BACK DOOR Newsletter on East Timor home

"The Australian Government's recent record shows that it has been putting Timor Sea resources above any other consideration in its dealings with neighbouring countries. However, Australia stands to benefit far more from harmonious development within the region that will attract investment, for which Australia is better prepared than its neighbours." East Timor Observatory
See also this significant document by the Australian Council for Overseas Aid (ACFOA):

Dec 10 2000 ACFOA Position Paper: Negotiations of the Timor Gap Zone of Cooperation
[ACFOA is the peak body of some 90 or so Australian Aid and Development Non-Government Organisations (ANGOs) developing policy and advocacy related to development issues. This position paper is especially noteworthy given the wide range of political and religious viewpoints represented by the member ANGOs. - BD]
and also:
Nov 17 LHB: Health, Wealth, Apologies and Oil: The East Timor-Australia Connection

East Timor Observatory

Ref.: OIL01-12/01/2001

Subject: Timor Sea Oil and East Timor-Australia relations


Contents:
Summary:
1. What is the Timor Gap ?
2. Australia and Indonesia share the Timor Gap
3. The future of the Treaty: just new parties, or a new agreement?
4. The boundaries
5. Royalties
6. The Oil Companies
7. Canberra Government under domestic fire
8. Oil in East Timor's economy
Conclusions:
Note:

Summary: The Timor Gap is to be East Timor's main source of revenue for the next 20 years. Being the country's main source of revenue does not necessarily mean being the main economic factor for the livelihood of its population, 80% of which works and is directly dependent upon agriculture. However, as from 2005, revenues from oil and gas royalties could be twice the country's current budget - an immense contribution to the economic viability of the new State emerging from the ashes of September 1999.

The Australian Government, which tried to share Timor Gap resources with Indonesia, now wants to share them with East Timor. However, both international law on maritime boundaries, and the political environment have changed. Many experts, including some Australians, believe that under these laws, East Timor could recover its rightful share. The Australian Government says it seeks negotiations that will benefit both parties; in that case, other benefits - not only Timor Gap exploration revenue - must also be taken into account, such as profits Australia will make from gas processing in Darwin, the advantages it will gain from having a self-sufficient neighbour, with whom it can have honourable relations. For the Timorese, there could be some long-term risks attached to the oil "windfall" if revenues are not properly managed.

1. What is the Timor Gap ?
 

  • In 1972 Australia attempted to demarcate its sea boundaries in the Timor Sea, with Indonesia and East Timor (then a Portuguese colony). Using the continental shelf argument, Australia managed to get agreement on a boundary that was actually closer to Indonesia than to its own coastline, and obtained 85% of the ocean territory separating the two countries. Portugal rejected the continental shelf argument and sought a boundary located mid-way between Australia and East Timor's coastlines. The contested area of sea came to be known as the "Timor Gap", the boundaries of which were the result of agreement between Australia and Indonesia, since Timor itself was never heard.
  • When it became known that Indonesia intended to invade East Timor in 1975, Australia's ambassador to Jakarta, R. Woolcott, sent a confidential telegram to his government: "Closing the present gap in the agreed sea border could be much more readily negotiated with Indonesia … than with Portugal or an independent Portuguese Timor"; he suggested that the Ministry of Mines and Energy might be interested in this.

