Timor-Leste Pipe Dreams: After Compulsory Conciliation, What Comes Next?

28 January 2021 Professor Vivian Louis Forbes, FDI Associate Download PDF

Although the Australia and Timor-Leste Maritime Boundary Agreement has been ratified, the development of the Greater Sunrise hydrocarbon field remains just a “pipe dream”; the Agreement contains a number of problems and the revenue-sharing formula is still open to conjecture.

 

Key Points

  • The Greater Sunrise hydrocarbon field straddles an international maritime boundary between Australia and Timor-Leste, which was delimited via the process of compulsory conciliation.
  • Whereas the Agreement entered into force on 29 July 2019, the development of the gas field eighteen months later is just a “pipe dream” and the revenue-sharing formula remains open to conjecture.
  • The COVID-19 pandemic sent the price of oil plummeting to an all-time low in 2020 and the world’s economies are moving away from utilising fossil fuels. Oversupply and the increasing competitiveness of clean energy sources mean that oil and gas may stay cheap for the foreseeable future.
  • If the pipe dream is to be realised, the Government of Timor-Leste will have to seek substantial loans (possibly from China), which could become a burden on the economy and welfare of the country.

Summary

Since 2013, the Government of Timor-Leste (formerly East Timor), sought the ruling of the UN Compulsory Conciliation to resolve its differences with Australia relating to a permanent maritime boundary in the Timor Sea, in the vicinity of the Timor Trough. Australia favoured the principle of “natural prolongation”, in the context of the 1958 Geneva Convention on the Continental Shelf (the First UN Convention on the Law of the Sea), which provided Australia sovereign rights to seabed resources extending from the northern Australian coast to the bathymetric axis of the Timor Trough. In contrast, Timor-Leste favoured a “median” line, which is supported by contemporary international maritime law, namely, the 1982 UN Convention on the Law of the Sea (UNCLOS). This commentary assesses the “pipe dream” of energy operators and the regulators of Timor-Leste following the compulsory conciliation.

The key boundary for establishing possession of the Greater Sunrise hydrocarbon reserve is the eastern lateral limit. This boundary divides the Greater Sunrise field [See: Figure 1, below]. The delineation of the bilateral median line principles requires the negotiating acumen of the Indonesian and Timor-Leste negotiators. Timor-Leste, however, claims that the eastern lateral boundary should be located substantially further eastward, allowing it to claim a greater possession of, or the entire, Greater Sunrise field. Both states have relevant arguments about the rightful ownership of the field; however, UNCLOS provides little guidance on the placement of the eastern lateral beyond demands for “equity”. As a result, numerous interpretations were offered to amplify the actual and potential problems. Figure 1 illustrates the maritime boundary between the two countries and the polygon in the eastern sector, within which lies the Greater Sunrise gas field. The maritime boundary was delimited, conveniently, on a “modified equidistance methodology”.

Analysis

Compulsory Conciliation and Revenue-Sharing

The Australian and Timor-Leste Governments redefined their maritime boundary with the signing, at UN Headquarters in New York, of the Maritime Boundary Agreement, on 6 March 2018. On 24 July 2019, the Parliament of Timor-Leste voted in favour of ratifying a maritime boundary agreement with Australia that governs how the two countries will share the estimated billions of dollars’ worth of hydrocarbon resources apparently lying in the substratum of the Timor Sea. On 29 July 2019, the Agreement was ratified by the Parties. The Government of Australia was aware that before ratification of the present Treaty technical amendments were required to reflect the agreed boundaries and common points between Australia, Indonesia and Timor-Leste.

The Treaty signed by Australia and Timor-Leste formed part of the Comprehensive Package Agreement of 30 August 2017 concluded between them (the “30 August Agreement”). An integral part of that Agreement was the “action plan” for engagement leading to a decision on the development of the Greater Sunrise gas field. Pursuant to this action plan, the two governments and the companies comprising the Sunrise Gas Project Joint Venture (the licence holder to the resource), had engaged in intensive meetings and discussions. The treaty established revenue-sharing arrangements between the Governments of Timor-Leste and Australia where the shares of upstream revenue allocated to each of the Parties will differ depending on downstream benefits associated with the different development concepts for the Greater Sunrise gas field. That may have been the positive news. By 31 December 2020, however, the plans were in the balance and questions have been raised relating to the future development of the gas field.

