Timor Gap oil update

4 November 1999

E. Timor prospects oil zone for income

Christian Science Monitor

Shawn Donnan The Timor Gap may figure into assessments the World Bank is making of the area’s economic future.

DARWIN

Between this muggy northern Australian city and tiny East Timor lies a region in the sea that may hold the economic key to newly free East Timor’ s future.

The 38,000-square-mile area known as the Timor Gap is a cooperation zone created by a treaty signed in 1995 between Australia and Indonesia. It has oil and natural-gas resources that geologists claim are stored deep in the seabed. So far, however, it has yielded little except modest amounts of oil, legal battles, and speculation over just what its possibilities really are.

But with East Timor’s newfound independence from Indonesia, the zone has gained new significance. In the long run, it could be what makes the difference between the small half-island relying forever on foreign aid to survive and being able to chart a truly independent course.

The problem is that no one knows just how much oil or natural gas is there.

"Up to now we don’t know exactly what we can get from it," says Mario Carrascalão, a senior pro-independence figure who planned to lead an East Timorese contingent accompanying a World Bank mission when it arrived in East Timor on Oct. 29. The World Bank is undertaking a crucial study that will determine in large part just how much aid the new country receives in the coming years.

Australia’s and Indonesia’s royalties from the area now amount to only a few million dollars. But oil companies have been dangling the prospect of hundreds of millions in royalties down the road, and the giant Phillips Petroleum has already unveiled a plan to harvest oil condensate from natural gas reserves in the area.

That could be crucial income for a country of 850,000 people. East Timor’s biggest export now is the $10 million to $20 million in organic coffee beans it sent to the United States each year under Indonesian rule. Its entire civil service is expected to have a budget of just $64 million.

"It’s very obvious that it’s going to be very important," says João Saldanha, an American-trained economist who is now part of an East Timorese team working to plan their country’s economic future. "But the question is how much is it going to be, how much are we going to get."

What has kept many resource companies from rushing headlong into the area covered in the treaty has been the political uncertainty that has hung over East Timor, oil analysts say.

The fight that followed the signing of the treaty was so bitter that Portugal - East Timor’s colonial ruler and the center of much of the pro-independence movement’s political activity in the last 23 years - took both Australia and Indonesia before the International Court of Justice in The Hague in a bid to have it canceled.

But now, political certainty about the region is slowly fading. A United Nations transitional administration is set to take over from the Australia-led multinational force, and the long process of nation-building is getting under way amid the ruins left by elements of a vengeful Indonesian military and its militia cronies during a three-week rampage after an Aug. 30 vote for independence.

There are still important questions left to answer over just what form the government of the new country will take once the UN pulls out in two to three years. But oil companies now at least have someone to talk to and the certainty that Indonesia has at least for the time being given up its claim of sovereignty over East Timor.

Nobel laureate José Ramos-Horta, the diplomatic face of the East Timorese independence movement, caused some nervousness in the oil industry when he said earlier this year that he wanted the Timor Gap Treaty to be renegotiated. But he has since backed away from that stance and taken a more conciliatory approach.

"The only thing wrong with the treaty is who signed the treaty," he said recently. "There is nothing wrong with the terms.... No mining company should have any concern whatsoever. In the end it’s in our national interest."

Any windfall remains years away, though. At the earliest, significant royalties are five years down the road, analysts say. Even then - if they materialize - they are likely to be only in the range of $25 million to $30 million a year, although the long-term potential is for them to grow into the hundreds of millions, oil companies are advertising.

In the meantime, it will be international aid that will pay for East Timor’s reconstruction, and economists are looking elsewhere for revenues to begin filling its coffers.

Agriculture and tourism have been identified as possible major earners, and there are plans to in the coming months impose taxes on items like alcohol and cigarettes and even charge landing fees at airports there.

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