  • 2. Australia and Indonesia share the Timor Gap
     

  • In 1979, once international outcry over Indonesia's violent intervention in East Timor had subsided, Australia began to negotiate with Indonesia. Meanwhile, the 200 mile exclusive economic zone idea, and median line approach for boundaries between opposing coastlines, began to gain support internationally. Australia, however, rejected that solution and the "Gap" remained.
  • In 1981, Australia and Indonesia agreed on a boundary for fishing rights that ran along the median line (PFSEL - Provisional Fisheries Surveillance and Enforcement Line).
  • In 1982, the median line approach was enshrined in the "UN Convention on the Law of the Sea" (Montego Bay), but this only entered into force after 60 countries had ratified it - that only occurred in 1994.
  • In 1989, after 11 years of negotiations, Australia and Indonesia signed the Timor Gap Treaty, which signified Australia's formal endorsement of Jakarta's claims over East Timor, while no other country in the West had yet recognised Indonesian de jure sovereignty over the territory.
  • The Gap is divided into 3 areas: in Zone B Australia gets 90% of revenues from oil and gas exploration royalties and Indonesia receives 10%, while in Zone C Indonesia receives the lion's share and Australia gets 10%. Zone A, the so-called Zone of Cooperation (ZOCA), located in between B and C, (500 km from Darwin, 250 Timor), is jointly managed by both countries and royalty revenues are divided 50-50. Had the median line approach been used, however, all revenues would have gone to Indonesia - the price it paid for recognition of its political sovereignty.
  • Portugal tried taking legal action against Australia at the International Court of Justice at The Hague, over the illegality of the Timor Gap Treaty (1991-1995). The outcome was that the Court declared itself incompetent to try the case in view of the fact that Indonesia, not accused by Portugal, was not present as it refused to recognise the Court's authority. Although Australia was not charged by the Court, it was obliged to formally agree that the Treaty signed with Indonesia would not be binding on an independent East Timor.
  • In 1997, altering their maritime boundaries in accordance with the new international regulations, Australia and Indonesia decided that the median line, already accepted for the purposes of fishing rights, would become the new boundary line. Nonetheless, it would not apply to seabed resources, which would continue to be governed by the terms of previous agreements, such as the Timor Gap Treaty.
  • In 1998, while negotiations were still in course between Portugal and Indonesia under UN auspices, the CNRT (National Council of Timorese Resistance) announced it would seek a revision of the Gap Treaty. It was careful, however, to reassure both oil companies (by promising to respect existing contracts) and Australia itself (by saying it wished to continue joint development).
  • 3. The future of the Treaty: just new parties, or a new agreement?

    Renegotiation of the Timor Gap Treaty revolves around the successor state concept. If East Timor succeeds to Indonesia, it inherits Indonesia's rights and the terms of the Treaty remain intact. In that case, East Timor could only negotiate better terms if Australia were willing to do so. If the Treaty came to be regarded as invalid, however, all aspects would have to be renegotiated, including the maritime boundaries. This would have a major impact on the oil and gas revenues of the parties concerned.
     

  • During a visit to Lisbon, Australian Foreign Minister, Alexander Downer, announced that the Timor Gap Treaty would remain in force. If Timor gained independence, Indonesia's rights would simply be transferred to East Timor, he said, adding that he had discussed the issue with Xanana Gusmão (in a Jakarta jail at the time). He said the East Timorese had no intention of introducing any significant changes in the Treaty (Lusa, 1-3-99).
  • Australia's Attorney-General's Dept. advised the Senate that East Timor could demand amendments to the Treaty, and that Australia should quickly determine the state's intentions to protect its mining interests. Autonomy (of East Timor, within Indonesia) could also affect the territory's involvement in the Treaty, it said (The Age, 24-5-99).
  • Following the vote for independence on 30 August 1999, Australia led the UN military intervention forces in East Timor.
  • While the Indonesian Government renounced its claims on the Timor Gap (25-10-99), West Timorese authorities began to claim a share of oil and gas revenues, but they have yet to put forward any valid arguments in support of these claims (Jakarta Post, 10-12-99; Asia Pulse, 24-12-99; Antara, 28-2-00).
  • The referendum results gave the CNRT new legitimacy. Mari Alkatiri, in charge of oil affairs, said: "... for us the treaty is an illegal one, that's why we simply cannot be a successor state". East Timor would seek to resolve the dispute underlying the treaty: the position of the final seabed boundary, said Alkatiri (The Weekend Australian, 21-11-99). Gusmão gave the same message at a press conference in Darwin (Lusa, 7-12-99).
  • After rejecting the idea of discussing boundaries (6.99) the Australian Government attempted to frighten the Timorese off by suggesting they could jeopardise investments: "To start to unravel the whole of the Timor Gap Treaty, which I don't think for a minute is going to happen, would in turn unravel all of the investment in the Timor Gap, and that wouldn't be in anybody's interest, particularly East Timor's" (AAP, 30.11.99).
  • In January 2000, a workshop on the Timor Gap was held in Dili for all those involved in the matter: the Australian Government, the Northern Territory Government, petrochemical companies, UNTAET and CNRT. It was agreed to continue the practical arrangements of the treaty for the transitional period until independence, to ensure the confidence of oil companies and secure their investments; the end to Australia's pretensions was announced: "East Timor will not simply replace Indonesia in the treaty, … this is not a case of succession… We do not want to retroactively legitimise or give any legitimacy to the conclusion of the treaty…". The terms of the Treaty may be altered when Timor is fully independent. (…) (UNTAET, 19-1-00).
  • The Australian Government knows it will have to negotiate: "It is necessary to avoid a legal vacuum … and to provide commercial certainty for the petroleum industry in the Timor Gap" (AAP, 18-9-00), but instead of facing up to reality, Australia approached the revenue sharing negotiations with "a feeling of good will, a feeling of being generous", according to Daryl Manzie, Northern Territories' Minister for Resource Development. "We don't know if negotiations will bring up 60%/40% (in East Timor's favour) or 50%/50%, but Australia is not reluctant to discuss that …We would be reluctant to give them the whole thing", said the Minister, speaking at the APPEC meeting (Asia Pacific Petroleum Conference, 26-9-00). In case Australia's "generosity" had not yet convinced the Timorese, the Australian Government hinted at the threat of disinvestments: the Gap's natural gas reserves were not vital to Australia:  "3.4 trillion cubic feet are in the Zone of Cooperation but almost 40 trillion cubic feet lie outside the Zone", said Daryl Manzie, in an attempt to convince the Timorese of the risks of asking for too much (Dow Jones Newswires, 26-9-00).
  • In early October, Peter Galbraith, UNTAET's official responsible for the negotiations, responded with a threat to take the case to the International Court if the negotiations failed (Reuters, 9-11-00).

