Suai Supply Base: benefit or boondoggle?

The centerpiece of Timor-Leste’s Strategic Development Plan is the Tasi Mane Project (TMP), a corridor of petroleum infrastructure along the southwest coast of this country which includes a supply base in Suai (Covalima district), refinery in Betano (Manufahi district), LNG plant in Beaçu (Viqueque district) and a highway to connect them.

This article summarizes La’o Hamutuk’s extensive new web page on the Suai Supply Base (SSB), the first component of TMP. That page has more information, documents, analyses, presentations, maps and graphics, and will be updated regularly.
English: http://www.laohamutuk.org/Oil/TasiMane/13SSBen.htm
Tetum: http://www.laohamutuk.org/Oil/TasiMane/13SSBte.htm

The main project in Suai will be a port (breakwater and jetties), storage yard, warehouses, offices, fuel tank farm, helipad and future industrial park in Kamanasa Suco, Covalima District. Its 1,113 hectares are almost entirely agriculture land, a sacred area for local inhabitants.

In addition to the Supply Base itself, the Covalima components of the Tasi Mane project will include an expansion of Suai airport, a 208-hectare “Nova Suai” new town to house workers from the project, and a divided highway that will eventually go 150 km to Beaçu.

The project originally included a seaport in Suai Loro, which was cancelled because it would have been redundant with the port in the Kamanasa Supply Base, which can also serve as a cargo terminal.

The Supply Base will be built, owned and operated by Timor-Leste’s state-owned oil company TimorGAP and their subcontractors, with estimated operating costs of $8 million per year.

Supply Base construction will be phased over many years, but TimorGAP plans to fence in the entire area in Kamanasa and exclude local use, perhaps as soon as the end 2013.

The rest of this blog posting discusses key issues about the Suai Supply Base, including

• History and current status
• Project cost -- which has multiplied by 14 in less than three years
• Environmental Impact Assessment, including documents and information gaps
• Rough estimate showing that the SSB may not recover its investment
• Suai community views and the recent land transfer

Project history and status

In October 2010, Prime Minister Xanana Gusmão visited Lamongan Shorebase in East Java, the main project of the Singapore-based private company Eastlog Holdings. Two months later, Timor-Leste awarded Eastlog a $3.4 million contract to do feasibility studies and Front-End Engineering Design for the Suai Supply Base. In September 2011, the Council of Ministers analyzed Eastlog’s reports and decided to proceed with the SSB project.

Land identification and negotiation then started, and the Australian engineering company WorleyParsons was hired to draft an Environmental Impact Assessment. The Government awarded Eastlog a second contract to manage the construction of the Supply Base, and a tender for the construction was planned for early 2013.

The Annual Action Plan for 2013 from the Ministry of Petroleum and Mineral Resources (MPRM) and TimorGAP includes:

• Suai Supply Base: tender is completed, and construction is 30% completed.
• Suai Airport: tender is completed, landowners are compensated, and construction is 50% completed.
• Suai Crocodile Park: design is completed.
• Nova Suai town: detail design discussed with partners.
• Special Industrial Zone: legal aspects completed; initial studies; discussions with partners.

Land identification, consultations and negotiations were essentially concluded by April 2013, when Kamanasa community leaders turned over 1,113 hectares to the Prime Minister in return for 10% of the future profits of the Supply Base. The tender to select a company to design and construct the base is being delayed, perhaps until late 2013.

Estimated project cost multiplies by 14 before construction starts.

Information about how much Timor-Leste will spend to build the Suai Supply Base is hard to find, but a little has been published in the annual state budgets. During the last 2½ years, SSB cost skyrocketed from $52 million to $719 million. Decision-makers who approved a lower-cost project should consider if it still makes sense, as its cost could escalate even more.

The 2011 State Budget was the first to include significant appropriations for the Suai Supply Base, appropriating $12 million to be spent during 2011, as part of $52m to be spent between 2011 and 2015, as well as $7m to rehabilitate Suai airport in 2011 (part of $12m through 2015).