Australia and Timor-Leste acknowledged their continued commitment to their close relationship and that they will continue to work together on their shared economic, developmental and regional interests. Australia, through its actions, supported the international rules-based order and the provisions of the 1982 Convention.

Apparently, the agreement on the boundaries is comprehensive and final. It encompasses the delimitation of both the “continental shelf” (which entails rights to exploit seabed resources, such as hydrocarbons) and the “exclusive economic zone” (which entails rights to exploit resources in the water column, such as fisheries). The Treaty also addressed the legal status of the Greater Sunrise gas field, the establishment of a Special Regime for Greater Sunrise, and a process for the development of the resource. Upstream revenue from Greater Sunrise will be shared 70/30 in Timor-Leste’s favour if the field is developed by a pipeline to Timor-Leste, or 80/20 in Timor-Leste’s favour if the field is developed by a pipeline to Australia. The Joint Venture on the development of the resource has honoured its existing commitments. These provisions are presently in doubt.

There are many inherent problems with the 2018 Treaty. These include: 1) the reality that Indonesia and Timor-Leste have not defined or delimited their lateral maritime boundaries in the Timor Sea may have an impact on the allocation of the hydrocarbon resources; 2) that, as of this publication date, the 14 March 1997 Agreement between Australia and Indonesia on Certain Maritime Boundaries, signed in Perth, is still awaiting ratification, is a concern; 3) the knowledge that Indonesia has indicated that it would like to revisit the terms of the 1997 Agreement; and, 4) the rules and regulations for the management of marine biotic resources and the marine environment in the sea space between the two States are not transparent.

In mid-2020, the political situation in Timor-Leste took a turn and the situation remains fragile with an annual economic growth that has been modest and predicted to remain low. With the price of oil and gas also remaining relatively low, Timor-Leste’s pipe dream of exploiting the hydrocarbon resources within its jurisdiction looks set to be shattered.

Actual Problem

The treaty established revenue-sharing arrangements between the Governments of Timor-Leste and Australia where the shares of upstream revenue allocated to each of the Parties will differ depending on the downstream benefits associated with the different development concepts for the Greater Sunrise gas field. That is a problem. On paper, the revenue-sharing model is idealistic with honourable intentions; in practical terms, however, it carries numerous concerns that will stem from the decisions made relating to the processing of the hydrocarbon reserves contained in that hydrocarbon field.

On 22 November 2018, the Government of Timor-Leste announced that it had bought Shell’s stake in the Greater Sunrise field for the sum of for US$300 million and stated that it would proceed with its contentious plan to pipe the natural resources to its proposed south coast processing plant at Beaço. On 16 April 2019, the Timor-Leste Government acquired a controlling share in Greater Sunrise with the US$350 million purchase of the 30 per cent share held by ConocoPhillips. The Greater Sunrise and Troubadour fields, discovered in 1974, are estimated to hold 5.1 trillion cubic feet of gas and 226 million barrels of condensate with a combined value of US$50 billion, according to Petroleum Economist, in September 2019.

Between 2008 and 2010, the Australian and Timor-Leste Governments attempted to agree upon the best ways to develop Greater Sunrise. The licensee consortium, headed by Woodside Petroleum, deemed a floating LNG platform to be the best commercial decision. Australia ultimately supported Woodside’s decision. Woodside welcomed the commitment to negotiation as a positive move towards commercialisation of the Greater Sunrise fields, which lie 150 kilometres south-east of Timor-Leste and 450 kilometres north-west of Darwin.

Other Potential Issues

The reactions of the oil and gas exploration companies involved in this regional sea are difficult to obtain, as are those of fishers and the administrators. Indeed, the economic prospects of the reserves are not fully understood, and the hoped-for hydrocarbon bonanza may not live up to expectations. After all, there is great dependency on “supply and demand” and the complexities of geopolitics and economics, the effects of COVID-19 on international trade and the dwindling demand for oil and gas products, as witnessed during 2020. Investment funds are required, perhaps from financial institutions in China, to see the initiative achieve realistic plans, which in turn leads to a greater debt burden on Timor-Leste.