  • 4. The boundaries
     

  • In June 2000, the CNRT announced that a new boundary, midway between East Timor and Australia, would be the departure point for the negotiations (The Australian, 15-6-00). Australia agreed to discuss sharing revenues from royalties but, for obvious reasons, would not agree to discuss the boundaries: many experts predict that a revision of the boundaries would place the entire Timor Gap, and possibly even more sea territory, under the exclusive control of East Timor.
  • "The median line would be a viable starting point for negotiation", said Ivan Shearer, Prof. of International Law at the Univ. of Sydney, adding that recent international practice "puts all the pressure on favouring a common line for both seabed and water-column (fisheries)". Prof. Anthony Bergin of the Australian Defence Studies Centre said that international law had changed a lot since the Timor Gap Treaty, and Australia was liable to be seriously contested at the International Court (The Australian, 15-6-00). Geoffrey McKee, an oil industry consultant, said, "the fishing boundary adopted in 1981 could be a good argument for the boundary determining oil and gas rights" (Weekend Australian, 29-11-99).
  • Some go even further: revision of the boundaries within the Timor Gap could lead to revision of the boundaries of the Timor Gap itself in relation to neighbouring zones. A map drawn up by the Australian navy for a possible military intervention in 1999, would give East Timor sovereignty over the Laminaria/Corallina reserves, west of the Zone of Cooperation (150,000 barrels/day). Prof. Prescott believes that the eastern "tripoint" called "A16" on the current Zone of Co-operation boundary would have to be moved a little further to the east in an agreed settlement. This would result in East Timor inheriting a greater share of Shell/Woodside's Sunrise/Troubadour reserves. These alterations could increase East Timor's present reserves by 5 (Energy Asia, www, 24-7-00; The Economist, 2-12-00).
  • "Good fences make good neighbours", said Prof. Ivan Shearer (EnergyAsia, www, 24-7-00).

