Michael Richardson: East Timor edges towards oil deal with Australia

It has been a rollercoaster ride of more than two years of sometimes acrimonious talks between Australia and East Timor on how to share energy reserves in the Timor Sea.

After the fifth round of discussions ended on May 13, Australian Foreign Minister Alexander Downer said the two countries were on the threshold of an agreement that would allow both sides to benefit from major offshore oil and gas projects.

But East Timor's Prime Minister Mari Alkatiri has since said more talks may be needed to iron out remaining issues.

If some of the rhetoric that has been flying around is a guide, Australia has descended in recent months from the rank of Best Friend to Big Bully in its dealings with East Timor, which gained independence from Indonesia just over three years ago.

Some aid, religious, human rights and war veterans groups in Australia joined East Timor officials in accusing Prime Minister John Howard's government of being stingy and bullying a small, weak neighbour. Is that a fair description?

A key issue was whether to negotiate a permanent maritime boundary in the 600km of the Timor Sea that separates the countries and, if so, where to put the line.

The seabed in this area contains valuable oil and gas fields that are being exploited or explored by Australian and foreign companies, and may well contain even greater petroleum riches that have not yet been discovered or proven.

So the position of the boundary would determine how much of the tax and royalty revenue from development of these fields goes to Australia and how much to East Timor. A lot of money is at stake. The known energy reserves in the area are worth an estimated US$32 billion ($45 billion).

Linked to this issue is what kind of relationship should Australia, one of the world's richest societies, have with East Timor, one of the world's poorest. Australia, with New Zealand, played a major role in the United Nations operation in 1999 that helped protect East Timor after its vote for independence from Indonesia triggered mayhem by pro-Indonesian militias. Since then, Australia has been generous with aid and other assistance. But East Timor's leaders argue that the key to their plans to shift the economy from heavy dependence on aid to self-reliance is an assured stream of oil and gas revenue from the Timor Sea

East Timor's leaders wanted a maritime boundary to be fixed halfway between their country's southern coastline and Australia's Northern Territory. The country's former guerilla leader turned-President, Xanana Gusmao, put it this way last year: "How can we prevent poverty if we don't have the money? How can we reduce disease, how can we stabilise the country, how can we strengthen the democratic process, how can we strengthen tolerance?"

There is an interim arrangement between Australia and East Timor covering a large zone in the Timor Sea. East Timor gets 90 per cent of royalties from energy reserves exploited in this zone. This amounts to long-term revenue of about US$8 billion. Australia gets only 10 per cent of the royalties.

But the zone is positioned much closer to East Timor than to Australia because of an earlier deal Canberra worked out with Indonesia, which invaded East Timor in 1975.

The deal was based on a legal argument advanced by Australia that the seabed boundary between Australia and East Timor was naturally determined where Australia's continental shelf plunged into a trough 3000 metres deep about two-thirds of the way to East Timor.

Since then, international law has evolved and a median line has become the generally accepted principle in fixing seabed boundaries between close neighbours. Indeed, Australia accepted the equidistant approach in more recent seabed border negotiations with the Solomon Islands, New Zealand and France in the Southern Ocean.

Some of the oil and gas fields in the Timor Sea - including Greater Sunrise, one of the biggest - lie wholly or partly outside the joint development area in waters claimed by Australia and now East Timor.

If the latter could get the border placed at the half-way mark, many billions of dollars in extra tax and royalty revenue from these fields would flow to East Timor, not Australia.

Canberra was concerned that if it made major concessions to East Timor on the maritime frontier, its credibility with oil and gas companies would be undermined.

It was also worried that Indonesia would demand a renegotiation of its adjacent seabed boundaries with Australia in the Timor Sea that were fixed in the early 1970s, much closer to Indonesia than Australia.

Australia insists any solution must give the companies that plan to invest heavily in the Greater Sunrise project the fiscal, legal and regulatory certainty to proceed. The project was shelved in November but could be revived.

The preliminary deal thrashed out in the last round of talks would postpone for 50 years any agreement on a permanent maritime boundary. In exchange, East Timor would get 50 per cent of tax and royalty revenues, instead of 18 per cent, from the Greater Sunrise area.

In essence, Canberra is offering Dili as much as US$7 billion.

Outlining the preliminary deal in an article he wrote for the Age in Melbourne on May 30, East Timor's Foreign Minister Jose Ramos Horta said the two sides were "on the cusp of securing" the fairest agreement possible on sharing the energy resources of the Timor Sea.

* Michael Richardson, a former Asia editor of the International Herald Tribune, is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.