The Timor-Leste Government insists that the LNG be piped to a planned processing plant in Timor-Leste. Woodside Petroleum (the operator) is reluctant to lay the pipelines as that would require routeing them across a technically challenging deep undersea trench (the approximately 3,500-metre deep Timor Trough). The operator would prefer either a floating platform or piping the resource to an existing processing facility in Darwin. This difference of opinion has put the project on hold – another potential issue.

Timor-Leste is now considering buying out Woodside’s partners to gain a majority share and develop the field itself. The country has already committed to building the LNG refinery, plus infrastructure, at a cost of at least $5 billion. The development cost for the whole project could be between $16-billion and $18-billion, or even greater, when finalised. If Timor-Leste does go it alone, many fear that the project would quickly exhaust the country’s limited financial reserves.

Another problem: Timor-Leste would then most likely require a loan, probably from China, and that will make it beholden to a regional superpower whose intentions are not always benign, and which is often at strategic odds with neighbours such as Australia and Indonesia. Chinese state-owned companies own or operate port facilities around the region and will possibly establish a military base on the island. That would give the PLA[N] (People’s Liberation Army [Navy]) a base for a quicker response to any contingency, for instance, in the Malacca Strait and South China Sea. China plans to establish a port and fish-processing facility at Daru Island, in the Torres Strait waters of Papua New Guinea, to help defend access to the region.

A Dream to be Fulfilled by 2020

It was envisaged that, by 2020, the second phase of the Suai Supply Base would have been completed, the first phase of the refinery project would have been finished and the Beaço Port finalised. By 2030, the Tasi Mane project will have been completed, establishing a dynamic and integrated petroleum industry connected by a highway on the south coast of Timor-Leste.

With the Timor Sea oilfields expected to cease production by 2023 and no other meaningful sources of income, at the present rate of spending, the country will be in financial difficulty before 2030. The Timorese Government is eager to extend its successful offshore oil production activities to onshore and is supporting activity in this area through a range of onshore initiatives to promote domestic hydrocarbon production, domestic retail distribution, and surplus for export. Chinese construction companies have been involved in different aspects of the Tasi Mane project. State-owned China Civil Engineering Construction last year won a contract of nearly $1 billion to construct the LNG offloading terminal for the yet-to-be-built Beaço gas plant.

Senior Timor-Leste Government officials repeatedly hint that China could be invited to develop the Greater Sunrise pipeline and processing plant as a means of playing the geopolitical trump card, namely, pitting China and Australia against each other to access funding on favourable terms. Woodside has a 33.44 per cent stake in the Sunrise Joint Venture, alongside Japan’s Osaka (ten per cent), while the Timor-Leste Government presently controls a majority 56.56 per cent after buying stakes held by ConocoPhillips and Shell. Woodside has adamantly insisted that the gas reserves either be piped to Darwin or to a floating processing facility developed in the Timor Sea.

On a more positive note, Santos and its partners announced on 5 January 2021, its commitment to the Phase 3C infill programme at the Bayu-Undan field which lies to the south-west of the Greater Sunrise field. The $235-million investment will have three production wells, thereby adding over 20 million barrels of oil equivalent (MMboe) gross reserves and production at a low cost of supply and demand.

Still Just a Dream

The standoff between Australia and Timor-Leste on how to develop Greater Sunrise has lasted years. Thus, although the maritime boundary has been delimited, the exploitation and processing of the resources in Greater Sunrise is still a dream. Economic and industrial analysts opine that any further delay in making decisions on the processing of the reserve will be detrimental to Timor-Leste’s dream and the proportional allocation of the revenue from the resources will be just a memento of compulsory conciliation.

 

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About the Author

Dr Forbes is an Adjunct Research Professor at the National Institute for South China Sea Studies, Haikou, China and a Distinguished Research Fellow and Guest Professor at the China Institute for Boundary and Ocean Studies, Wuhan University, Wuhan, China. He is affiliated at the professorial level with other institutions in Australia, China and Malaysia.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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