Global Policy Forum

By Michael Richardson

Australia and the United Nations temporary administration in East Timor are reportedly near an agreement on new revenue-sharing rules covering the rich oil and gas fields between northern Australia and the former Indonesian territory. If the deal can be finalized in the next few weeks, as Australian officials hope, it will clear the way for supplying liquefied natural gas from the area to the U.S. West Coast.

While Indonesia ruled East Timor from 1975 to 1999, Canberra negotiated a treaty with Jakarta governing a 75,000-square-kilometer (30,000-square-mile) area in the Timor Sea. The zone was jointly managed by the two countries, and production royalties from oil and gas fields were divided equally.

Eight months ago, after East Timor's break from Indonesia, negotiations on a new treaty began between Australia and the UN-led administration, which is preparing the former territory for independence. The next round of talks is scheduled to take place this week in Dili, the capital of East Timor. The negotiations have proved tougher and slower than expected; a UN official on the East Timor side said last month that the zone was closed for business unless Australia agreed to new boundaries in the Timor Sea that gave East Timor much more resources.

The UN official, East Timor's interim minister for political affairs, Peter Galbraith, said the difference between the East Timorese and Australian positions amounted to a large revenue loss to East Timor. Depending on the outcome of the talks, the United Nations expects oil and gas production in the Timor Sea to generate annual revenue of $100 million to $500 million for East Timor. There are several oil fields under production in the zone, and in February the liquefied natural gas project moved a step closer to reality when Phillips Petroleum Co. of the United States, Royal Dutch/Shell Group and Woodside Petroleum Ltd. of Australia agreed to work together to jointly develop their separate gas fields in the Timor Sea.

This arrangement will ensure sufficient gas reserves for Phillips to go ahead with construction of a plant near Darwin, in northern Australia, to produce 4.8 million metric tons a year of liquefied natural gas for export. But the company has a July deadline for approving construction of a 500-kilometer (300-mile) pipeline to Darwin from its Bayu-Undan field in the Timor Sea zone. Phillips must also finalize key supply contracts in the next three months, including a deal worth up to 7 billion Australian dollars ($3.68 billion) to supply liquefied natural gas to El Paso Corp. El Paso has signed a letter of intent to buy the gas over 15 years starting 2005, mainly for use in California, which is facing serious energy shortages.

"The entire set of gas export contracts could be jeopardized if the treaty is not agreed in time," said Jim Godlove, the Darwin area manager for Phillips Petroleum Co., which is part of a consortium developing gas fields in the Timor Sea.

Australia's foreign minister, Alexander Downer, said recent talks with East Timorese and UN officials had made considerable progress after an "extremely difficult" phase in the negotiations. After initially proposing to split revenue on a 60-40 basis, Australia is reported to be offering East Timor an 85 percent share, much closer to the East Timorese request for 90 percent. East Timor is said to have withdrawn its demand for a redrawing of the sea-bed boundaries. Mr. Downer said it should now be possible to conclude a framework agreement for a new Timor Sea zone treaty in the next couple of months.

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