By an OGJ Online Correspondent
MELBOURNE, Aug. 1 -- Phillips Petroleum Co. said Tuesday it and its partners have postponed indefinitely a decision to build a gas pipeline from Bayu-Undan field in the Timor Sea to Darwin, Australia.
The companies said "critical legal, fiscal, and taxation issues arising from the Timor Sea arrangement entered into between the governments of Australia and East Timor on July 5" prompted the deferral.
Phillps said, "This decision may prevent commercialization of certain Timor Sea gas resources."
East Timor representatives wanted to increase taxes to recoup what they saw as an overgenerous 127% refund of exploration and development expenditures allowed in the production sharing contract.
The companies plan to proceed with the Bayu-Undan gas reinjection/liquids production recycle project, which the Timor Gap Joint Authority approved in early 2000 and is expected to begin full commercial production in early 2004.
The companies said they would work with the East Timorese and Australian representatives on a resolution of the issues and expect East Timor to continue the production sharing contracts in the same terms as the existing contracts, as provided for in the arrangement with Australia.
Stephen Brand, vice-president of Phillips's Australasia division, said, "Investments in Bayu-Undan have proceeded based on certain commitments from key East Timorese leaders regarding continuation of legal rights under current production sharing contracts, as well as assurances that fiscal and taxation policies applicable to such contractors would be no more onerous than those currently in place. These assurances and commitments provided investors the confidence to proceed with project development and commit funds in excess of $1 billion.
"Agreement by East Timor to fiscal and taxation arrangements reflecting their earlier commitments would allow further investment to proceed, providing significant economic benefits to the Bayu-Undan coventurers and the new nation of East Timor. However, since the conclusion of the Timor Sea Arrangement, the United Nations, acting on behalf of East Timor, has yet to reaffirm these crucial commitments."
The Bayu-Undan field contains estimated reserves of 400 million bbl of condensate and liquefied petroleum gas and 3.4 tcf of natural gas. The field is in 80 m of water about 500 km northwest of Darwin, Australia, and 250 km south of Suai, East Timor.
The Bayu-Undan partners are Phillips (91-12) Pty Ltd. with 50.35, Santos 11.8%, Inpex 11.7%, Kerr-McGee Corp. 11.2%, Petroz 8.3%, and AGIP 6.7%.
Reaction
Allen Beasley, executive director of the Australian Pipeline Industry Association, said the potential benefits of the project were enormous, not unlike the North West Shelf Gas Project that created tens of thousands of jobs, enhanced energy export earnings, and created a major gas-based economy in many areas of Western Australia.
He added that Australia's gas potential has for too long been stifled by what he called a creeping policy paralysis and a sense of complacency that failed to recognize and address the challenges of remote gas infrastructure development.
Beasley predicted sobering lessons will be learned from the Bayu-Undan deferral and it adds to the pessimism created by a number of recent project deferrals.
He noted that last week the Dow Chemical/Shell Chemical joint venture said it would not proceed with its proposed petrochemical plant on the Burrup Peninsula of Western Australia that would have used ethane from North West Shelf gas.