As this budget was being debated in late 2010, Timor-Leste hired Eastlog to do a “Commercial and Financial Feasibility Study, Detail Design with complete Engineering” of the Suai Supply Base. The following September, the Council of Ministers approved Resolution 26/2011, estimating the cost of constructing the first phase of Suai Supply Base as $273-$347 million. This figure, approximately six times larger than the estimate in the 2011 State Budget, was the basis for the Ministers’ “Final Decision” to proceed with the project.

By the end of 2011, the Government had spent only $1.75 million on the Supply Base and zero on the airport; the unspent appropriation automatically carries over to the next year.

The 2012 General State Budget adopted in late 2011 appropriated $322m for the SSB over the next five years, $100m of which was to be spent during 2012.

In March 2012, WorleyParsons submitted a draft Environmental Impact Assessment (EIA) which said that the cost of all three phases of building the SSB, airport and Nova Suai would be $150m through 2030. Two months later the “final” EIA amended this to $350m, without specifying the phases and years it includes.

When the Government proposed to amend the 2012 budget in September 2012, it was already clear that most of the $164m allocated for Tasi Mane would not be spent in 2012. Therefore, the Government borrowed $30m designated for the SSB (and $20m more from the south coast highway), promising that it would be restored in 2013.

Executed expenditures for the Supply Base during 2012 were $11m, with a million more spent on the airport. This was only 14% of the reduced amount in the budget which had been amended two months before the year ended.

In December 2012, the Government proposed the 2013 State Budget to Parliament. The Suai Supply Base 2011-2017 project cost had doubled again, to $719 million, with an additional $62 million to be spent on Suai Airport. During the closed-door debate, the Parliamentarians approved the Government’s entire $1.3 billion Tasi Mane Project request to show a unified front to the Australian government on the Greater Sunrise pipeline.

The graph at left shows how the enacted budget allocates funds for the Suai Supply Base and airport. The red line, representing the 2013 budget as approved by Parliament in February 2013, continues to increase through 2017, the last year for which numbers are given.

During the period 2013-2017 the Government intends to spend more than $1.3 billion from the Infrastructure Fund on the Tasi Mane Project, nearly one third of all Infrastructure Fund spending, and nearly twice as much as the $0.7 billion estimated in the previous year’s budget. The $781 million allocated to the Suai Supply Base and airport is more than five times what the state will spend from the Infrastructure Fund for agriculture, education, health, water and sanitation put together.

Environmental Impact Assessment

In November 2011, RDTL awarded a million-dollar contract to the Australian engineering company WorleyParsons  to carry out an Environmental Impact Assessment (EIA) and develop an Environmental Management Plan (EMP) for eleven components of the Tasi Mane project.  An EIA includes information about the current environmental and social context, as well as how it will be disrupted or improved by a project, while an EMP lays out policies and recommendations to minimize negative impacts during construction and operation, during normal and emergency (i.e. accident or spill) situations.

WorleyParsons was not given enough information about most project components, so they focused on the Suai Supply Base. The Betano and Beacu EIA and the SSB EMP they submitted are strategic; that is, they do not contain detailed project-specific information or recommendations and are insufficient to apply for an environmental license.

WorleyParsons submitted a 750-page "final" Environmental Impact Assessment for the Supply Base in May 2012 (executive summary), including a Strategic Environment Management Plan. A month later, they submitted an 1190-page Strategic Environmental Impact Statement (EIS) for the Betano refinery and Beaçu LNG plant (executive summary). TimorGAP and MPRM forwarded the documents to the State Secretariat of the Environment (SEMA), and all seven volumes can be downloaded from La’o Hamutuk's website.

Applying for an environmental license normally starts a 50-day review process, including 24 days of public consultation. However, SEMA feels that the documents are not yet complete, so the clock has not begun. SEMA, MPRM and TimorGAP continue to exchange questions and answers.

