The Troubles of Timor

East Timor is a topic that has mostly been rendered invisible to mainstream media over the last couple of years, as Iraq and the War Against Terrorism have taken centre stage. But Timor Leste (as the new nation now prefers to be called) remains a fascinating subject deserving much more attention. In the last few days, however, at least one aspect has leapt back into the headlines. Indeed, the Financial Times has just published a story reporting that Timor Leste Prime Minister Mari Alkatiri has accused Australia of “stealing a million dollars a day in petroleum royalties from his impoverished nation“.

The issue provoking Alkatiri’s technicolour rhetoric is that of the maritime boundary between the two countries, and the related issue of the carve-up of royalties and practical control of sea-bed mineral resources (i.e. mostly oil and gas). The editorial in yesterday’s Australian newspaper also covered the issue, albeit in pro-Australian partisan terms that didn’t really give readers any proper opportunity to assess the objective merits of the Australian and Timorese positions. This post attempts to redress that balance.

The boundary issue is a longstanding one, stretching back at least to the early 1970s. The background is explained in this Parliamentary Bills Digest on the Petroleum (Timor Sea Treaty) Bill 2003:

In 1975, East Timor was incorporated into Indonesia and was annexed the following year. The United Nations did not recognise Indonesia’s annexation and continued to regard East Timor as under the administration of Portugal. Australia was the only country to recognise Indonesia’s annexation. In 1989, Indonesia and Australia concluded negotiations over a treaty for joint exploration and production of oil and gas under the Timor Gap Treaty. The Timor Gap Treaty was signed on 11 December 1989.

Australia gave effect to the Timor Gap Treaty by enacting the Petroleum (Timor Gap Zone of Cooperation) Act 1990. The Timor Gap Treaty provided a provisional settlement of a dispute over the seabed boundary line and it established a ministerial council and joint authority involving Australia and the Republic of Indonesia to jointly develop the rich reserves of oil and gas in the Timor Sea area. The Timor Gap Treaty included annexes dealing with a Petroleum Mining Code and a taxation code.

The use of the word ‘gap’ reflected a long-standing delimitation issue involving Portugal, Australia and Indonesia concerning the seabed boundary line of the Timor Sea. Portugal maintained that the boundary line was the median distance between East Timor and Australia. Australia maintained that the boundary was delimited by the Timor Trench, a deep seabed depression closer to East Timor and which Australia asserted was the edge of its continental shelf. Indonesia recognised the Australian position.

The boundary issue is significant because the disputed area contains the major Bayu-Undan oil and gas field. Another field, the Greater Sunrise Field, straddles the boundary with 79.9% of the field within Australian jurisdiction. Where a resource field straddles an international boundary an International Unitisation Agreement (IUA) can be negotiated to define the scope of the resource and to provide terms for the administrative and regulatory regimes that will apply. The field is then treated as a single unit.

However, the other relevant aspect of the treaty Australia negotiated with Indonesia over the Timor Gap is that Australia was almost the only country in the world that ever gave de jure recognition to Indonesia’s annexation of East Timor following its 1975 invasion. Many people (me included) regard this as one of the more shameful acts ever perpetrated by an Australian government, and one only partially redressed by our leading role in rescuing East Timor from Indonesian retribution following the independence referendum of 1999.

It’s difficult not to conclude that one of the principal reasons for Australia’s recognition of Indonesian sovereignty over East Timor was precisely so it could do a deal with Suharto that entrenched our government’s ambit claim for control of seabed resources. The Australian position claimed sovereignty over the seabed to the edge of the continental shelf, claimed to be relevantly delimited by the Timor Trench, which is well over 3/4 of the way from Australia to East Timor and puts the lion’s share of mineral resources in Australian control.

In fact, the Australian position is not utterly outrageous on the merits (as some East Timor advocates claim), but nor is it overwhelmingly compelling. Maritime boundaries are governed in international law by the UN Law of the Sea Convention 1982. Article 76 defines the continental shelf and how it is measured, and Article 77 specifies the rights that accrue to a coastal State on its continental shelf:

1. The coastal State exercises over the continental shelf sovereign rights for the purpose of exploring it and exploiting its natural resources.

2. The rights referred to in paragraph 1 are exclusive in the sense that if the coastal State does not explore the continental shelf or exploit its natural resources, no one may undertake these activities without the express consent of the coastal State.

3. The rights of the coastal State over the continental shelf do not depend on occupation, effective or notional, or on any express proclamation.

