The Timor Sea Treaty is less a result of bullying than poor negotiations

Now that the Timor Sea Treaty has finally been ratified, both Australia and Timor Leste (formerly known as East Timor) are obliged to abide by its terms and conditions; this includes the "international unitisation agreement" governing the development of the Sunrise field. The treaty will be binding on both parties for a period of 30 years, unless they agree on the location of new lateral maritime boundaries. This is most unlikely, given Timor Leste's loss of leverage to alter Australia's firm stance on this issue.

Timor Leste has lost a large swathe of important benefits under the Treaty's provisions and current development plans: notably its size and share of production in the "joint development area". It will receive only 40 per cent of its Exclusive Economic Zone entitlements over petroleum reserves, and possibly none of the potential downstream infrastructure benefits resulting from their development.

Put another way, Australia will receive 60 per cent of Timor Leste's claimed petroleum resources, and hopes to receive 100 per cent of the associated downstream infrastructure benefits.

How did this come about?

There has been a lot of talk about Timor Leste being "bullied" by Australia into this apparently unequal agreement. However, this conclusion appears only partly true.

The favourable outcome to Australia of the negotiations is more a result of Timor Leste's lack of oil & gas industry knowledge, experience and policy development measures, than to Australian "bullying".

This was particularly applicable to downstream benefits. During the critical negotiating period in 2000 and early 2001 - leading up to the agreement of 5 July 2001 - this weakness led to lost opportunities. Technical knowledge is power, and a lack of knowledge is weakness and failure.

In late 2000, the UN Transitional Administration for East Timor gave away Timor Leste's strongest "negotiating card" because the value of this card was not fully understood and appreciated.

As a lever to shift the Australian side to a 90/10 per cent split from their offer of a 75/25 per cent split of production in the modest "joint development area" (Zone A), the UNTAET negotiators offered too generous a "carrot". UNTAET kept reminding the Australian side that they would receive all the "downstream benefits" from the imminent development of the Bayu-Undan field if they moved to a 90/10 split. This was a serious tactical error in judgement, which achieved the desired result but cost Timor Leste much more than it gained.

At that time the Bayu-Undan operator was planning a pipeline to Darwin and the UNTAET negotiators did not fully appreciate the feasibility of alternative development options, such as BHP Petroleum's earlier offshore compact Liquid Natural Gas (LNG) technology or a deepwater pipeline across the Timor Trough to Timor Leste.

The Bayu-Undan operator's provision of grossly misleading advice in relation to the latter option, to serve its own interest in a quick development, did not help the situation. It was also not helped by the UNTAET negotiator's focus on a grab for maximum revenue. Revenue is easy to comprehend, but it is more difficult and challenging to understand how petroleum infrastructure can be created on the shores of Timor Leste in order to create real wealth in the form of energy independence and jobs. Did UNTAET possess the appropriate expertise and was it equipped to negotiate such an important nation-building treaty on behalf of Timor Leste?

Outspoken independence activist and researcher Mr. Robert Wesley-Smith, spokesman for Australians for a Free East Timor recently summed up the situation:

We have not been helped by the secrecy from the East Timor government, which amongst other things effectively limited media scrutiny in the absence of their comments. The East Timor government also rejected good legal and strategic advice from well-disposed friends, so as a result the whole nation has lost out at this stage.

In all likelihood, Timor Leste could have achieved the 90/10 split without giving away to Australia the "carrot" of downstream benefits.

How can this situation be redressed?

The Bayu-Undan operator's development plans relating to a pipeline to Darwin and associated onshore LNG export facility dictated the timetable for ratification of the Treaty. If this project goes ahead, Timor Leste will lose all the downstream benefits from Bayu-Undan over which they have 90 per cent jurisdiction. This in itself is a big loss for Timor Leste and contrary to a nationalistic petroleum development policy. However, it is a great win for the Northern Territory of Australia, especially since it is made possible by subsidies from Timor Leste in the form of the December 2001 "Bayu-Undan Understandings Agreement".

Given that Timor Leste may have lost the infrastructure benefits from her Bayu-Undan resources, how can she redress the balance by achieving the same benefits from the much larger Greater Sunrise field?

The current Sunrise field operators have not yet settled on a development plan, and have not even secured an export market for the gas, so it is "early days". With appropriate knowledge, Timor Leste will be able to explore how she can attract infrastructure investment arising from the development of this field. This will involve the development of expertise on how onshore fiscal and taxation adjustments can provide the greatest rate of return on investment to the commercial operators, and the most competitive gas price for the customer.

A talk on this subject by Mr. John Imle, former president of Unocal, and delivered at the recent Mining & Energy Resources Conference in Dili (5 to 7 March 2003) is a positive development that indicates that infrastructure benefits are now understood and back on the agenda in Timor Leste, albeit at a very late stage. The conference organisers are to be praised for their courage in tackling this challenging nation-building issue that has been undermined in the past by proponents of the pipeline to Darwin.