations, the Australian government offered a new deal. An apparent compromise was achieved in August 2004, when talks between Foreign Minister Alexander Downer and Josť Ramos-Horta produced an in-principle agreement regarding Australian compensation of around US$3 billion in exchange for permitting exploitation, under the current provisional rules, of the largest of the oil and gas fields in the Timor Sea, the Sunrise field. A further round of seabed boundary negotiations was also promised. The latter, however, broke up without agreement in late October, with East Timor still unwilling to accept any exploitation of Sunrise without a seabed treaty. Meanwhile, East Timor has been seeking, as part of a settlement, to locate onshore extraction facilities for the field on its territory.

Given that future oil and gas revenues are critical to East Timor's viability, it is noteworthy that the handling of the funds generated by those resources currently being exploited in the JPDA is less than fully transparent, and the means of their future management are unclear. Under draft legislation published in 2004, the Timor-Leste government announced its plans to establish a Petroleum Fund, which will receive all future oil and gas revenues. According to the wording of the government's explanatory document, this Fund will constitute a reserve 'for the benefit of future generations', but expenditure from it for government spending could be approved by the National Assembly. A Public Consultation document released in October 2004 laid out the options for public debate in order to prepare for the introduction of legislation in the current parliamentary session. If the East Timor political system remains dominated by a single party (a proposition that will be tested by the next elections, due in 2005) then the government, through the Ministry of Planning and Finance, could retain a free hand to expend revenues well in excess of its current budget. The government is under some pressure from the World Bank to create a statutory fund to oversee the nation's resource income, and its Consultation document does suggest longer-term fiscal guidelines and/or a role for an advisory council of eminent persons to protect the revenues. However, according to the current UN assessment, East Timor's government still lacks key personnel especially in the financial sector. Without capable individuals working in independent institutions there is an evident risk that East Timor faces those perils entailed in oil wealth outlined in the government's Consultation document.

WATCHPOINT: How will East Timor legislate to manage and conserve its oil wealth?


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