Article 83 deals with disputes over delimitation of the continental shelf between States with opposite or adjacent coasts (e.g. Australia and Timor Leste), but isn’t especially helpful, simply providing:

1. The delimitation of the continental shelf between States with opposite or adjacent coasts shall be effected by agreement on the basis of international law, as referred to in article 38 of the Statute of the International Court of Justice,, in order to achieve an equitable solution.

2. If no agreement can be reached within a reasonable period of time, the States concerned shall resort to the procedures provided for in Part XV.

3. Pending agreement as provided for in paragraph 1, the States concerned, in a spirit of understanding and co- operation, shall make every effort to enter into provisional arrangements of a practical nature and, during this transitional period, not to jeopardize or hamper the reaching of the final agreement. Such arrangements shall be without prejudice to the final delimitation.

Although I’m anything but an expert in this area, it appears that various factors may come into play in determining a maritime boundary dispute between two coastal States. They include relevant area and proportionality, coastal configuration, the relationship between the continental shelf and Exclusive Economic Zone of each State and, perhaps most importantly, geological and geomorphological factors. In that context it may well be that the location of the Timor Trench could be decisive. As I understand it, it marks the junction between the tectonic plates on which Australia and Indonesia respectively stand, and the seabed is quite shallow right out to the Trench. Accordingly it might well be held to mark the boundary of Australia’s continental shelf.

It was in that historical and international law context that Australia and Timor Leste sat down to negotiate a deal over control of seabed resources in the wake of Timorese independence in 1999. The negotiations resulted in the Timor Sea Treaty 2003 and the Greater Sunrise Unitisation Agreement 2003. Both agreements left the ultimate resolution of the maritime boundary for later resolution, and concentrated on the more immediate questions of control and royalty carve-up of the Bayu Undan and Greater Sunrise gas deposits. As the Bills Digest on the Timor Sea Treaty explains:

The ratification of the Timor Sea Treaty is a fundamental condition precedent to the exploitation of the gas and oil resources. Contractual obligations of the commercial venture partners for the Bayu-Undan field were premised on ratification of the treaty, preferably by the end of 2002, to enable sufficient lead-time for infrastructure, such as on-shore facilities, to start construction. This Bill, to enable the ratification of the Timor Sea Treaty, required urgent consideration on 5 and 6 March 2003 because the deadline for the Bayu-Undan commercial contract was the 11 March 2003. At the time the Bill was debated in the House of Representatives on 5 March 2003, the IUA for the Greater Sunrise field remained unsigned. It was signed on 6 March 2003.

The deep Timor Trench precludes pipeline delivery for on-shore processing in East Timor. Instead, on-shore infrastructure will be constructed in and around Darwin. The likely investment in the Northern Territory by the developers associated with the Bayu-Undan field is estimated at $3 billion for a pipeline to Darwin and a liquid natural gas (LNG) plant at Wickham Point, near Darwin.

The former Timor gap area was referred to as the Zone of Cooperation. Under this legislation that area will be known as the Joint Petroleum Development Area (JPDA). The Timor Sea Treaty provides that the title to all petroleum in the JPDA belongs to both East Timor and Australia on the basis of 90% of the petroleum attributed to East Timor and 10% to Australia. In the case of the Greater Sunrise Field, which straddles the JPDA boundary line, East Timor is likely to be entitled to 90% of the 20% of the field that falls within the JPDA i.e. 18% of the total field. The expected revenue stream to East Timor from its share of the oil and gas resources is likely to be significant and critical for this emerging nation.

However, what the Bills Digest fails to explain is the extent to which the Howard government played diplomatic “hardball” with the fledgling East Timorese government over these negotiations. Completion of agreement, ratification and legislative implementation by both countries of arrangements over the Bayu Undan deposit was both critical and time-sensitive. As explained above, Phillips Conoco had signed contracts with Japan that made commencement of construction by mid-2003 essential (otherwise resources would have needed to be sourced elsewhere). In addition, as Australian negotiators well knew, the Timor Leste government had planned a large part of its near-term economic strategies on availability of the royalty stream from Bayu Undan. With few other significant revenue sources, it had deliberately decided to largely avoid international borrowings and to fund its public expenditures on the smell of a gassy rag until the Bayu Undan royalty revenue started flowing. Hence the loss of those revenues, or even a serious delay, would have been catastrophic to the Timorese economy.

