A serious dispute has broken out between Australian oil company Woodside and the East Timorese government over the processing of gas from the Greater Sunrise field in the Timor Sea. The dispute looks set to lock up one of the richest gas fields in the region and cost Woodside hundreds of millions of dollars already spent on research and development.
At the heart of the dispute is East Timor’s claim for natural gas taken from the joint Australian-East Timorese field to be processed into LNG in East Timor. Woodside has rejected that option, saying it wants to process the gas on a floating platform in the Timor Sea. The East Timorese government has said, however, that its position is not negotiable and that without an agreement on refining in East Timor there will be no agreement to proceed with drilling.
Both the floating platform and on-shore processing is likely to cost up to around five billion dollars to develop, which is the equivalent of East Timor’s current financial reserves from which it derives interest to, in effect, run the country. The profit from the project, however, is expected to run into tens of billions of dollars.
East Timor’s claim to have processing undertaken on-shore is similar, in essence, to the Australian government’s extended tax on mining companies. It wants its people to receive greater benefit from national resources that will otherwise enrich a foreign owned company. It also says that Australia already benefits from an earlier processing agreement and that it is now East Timor’s turn to benefit.
East Timor sees its economic future built upon the oil and gas reserves in the Timor Sea. An on-shore processing plant would mean not just the initial massive investment, but will further require establishing related infrastructure, meaning significant secondary economic benefits, as well as technology transfers and the training of local workers.
This, the East Timorese government believes, would herald the start of East Timor’s own petrochemical industry and its chance to leap-frog the development cycle from little more than subsistence to industrialised status.
But apart from the lack of existing infrastructure and questions over reliability if it is established, Woodside is also concerned about political instability. The East Timorese government argues that its political environment is now stable and that the gangs that caused havoc in 2006-7 have been brought under control. This is mostly correct.
East Timor is a quiet and safe place compared with 2006-7 and many of the underlying tensions fuelling that crisis have been resolved. However, with elections in 2012, or earlier, there could be a return to at least some of the discord that marked the 2007 elections.
More importantly, however, is that Woodside’s investment is long-term, while East Timor’s political stability remains, for now, short-term. Although Woodside is not saying this, any promises about control made by a current government might be disowned by a future government.
It would seem, then, that the way forward is through negotiation. However, the East Timorese Prime Minister Xanana Gusmao has increasingly dug himself into a ‘no compromise’ position, in part playing to a domestic audience at a time of rising nationalist assertiveness.
For its own part, Woodside has been high-handed in its treatment of East Timor’s war-hardened political leaders, who are particularly incensed at Woodside’s unilateral announcement of its decision to proceed with a floating processing platform. Woodside boss Don Voelte tried to talk with Gusmao late last week to convince him of Woodside’s proposition. Gusmao refused to meet him.
The line from the East Timorese government is that it is happy to leave the gas under the sea. It will always be there and its price can only increase as other supplies dwindle. Woodside and the Australian government, on the other hand, argue that the economic benefits from its proposal would fatten East Timor’s coffers to the tune of about 13 billion dollars, providing a stable economic base for a more considered, long-term, economic development program.
An agreement that develops some type of secondary on-shore processing, technology transfer and training would seem to be a part of any compromise deal. But at this stage, both parties are talking tough.
The East Timorese government has also threatened to look for an alternative partner, although Woodside and the East Timorese government disagree over whether their existing agreement would allow this. But even if East Timor can find another partner, despite what it might say ahead of signing a new agreement, a new partner will likely be at least as self-interested as Woodside.
East Timor’s political leaders are, reasonably, trying to promote the best interests of their fledgling state. But it is a hard world for a small, poor country and the petrochemical industry has never been a gentle development partner. Unless one gives way, it seems there will be no oil on (or gas from) these troubled waters.