  • 5. Royalties
     

  • If the maritime boundary were altered, East Timor would be entitled to all revenue from exploration in the ZOCA. José Ramos Horta stated that the new country is entitled to up to 90% of gas and oil royalties from exploration in the area covered by the treaty, and expressed the hope that Australian leaders, especially the PM John Howard, would take the initiative themselves to review the current (50-50) royalty split (ABC, 7-5-00).
  • In 1998, Australia and Indonesia made US$1.1 million from oil royalties from the Timor Gap. The figure for 1999 should rise to 2.2 million, according to Mr. Kuntoro, Indonesian Mines and Resources Minister (SMH, 27-02-99). In October 2000, East Timor received its first royalty payment worth over US$3 million - more than had been expected. It came from oil lifted from the only active oil field in the Timor Sea - the Elang Kakatura oil field operated by BHP, producing around 15.000 barrels a day (Dow Jones Newswires, 7-11-00).
  • Revenues should sharply increase after 2004/2005, when extraction of liquefied petroleum gas and condensate starts in the Bayu-Undan field in the ZOCA. Considerable fluctuations in oil products prices make revenue predictions impossible. Jonathan Prentice, a spokesman for UNTAET who took part in the negotiations said: "a barrel used to cost $10 a year ago, now it costs $28… These factors affect the profits or losses … Yes, the figure is extremely sizable, in the many, many millions" (Dow Jones, 20-1-00). The $50 million expected from 2004 onwards assumes an average oil price of $18, although the average price in 1999 was US$25.5 (All Columns, 23-6-00) - this revenue would double if the boundaries were redrawn.
  • "This year the annual recurrent budget of East Timor is $45 million, so you can imagine what an enormous difference this resource can make to East Timor", said Galbraith (IPS, 29-11-00).

  • 6. The Oil Companies
     

  • A few months after the New York accords (August 1998), before Indonesia had even agreed to the "popular consultation", the Broken Hill Proprietary Co (BHP) representative in Indonesia, Peter Cockcroft, was already visiting Xanana Gusmão in Cipinang jail. This was the first sign that the oil companies were starting to recognise the possibility of alterations in the Timor Gap. Protests from Indonesia forced Australia and BHP to reaffirm their commitment to the Treaty. Peter Cockcroft was posted to India.
  • Before the BHP rep's visit, the CNRT had already issued a statement seeking a review of the treaty, but recognizing the rights of the oil companies and development interests of Australia. Such reassurances have often been reiterated since: "We want to assure all those involved that they can continue exploration", said Xanana Gusmão (Lusa, 7-12-99); "We are not going to do anything to upset the oil and gas projects in the Timor Gap zone because it is in our interests to keep them going", said Alkatiri, "We must create a provisional framework to assure investors that renegotiation of the treaty will not prejudice their position" (International Herald Tribune, 14-12-99). The revision of the treaty will not affect the companies, "It doesn't matter for them [the oil companies] whether they are going to pay Australia or East Timor " (The Weekend Australian, 21-11-99).
  • The oil companies work independently, which means that Australia's threats of disinvestments do not hold water: "We want to make sure that our existing legal rights, and the fiscal and administrative arrangements are unchanged for the life of our project", said Jim Godlove, Phillips' manager in Darwin, adding "The negotiations on fixing the seabed boundary are between East Timor and Australia" (International Herald Tribune, 14-12-99).
  • On 25 October 1999, Indonesia confirmed that it was no longer involved in the Timor Gap and, the following day (Dow Jones Newswires, 6-12-99), Phillips Petroleum Co. announced it would be investing US$1.4 billion in the ZOCA Bayu-Undan field. Its investments rose to 2.7 billion in November 1999 and, with other fields in the zone, some of which could go to East Timor if boundaries are reviewed, investments for gas production in the Timor Sea were put at 5.9 billion. The company, in partnership with Woodside, would also be building a multimillion dollar liquefied natural gas plant in Darwin to process the gas.

