Negotiation of Timor Gap royalties begins

Australian government officials and representatives from the United Nations Transitional Authority in East Timor have begun the first round of negotiations on the division of revenues from oil and gas production in the Timor Gap.


MELBOURNE�Australian government officials and representatives from the United Nations Transitional Authority in East Timor (UNTAET) have begun the first round of negotiations on the division of revenues from oil and gas production in the Timor Gap.

Once completed, the new arrangements will replace the Timor Gap Treaty signed between Australia and Indonesia back in December 1989.

The negotiations are expected to be hard-fought, with senior East Timorese leaders and UNTAET officials signaling their intention to request a greater share of revenues that currently are shared on a 50:50 basis.

The fields themselves are geographically located much closer to East Timor than Australia. However, the Australian government has always argued that that the median line should be drawn along the edge of the continental shelf rather than the mid-point between the coastlines of the two countries. This puts the fields on the Australian side of any median line, as the deep Timor Trench lies just off the south coast of East Timor.

At the moment the Timor Gap is administered as a three-zone region, with the central zone (containing most of the discoveries in the region) being run by a Joint Authority (JA) of Australia and UNTAET. Several East Timorese are now included in the JA as trainees.

The Australian government has said it is prepared to enter the renegotiations with goodwill. However, there is some concern that East Timor expects too much in terms of revenue percentage from production.

In 1999 total revenues from production payments (from the Elang/Kakatua oil fields) was only $6 million (Aus.). But this figure is expected to grow in the next five years as other fields come on stream.

In the meantime Phillips Petroleum Co. Australia, operator of the Bayu-Undan development in the Timor Gap, has called for an agreement in principle on a new Timor Gap treaty by the end of 2000 so that delays in the development of the oil and gas province will be minimized.

The current treaty is being maintained for oil development�in particular the $2.6 billion (Aus.) Bayu-Undan liquids project that is scheduled to come on stream in 2004 at 100,000 b/d of condensate and LPG. However, there is no clear fiscal regime or agreement for valuation of the Gap�s vast gas deposits.

Phillips is concerned that a new treaty may not be ratified until East Timor�s government is installed�perhaps not until early 2002. The company would like to see both sides reach agreement in principle well before that time. Until a gas agreement is in place, revenue from gas development cannot be calculated�a situation that is unsettling for potential producers and customers and one that is bound to cause development delays.

Potential projects in the wings include the Bayu-Undan Stage 2 gas development and the Woodside Petroleum Ltd.-Shell Australia Ltd. Sunrise-Troubadour-Sunset project. Potential customers include Asian LNG markets, Australian domestic markets, and Methanex Corp., the international methanol producer.

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