/** reg.easttimor: 3530.0 **/

** Topic: Analysis: TIMOR'S HIDDEN TREASURE **
** Written 8:32 PM Sep 29, 1999 by Joyo@aol.com in cdp:reg.easttimor **
South China Morning Post
Thursday, September 30, 1999


Timor's hidden treasure


Oil has been the backdrop to countless conflicts this century. The present independence struggles in East Timor, Aceh and Irian Jaya are no exception.

All three boast huge oil and gas reserves, potential revenue that crisis-torn Indonesia can ill-afford to lose.

The most pressing question is what will happen to the lucrative exploration and exploitation rights off East Timor once the recent independence referendum vote is formally ratified by Indonesia's new parliament, which sat for the first time last Friday.

It is a multi-billion dollar question, judging by the vast reserves thought to be beneath the Timor Sea.

One foreign diplomat in Jakarta said: "It is very dicey. No-one knows the outcome. It is going to keep lawyers busy for many years."

A simple transfer of Indonesia's oil rights to a newly independent East Timorese government would be the simplest option, providing it with the lifeblood for reconstruction.

But even if Indonesia's parliament was willing, it may not be that easy. A host of international complications stand in the way.

Australia was the first country to recognise Indonesia's annexation of East Timor after Jakarta's elite paratroopers invaded the former Portuguese colony in 1975, something other countries and the United Nations steadfastly refused to do.

The gesture enabled the Australians to start talking with Jakarta about jointly dividing up the spoils, culminating in the Timor Gap Treaty of 1989.

The tables have now ironically turned, with the Australians now playing a lead role in international efforts to ensure the implementation of the East Timorese vote for independence. But that is a different story.

Not all of the Timor Sea is disputed. Some is clearly Australian. Some clearly Indonesian.

What the Timor Gap Treaty did was work out the grey area, agreeing to equally divide any revenue from East Timor's waters, where both countries' claimed sea boundaries partially overlapped.

The treaty enabled exploration and extraction rights to be farmed out to international contractors, with Australia and Indonesia each staking claim to 5 per cent of any oil and gas extracted, plus tax revenue. Contractors would also be duty-bound to employee rig workers from both countries.

Portugal, which never recognised Indonesia's sovereignty of East Timor, also never recognised the treaty.

International oil explorers operating in the Australia-East Timor Zone of Co-operation (ZOCA) include Phillips Petroleum, British-Borneo Oil & Gas, Santos, Inpex Sahul and Kerr-McGee.

Little has been extracted so far, but the potential is said to be huge.

After a string of dry holes and unviable finds, a consortium of production-sharing contractors first began extracting crude oil from three small oil fields in the Elang and Kakatua area less than a year ago.

This is producing about 16,000 barrels a day. A total of 10 million barrels has reportedly been produced in the first 10 months, generating a paltry US$2.5 million each in revenue for the Australia and Indonesian governments.

This compares with $680 million reportedly spent so far by contractors on research and development. Fortunately for the two governments, the contractors carry all the risks and costs.

What is more, the Elang and Kakatua fields are expected to run dry in another year. But the big excitement is not over Elang and Kakatua. It is over what comes next.

US giants Phillips and its partners claim to have discovered huge natural gas and condensate reserves at their Bayu-Udan field.

Just how much is a closely guarded industrial secret, but it is believed to be worth about $2 billion. Perhaps more.

Jim Godlove, Phillips' Darwin-based regional manager, said: "It's a world-class field."

It is hoped Bayu-Udan can start producing in 2003, providing there are no unfortunate political hiccups or hold-ups.

More finds are expected.

Explorers may have got off to a slow start, but they are now enjoying a high success rate, with one in three successful wells finding hydrocarbons, compared with a world average of one in 10.

Mr Godlove said 420 to 560 billion cubic metres of gas has already been identified as proven or probable within the ZOCA catchment area.

Phillips, which has a controlling 50.3 per cent stake in the consortium, intends to pipe the gas to Australia.

"We are firmly committed to move ahead. But clearly, we are watching political events carefully," Mr Godlove said.

The Australians are naturally happy with the existing treaty and would be content to see Indonesia's name simply replaced with East Timor's on the existing agreement, once independence is finalised.

Robert Mollah, executive director of the Australian Indonesian Joint Authority for the Timor Gap, said: "The treaty has worked very well over the last nine years.

"There has been some good co-operation between Australia and Indonesia, a lot of exploration and some development taken place."

However, Mr Mollah added: "There is considerable future expenditure required on exploration and in particular in the development of the Bayu-Udan field."

Indonesia's Mining and Energy Minister Kuntoro Mangkusubroto has already signalled his readiness to transfer oil rights to an independent East Timor.

"The treaty will be continued by East Timor," he recently declared.

East Timorese independence leader Xanana Gusmao, popularly tipped to be the territory's first president, has also promised in writing to abide by the treaty's terms and to maintain an investor-friendly environment for oil explorers, with an independent East Timor taking over Jakarta's mantle.

But it is not as simple as that. Firstly, Mr Kuntoro's Golkar Party no longer controls parliament, following June's historic general elections.

It will be the new-look People's Consultative Committee to decide whether to endorse the East Timor referendum vote and if so, whether to hand over just the land or also sea rights.

In fact, Mr Kuntoro himself could soon be out of a job if President B. J. Habibie loses power in November's presidential vote, as is now widely expected.

Secondly, officials from Indonesian state oil firm Pertamina have suggested Jakarta claim part of the ZOCA zone as West Timor's waters.

This would involve re-drawing historical maps and imply a three-way divide between Australia, East Timor and Indonesia. But then there is also Portugal to factor in.

Not only has it never recognised Indonesia's annexation or the Timor Gap Treaty, it has not yet acknowledged East Timor's independence.

It too may claim a stake.

A foreign diplomat said: "It could take a while to sort out. It will probably end up being handled by the United Nations.

"They are chartering new waters. International law is based on precedent and there's never been a case like this before to sort out."

Bruce Gale, regional manager of the Political and Economic Risk Consultancy, said: "An independent East Timor is going to need to use future oil revenue as a guarantee against international loans.

"I don't think in the long run it is going to be a basket-case, but in the next few years it is going to be a mess. It is going to need all the money it can get."

** End of text from cdp:reg.easttimor **