This “Final” Supply Base EIA is tentative (emphasis added): “The specialist studies that informed this study took place within a narrow timeframe, in many instances without the benefit of the historical information or baseline information necessary to place into context the observations made during the fieldwork and in desktop studies. In addition, the level of engineering design detail available can best be described as preliminary in nature. Considered collectively, the conclusions that can be drawn in this report should be regarded with some caution as there is little doubt that, with the benefit of additional engineering design information and scientific data, the information presented and recommendations contained in this report will almost certainly change. ... If the Government of Timor-Leste wishes to reduce the current level of risk associated with the amount and scope of information to inform its decision on whether the project should proceed, an extensive array of further work is recommended.”

The "Strategic EMP" for the Supply Base explains (emphasis added) “An environmental management plan (EMP) is required to be submitted with the environmental impact statement to support an environmental licence application ... In the absence of a detailed project description, a strategic EMP (this document) has been prepared ... [which] will then form the basis for detailed EMP’s required prior to construction and operation of the project. The detailed EMP’s will be site and activity specific and will set out the specific tasks to be implemented by the project staff and contractors.”

TimorGAP SSB project manager Vicente Lacerda told La’o Hamutuk that the Suai Supply Base, as a project in the national interest, must be granted an environmental license before construction begins, probably in 2014. If the State Secretariat for Environment does not issue a license in time, TimorGAP may try to amend the Decree-Law or find another way to ensure that the bureaucracy or legal technicalities do not delay the project schedule.

Contracting

So far, nearly all the money spent on this project has gone to foreign companies, providing hardly any local employment or spinoffs. The biggest contracts to date are with local brokers for international companies, most of which were signed in the final weeks of 2010. In addition, Eastlog and WorleyParsons have conducted feasibility, preliminary engineering and environmental studies.

In late December 2011, the National Procurement Commission announced its intention to award a $930,000 contract to the Malaysian company Jurutera Perunding Zaaba Sdn Bhd for detailed engineering design for rehabilitating the Suai airport.  Another tender was conducted in early 2013 to construct airport infrastructure and control systems, as well as to extend the runway from 1,050 to 1,500 meters.

TimorGAP, with Eastlog’s support, planned to conduct a tender for Suai Supply Base Engineering, Procurement and Construction early this year. However, the Major Projects Secretariat and the interim High Administrative, Tax and Audit Court are reviewing the draft documents to ensure that the processes are legal and protect Timor-Leste’s interests. This process is delaying the bid round, probably until the last few months of 2013.

Will the Suai Supply Base recover Timor-Leste’s investment?

TimorGAP and the Ministry of Petroleum and Mineral Resources often give presentations on the Tasi Mane project, especially the Suai Supply Base. They believe that investments in petroleum operations totaling $50-$70 billion are planned in the Timor Sea between Suai, Broome and Darwin and that these three cities will compete to provide logistics and supplies for these operations.

In January 2013, Parliament asked Petroleum Minister Alfredo Pires what return he anticipates on the $700 million spent to construct the Suai Supply Base. He replied that Bayu-Undan spends about $500 million every year on goods and services, and Kitan spends another $125 million. If these figures are accurate, La’o Hamutuk doubts that there is enough potential business to recover this investment, as the following rough estimate calculation (more details on our website) demonstrates.

If half of the $500m Bayu-Undan spends each year goes for goods (the rest being for services), and the Supply Base operates with a 10% markup on goods that pass through it (the rest goes to the manufacturer, shipper and importer -- a higher markup would be uncompetitive), Bayu-Undan could provide $25m per year gross revenue to a supply base. If two-thirds of this pays for taxes, operational and personnel costs, this leaves about $8m/year to repay the investment and provide profit.

The Suai Supply Base will begin operation around 2016, and Bayu-Undan will end in about 2024 -- nine years. If we pessimistically assume that none of the Bayu-Undan supply business would have come to Timor-Leste without the SSB, the Bayu-Undan project will contribute $72 million toward recouping the SSB investment. Kitan operation will only overlap the SSB by two years and is already partly supplied from Timor-Leste, so its contribution will be less than $4 million. It would take seven times as much business as these two fields just to recover the $700 million capital investment -- and that’s without considering land compensation, depreciation, maintenance or profit. If a typical field operates for 20 years, it will take at least six more projects as big as Bayu-Undan to keep the Suai Supply Base from losing money.