Knowing that, the Australian negotiators sought to tie agreement on Bayu Undan to agreement on “unitisation” (i.e. royalty carve-up) of the much larger Greater Sunrise deposit. Australia was prepared to concede Timor Leste a 90% share of Bayu Undan royalties, but insisted on retaining 82% of the much larger Greater Sunrise field. There was no objective need to finalise agreement on Greater Sunrise, because there were no immediate plans to develop that deposit and the joint venture partners couldn’t even agree on how it should be done (onshore pipeline or offshore processing). However, by refusing to agree on Bayu Undan until Timor Leste agreed on Greater Sunrise, Australia put intolerable pressure on the Timorese to effectively accept its territorial claim, at least in the practical sense of accepting the royalty carve-up pending formal resolution of the maritime boundary dispute. One suspects that the Howard government hoped it could clinch a practical agreement that would allow exploitation of both Bayu Undan and Greater Sunrise to proceed, and then “go slow” and attempt to stall negotiations for a permanent resolution of the maritime boundary issue for as long as possible (having already achieved its preferred position in a practical sense). As the Financial Times article observes:

The dispute has grown increasingly bitter in the past year as Australia has refused to accelerate negotiations, and delays in royalties from various fields have forced Dili to turn to donors for budgetary support.

Mr Alkatiri’s government wants monthly negotiations. But Australia has agreed to meet only twice yearly and Canberra reasserted yesterday that it was not willing to amend this schedule.

A spokesman for Alexander Downer, Australia’s foreign minister, said: “We’ve always said this is going to be a complex process.”

However, the Timor Leste government hasn’t allowed itself to be bulldozed by Canberra. Although its representatives ultimately signed the Greater Sunrise Unitisation Agreement, the Timor Leste Parliament is refusing to ratify it as Section 95 of the nation’s Constitution requires. No doubt the Timorese take the view that they’ve got little to lose and everything to gain, given that they’d only be getting 18% of Greater Sunrise revenues anyway under the Agreement. The Howard government is attempting to characterise the Timorese as “reneging” on a done deal:

The essence of the Australian response is that there is nothing to argue about, that an agreement was reached in good faith and that a deal is a deal. …

And the East Timorese are not demanding changes to arrangements that suit them, such as the treaty on a related energy field that splits the assets 9 to 1 in Dili’s favour. According to the Australian Government, this deal will generate $7 billion for East Timor, compared with $1 billion in direct energy revenue for Australia.

However, it wasn’t a done deal at all. Australia was well aware that the Timor Leste Constitution required parliamentary ratification of any agreement, and by definition a deal isn’t “done” until ratification occurs. The Timorese are simply trying to play international hardball just as the Australians did to them. If Australia doesn’t come up with a better deal, no doubt the maritime boundary dispute will eventually go to international arbitration. In the meantime, unless Australia offers a better royalty deal, it seems likely that Timor Leste will continue refusing to ratify the Greater Sunrise Unitisation Agreement.

That will inevitably mean that development of that resource will remain stalled, because the Joint Venture partners (Shell, Woodside and Phillips Conoco) won’t be prepared to accept such a level of sovereign risk. That may seem a tragedy for either Dili or Darwin, because bringing such huge gas reserves onshore will mean an economic boom for the pipeline destination city. However, as things presently stand, the majority Joint Venture partners favour offshore processing on a floating platform. Adoption of that option would result in minimal local economic flow-on benefits (jobs, development, cheaper energy etc) to either Darwin or Timor, other than the royalties flowing to the respective governments. In a perverse kind of way, the current diplomatic mexican stand-off might actually be beneficial, at least to Darwin. By the time it’s resolved, it will be much more likely that there will be large enough confirmed onshore sales in Australia to make a pipeline to Darwin the best commercial option. My own preferred outcome would be for Timor Leste to have a much larger share of royalties, with the gas being piped onshore to Darwin to fuel growth and development that should finally see the Northern Territory become a viable domestic economy.

Update – Uncle from ABC Watch blogs on this topic as well. He’s a tad more shrill than this armadillo, but I mostly agree with his points. Uncle usefully points to another article in yesterday’s Oz that I’d overlooked. Among other things. it quotes Gillian Triggs, director of the University of Melbourne’s Institute for Comparative and International Law, as saying that the Howard Government’s case was strong. That’s essentially what I argued above, so it’s nice to know that a genuine expert on international law has reached a similar conclusion!