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Oil the fuel for East Timor

Australia's Woodside is the operator of the Timor Sea's Greater Sunrise field
Australia's Woodside is the operator of the Timor Sea's Greater Sunrise field  

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- For the next three years, the newest nation on earth's economy will be bolstered by $440 million in aid, after a series of nations pledged to help East Timor out.

But in the long-term, East Timor's economic survival rests on the promise of oil and gas, with large reserves under an area of sea known as the Timor Gap.

The U. N. Transitional Administration in East Timor (UNTAET) estimates that the biggest reserve, the Bayu-Undan field, could rake in up to $3 billion over 17 years.

Under a treaty to be signed by the East Timorese and Australian governments following Sunday's independence ceremony, the new nation will reap the lion's share of the oil revenue, dividing the income 90-10 in its favor.

Other oil and gas fields are also up for exploration, with high expectations on the Greater Sunrise field, which is still in the design phase. Eighteen percent of its production revenue is earmarked for East Timor.


East Timor chief minister Mari Alkatiri, right, signed an initial agreement on oil royalties with Australian foreign minister Alexander Downer, left, in July 2001
East Timor chief minister Mari Alkatiri, right, signed an initial agreement on oil royalties with Australian foreign minister Alexander Downer, left, in July 2001  

East Timor chief minister Mari Alkatiri has said that East Timor could ride out the next two to three years because of the aid funds, but beyond that its economy remained "very fragile".

Without the oil income, experts add, East Timor runs the risk of becoming just another "basket-case" economy, akin to other smaller Pacific island nations.

Tourism, fisheries and agriculture -- including coffee production -- are seen as other income earners for the fledgling nation, but they face major hurdles.

Tourism won't flourish until security and facilities are improved, while coffee faces depressed prices and stiff competition.

So oil is regarded as the savior, offering the chance of a steady income stream to underpin the spending on education, health and skills training that East Timor desperately needs.

But there is still uncertainty about how quickly the reserves can be developed. The oil will not begin flowing for some time and it could be some years before the government sees even a cent of the much-needed cash.

Despite the treaty signing on May 20, commercial issues remain unresolved.


Dr. George Quinn, East Timor expert at the Australian National University in Canberra, told CNN he regarded revenue from the Timor Sea oil and gas reserves as "very uncertain."

"There is the question of when it comes onstream and how much revenue it will provide; 2005 has been mentioned, but that is by no means certain," he said, adding that technical and contractual issues still need to be resolved.

According to the budgets prepared for the donors' meetings in Dili on May 14-15, East Timor's oil income is projected to be $20 million this year, or 5.3 percent of the country's GDP of $371 million.

That projection rises to $36 million in 2003, $78 million in 2004 and then $103 million each in 2005 and 2006, by which time it will account for 25 percent of GDP.

The International Monetary Fund says the budget projections use a conservative oil and gas revenue path that has been discounted by 25 percent to incorporate "possible downside risks to prices and/or production delays."

That reflects some of the commercial doubts surrounding the resource.

Tax issues

Phillips Petroleum, operator of Bayu-Undan, is due to begin the gas recycle phase of the project in 2004. The second stage calls for gas deliveries from late 2005, but that assumes tax issues with the Australian government are sorted out.

For the Greater Sunrise project, operator Woodside Petroleum said Monday it would delay until October about $110 million of initial design work.

There is still no decision on how to develop Greater Sunrise, which for revenue purposes is calculated as being

20 percent inside the joint petroleum development area East Timor shares with Australia.

Woodside and Osaka Gas support a proposal by partner Shell for a floating LNG plant, with the gas going to export markets. But Phillips, the fourth partner in Sunrise, favors taking the gas to Darwin for processing and use by Australian customers.

The IMF says it supports East Timor's proposed Oil Savings Fund that would put money into health and education, and make other public investments.

Poverty reduction is the new government's key economic and social goal as it battles with the legacy of destruction caused by the retreating militia in 1999 and the impending departure of 8000 big-spending U.N.-related staff.

Alkatiri has said eradicating poverty would be the "main target for the next few years," with fisheries and tourism key drawcards.

But he warned that subsidies -- used by Indonesia during the 25 years it controlled East Timor -- were not the way to go.

"The government's job is to create conditions for people to compete in the market," he said.

Cross-border trade with Indonesia could help East Timor flourish, but that raised security issues. Refugees still in West Timor could trigger unrest and so remained a threat to stability.




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