How many Australian oil companies, operating in Australian maritime territory, want the extra costs, risks, currency exchanges, border crossings and administrative hassles which come with supplying their projects from another country? How can we persuade these companies to resist pressure from Australian manufacturers, labor unions and local authorities to bring their business home?

Of course, financial return is not the only benefit Timor-Leste hopes to get from the SSB, and the Government promises about 1,400 jobs, 1,200 of which could be to Timorese workers. Based on the estimates above, and on the improbable assumption that six more Bayu-Undan-sized projects are supplied from this base, the SSB could spend about $25m/year on personnel. If the foreign workers make three times as much as the average Timorese worker, this could pay an average Timorese wage of about $1,160 per month, a reasonable salary in Timor-Leste’s 2013 economy (if not in 2033). However, if the SSB gets business from only two more big oil and gas projects, less than half of that will be available.

Is it worth it? If the $700 million the Government plans to “invest” on the Suai Supply Base project were handed out to 1,200 potential workers over 25 years, each person would receive $1,944 every month. We’re not suggesting that this be done, but only asking whether spending nearly twice as much to create a job as it will pay in salary makes sense.

In the Suai Community

Government promises led many to believe that people from the Suai area would get all of the SSB jobs, and conflicts could occur when workers are hired from other districts or countries. TimorGAP is now urging locals to be more accepting.

Timor-Leste currently has less than 50,000 private sector jobs, and only 3,400 in manufacturing, far fewer than the number of people looking for work. But in ten years, more than 2,000 young people will enter the labor force every single month, and the Supply Base and Tasi Mane project will only be able to employ a small fraction of them. National development requires job creation to be more geographically diverse, and to involve agriculture, light industry and other industries than petroleum processing, which produces less employment than virtually any other sector.

In August 2012, La’o Hamutuk visited the site of the future Supply Base in Suco Kamanasa and other Tasi Mane project components in Suai. We interviewed community members and leaders about their expectations, including their knowledge about the socio-cultural, economic and environmental impacts which will results from this project.

Yosef Nahak Kehik, Chefe Aldeia of Fatusin, Suco Kamanasa said: “The Supply Base is good to give jobs for young people, but when all our land is leveled, the people of Kamanasa will lose our land and forest. When we want to build a sacred house (uma lulik), we need to bring foundation posts and roofing leaves from another suco’s land, because we will have given away our land.”

Pedro Seran, a community member, said “we as farmers, palm wine makers and fisherpeople will go hungry when the Supply Base comes to take our land. We are very worried if the government doesn’t choose our university students in Jogja, Kupang and Dili to work in the SSB, if not we will only work as manual laborers.”

In August 2012, we observed that many people don’t know about the impacts and benefits of this project, as the consultation process had not been deep or included the whole community. We were told that nearly 2,500 people have claimed to be owners of the land the Supply Base will occupy. The Chefe Suco of Kamanasa told us they will each ask for $1,000 per month compensation during the entire life of the project, “because we have already offered our land, in the future our children and grandchildren will have no land to farm.”

On 11 April 2013, traditional and community leaders of Kamanasa formally handed over 1,113 hectares of land for the Suai Supply Base to the Prime Minister. They were promised a 10% share of the project’s profits over the next 150 years, managed through a foundation. Local newspapers reported the celebration, which was witnessed by the Minister of Petroleum, TimorGAP president, members of Parliament and other officials.

La’o Hamutuk talked with people in Suai just after the handover, and many don’t understand what it means, and TimorGAP declined to provide details. We have not yet been able to obtain the agreement, declaration or other concrete information, but we are concerned that 10% of zero is zero.

La’o Hamutuk hopes that the information in this article and on our website will enable better informed discussion on the Suai Supply Base and the Tasi Mane project, which will help enhance Timor-Leste’s development in more realistic, sustainable and inclusive directions. We welcome information and ideas from everyone.