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Calmer waters in Timor Leste?

A new exploration deal should benefit Timor-Leste and may point to a breakthrough in a maritime dispute with Australia

In April Australia's Timor Resources became the first private oil and gas company in more than 40 years to win the right to explore and develop Timor-Leste's onshore fields when it signed two production-sharing contracts with state-owned authority AMPM. The deal, which covers two blocks, marks a breakthrough in the impoverished, recently independent country's long-planned $2bn project to establish a petroleum corridor along its southern coast.

The deal is all the more surprising because Timor-Leste, formerly known as East Timor, is still embroiled in a dispute over maritime zones with Australia that finally ended up in The Hague's Permanent Court of Arbitration in mid-2016, despite Canberra's opposition to the proceedings. One of the longer-running Law of the Sea arguments, it concerns the hydrocarbon-rich, $30.22bn Greater Sunrise project adjacent to the Joint Petroleum Development Area (JPDA) administered by Australia and Timor-Leste.

It's hoped that the contracts reached over the onshore blocks indicate a rapprochement with Australia that could in turn end the standstill over the JPDA.

Timor-Leste needs the revenues. Nearly all the country's GDP comes from oil and gas in the form of the ConocoPhillips-run Bayu-Undan project. Until Timor Resources comes up with a find, it is the country's only oil-producing field. Output is expected to halt as resources run out within five years at the latest. As partner Bernardo Barradas in Lisbon-headquartered law firm PLMJ told Petroleum Economist: "The significant decrease in oil revenues and in the value of the Petroleum Fund put some pressure on the Timorese government to reach an agreement [at The Hague], perhaps not on final boundaries but at least a temporary agreement allowing the exploitation of the natural resources by the two countries."

The deal is all the more surprising because Timor-Leste is still embroiled in a dispute over maritime zones with Australia

Meantime Timor Resources, an affiliate of Australia's Nepean Group, will begin exploration immediately over an area covering 2,000 square kms. "[There's] the potential for a world-class discovery", the company said in a statement. "The best estimate is for 0.857bn barrels of recoverable oil un-risked based on existing geological and geophysical data."

Or as general manager of exploration Mike Bucknill put it more broadly, "We know there's oil in the areathe question now is how much?"

Ready to launch

According to Nepean group director Suellen Osborne, production should start within four years with considerable benefit to the tiny nation. Osborne told Petroleum Economist in a note: "Onshore the control is solely in the hands of the Timor-Leste government and people [as distinct from Greater Sunrise]. All activities onshore have a clear multiplier effect for the economy. All services, personnel and local content is conducted and managed on land. As well as the taxes collected, import duties, export duties, company tax are controlled by the government." Timor Resources, founded by Osborne, will joint state-owned petroleum company Timor Gap in the venture.

When a former Timor-Leste government ripped up a 2006 treaty with Canberra over the maritime zone, it threw a cloud over Greater Sunrise, located 150km southeast of Timor-Leste and 450km north of Darwin. The partners in Greater SunriseWoodside, ConocoPhillips, Shell and Osaka Gasnow await a decision from the court that could, predicts PLMJ, come as soon as September.

Timor-Leste would be a huge beneficiary of a maritime zone that extended its grip on the JPDA. "[The present treaty] establishes a share revenue of 50% between the two countries for the Greater Sunrise field, of which 80% is located outside the JPDA," explains PLMJ partner Manuel Santos. "In contrast the treaty grants Timor-Leste 90% of the upstream revenues from petroleum fields within the JPDA."

However it's not considered that Timor-Leste will win that argument. Even if it's a stopgap measure, the assumption is the court will recommend a simple median line as the fairest solution.

But Australia also has a stake in a quick solution because it could be under pressure from resource-hungry Indonesia, from which Timor-Leste broke away. For now, there's an overlap over jurisdiction of the seabed between the two countries. The boundaries, which are not permanent, are based on the Continental Shelf and not on the median line. As PLMJ's Barradas explains: "In the case of a recommendation from the court or an agreement between Australia and Timor, Indonesia could eventually take the opportunity to initiate negotiation procedures regarding its maritime boundaries with Australia."

Timor-Leste won the first round in the court. In September The Hague rejected Canberra's claim that it did not have jurisdiction over the dispute and it was in fact fully competent to preside over the matter. However Australia has also agreed that "if the decision is against us, [Australia] will engage in the conciliation in good faith."

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