  • 7. Canberra Government under domestic fire
     

  • Australian legal experts are expressing doubts about their country's rights in the Timor Gap dispute, and the view that East Timor's claims are legally valid. Not surprisingly, Bill Campbell, director of International Law Office of Australia's Attorney-General's Dept, favours a negotiated settlement of the Timor Gap dispute, and is opposed to a judicial settlement in which "states lose control" (EnergyAsia, www, 24-7-00).
  • Australian public opinion is also critical of the government's position: "According to budget figures, the government is only prepared to commit a paltry $150 million in aid to East Timor over the next 4 years. This is less than 6% of the expected revenue from the Bayu-Undan field income alone - which rightfully belongs to East Timor. The Howard Government is trying to hoodwink both the Australian and East Timorese people…" (Green Left Weekly, 17-5-00).
  • The Labor Party and Australian Democrats are urging Australia to change its national boundaries with East Timor to help the struggling country gain financial independence. The Democrats' foreign affairs spokesperson Vicki Bourne said she favoured a proposal [put forward by Timorese leaders] which would give 90% of all revenue from Gap development to East Timor (AAP, 9-10-00).
  • Downer warned the Timorese that any changes in the Timor Gap affecting the sharing of royalties "would play into the overall size of the Australian aid programme in East Timor" (Reuters, 9-10-00).
  • "By acting honourably and taking into account current international law, the Australian Government could gain not only the benevolence of East Timor but of other parties too, as well as providing East Timor with an economic basis with which it will be able to reduce its dependency on foreign aid", said a bi-party report by the Australian Senate Foreign Affairs, Defence and Trade Committee.

  • 8. Oil in East Timor's economy
     

  • Sarah Cliffe, head of the World Bank's Mission in East Timor, warned of some dangers: "Over-reliance on one or two exports - whether coffee or oil - makes the country too vulnerable if the price falls". She referred to the possible uses of oil and gas revenues, warning that this "windfall" brings with it some risks. Economies that have had high revenues from oil and have spent these immediately have often raised urban wages and incomes so fast that other industries cannot afford to operate and go out of business. Later, when the oil has run out, the economy has no sustainable alternative to provide incomes and employment (S.Cliffe's address to the CNRT Congress, August 2000).

  • Conclusions:

    1. Indonesia should be included in the review of the Timor Gap boundaries. The claims being made by West Timorese authorities must be clarified in order to eliminate pretexts for any future instability.
    2. The Australian Government's recent record shows that it has been putting Timor Sea resources above any other consideration in its dealings with neighbouring countries. However, Australia stands to benefit far more from harmonious development within the region that will attract investment, for which Australia is better prepared than its neighbours.
    3. The Timorese leadership has four years in which to decide on and prepare for the ways in which future royalties are to be used - ways that will serve the country and its people.
    Note: Documents and information relating to this subject have been compiled by the East Timor Observatory in a 42-page thematic Dossier entitled "Oil - ref. OIL01". The Dossier and/or further information may be ordered from the East Timor Observatory.
    Observatory for the monitoring of East Timor's transition process a programme by the 'Comissão para os Direitos do Povo Maubere'

    Coordinator: Cláudia Santos
    Rua Pinheiro Chagas, 77 2ºE -  1069-069     Lisboa - Portugal

    ph.: 351 1 317 28 60  -  fax: 351 1 317 28 70  -  e-mail: cdpm@esoterica.pt
    URL: http://homepage.esoterica.pt/~cdpm
    East Timor Observatory

    ETO was set up by two Portuguese NGOs - the Commission for the Rights of the Maubere People (CDPM) and the ecumenical group Peace is Possible in East Timor,  which have been involved in East Timor solidarity work since the early eighties. The aim of the Observatory is to monitor East Timor's transition process, as well as the negotiating process and its repercussions at international level, and the developments in the situation inside the territory itself.
    E-mail: cdpm@esoterica.pt  Homepage: http://homepage.esoterica.pt/~cdpm/frameI.htm
    See also:

    Jan 5 AU: Talks stall on Timor Gap oil profits
    Dec 10 2000 ACFOA Position Paper: Negotiations of the Timor Gap Zone of Cooperation
    Dec 6 GLW: Australia's oil and gas grab exposed
    Dec 2 TEcon: Timor's troubled waters
    Nov 29 IPS: Oil & Good Relations Don't Mix
    Nov 28 CAA: The Timor Gap Treaty: Latest News
    Nov 17 LHB: Health, Wealth, Apologies and Oil: The East Timor-Australia Connection
    BACK DOOR Newsletter on East Timor home

    Website: http://www.pcug.org.au/~wildwood Email: wildwood@pcug.org.au