04 October 2018

Buying part of Greater Sunrise from ConocoPhillips

What does it mean for Timor-Leste and the Pipeline?

Last week, negotiators from the Timor-Leste government and the ConocoPhillips international oil company agreed that Timor-Leste will purchase ConocoPhillips’ share in the Joint Venture (consortium or JV) of four oil companies who hold the contract to develop the Greater Sunrise oil and gas field. By paying $350 million, Timor-Leste will become the owner of 30% of this project, together with Woodside (33%), Shell (27%) and Osaka Gas (10%). If the sale goes through, TimorGAP, as Timor-Leste’s national oil company, will participate in making decisions about the project, be responsible to contribute 30% of the investment, and be entitled to 30% of the profit.

This article will address some confusion and misinformation that is circulating in Timor-Leste and international media about the purchase and the Sunrise project.  La’o Hamutuk has followed this issue for many years (we published the book Sunrise LNG in Timor-Leste: Dreams, Realities and Challenges in 2008), and we continue to encourage fact-based, objective decisions to serve the best interests of Timor-Leste’s people. We hope that this article will help you understand legal, economic, social and environmental aspects of the project, which has the potential to bring significant benefits or huge losses to our people. Decisions should not be primarily motivated by “winning” a pipeline or overcoming the opinions of countries and companies, but by what will give the most benefit to Timor-Leste’s people over the long term.

Background

The Greater Sunrise undersea gas and oil field was discovered in 1974, but it has not yet been developed because of the Indonesian occupation, the (recently resolved) maritime boundary dispute with Australia, and disagreement about where the gas should be processed. Some analysts estimate that its gas and oil will sell for about $50 billion. After paying for capital investment, operating costs and company profit, this could generate $8-20 billion in tax and royalty revenue to Timor-Leste. If Timor-Leste becomes a part-owner, we will share in the profits, as well as in the responsibility for investment.

For many years, Sunrise has been stalled because Timor-Leste’s government has insisted that its natural gas be piped to Timor-Leste, where it will be cooled until it becomes a liquid (Liquefied Natural Gas – LNG) that can be loaded onto tanker ships and sold to overseas customers.  However, the four oil companies in the Joint Venture believe that other ways of making LNG – either through a pipeline to Australia (Darwin LNG or DLNG) or on a floating platform above the field (FLNG) – will be more profitable and less risky. Timor-Leste’s government believes that spinoff jobs, contracts and local economic development on the Tasi Mane coast will more than compensate for the higher costs and risks of bringing the gas here, but this view is not shared by Australia, the Sunrise Joint Venture, or the UN Conciliation Commission that facilitated the Boundary Treaty. La’o Hamutuk and experts we have consulted are not convinced that the benefits to Timor-Leste are greater than the costs, and we have repeatedly asked the managers of the project for the assumptions and data that make them so optimistic.

Last March, Timor-Leste and Australia signed an historic treaty to establish their maritime boundary, and it is pending ratification in both countries.  La’o Hamutuk celebrates this achievement as a significant advance for Timor-Leste’s national sovereignty. Although the negotiators had hoped to resolve the Sunrise question before the Treaty was signed, they were unable to. Because Sunrise straddles the boundary established by the new treaty, Timor-Leste will receive 70% of the government revenues for extracting Sunrise oil and gas if the gas is processed in Timor-Leste, and 80% if it is processed in Australia.

Buying out ConocoPhillips

Timor-Leste’s purchase of ConocoPhillips' 30% share of Greater Sunrise is one step in a long process which may eventually bring a gas pipeline from the Sunrise field to Beaçu on the south coast. Many Timorese citizens are proud of our political leaders for persuading or paying Australia and the oil companies to accept this position. However, this issue has financial, economic, environmental and social consequences which could affect people’s lives for many generations, and will be longer-lasting and more consequential than temporary patriotic emotion.  It is not yet clear that the Sunrise pipeline will be good for the people of Timor-Leste.

The nation needs and deserves a detailed, objective analysis, with complete public information, about the costs, benefits, risks, and impacts of the entire Greater Sunrise and Tasi Mane projects before billions of dollars of public funds are disbursed to oil companies, contractors, brokers and other individuals and companies who don’t have any long-term commitment to the nation or obligation to serve the public interest.

La’o Hamutuk has serious doubts that such an analysis will prove that the benefits of bringing the Sunrise pipeline to Timor-Leste are enough to justify its huge costs, risks and social impacts.  But even if it does, the recent agreement to purchase ConocoPhillips’ 30% share is insufficient to ensure that the pipeline will come here. 

What else has to happen to bring the pipeline to Timor-Leste?

  1. Under the Sunrise Joint Venture rules, each other partner – Woodside, Shell, or Osaka Gas – has the right to “pre-empt” another buyer. In other words, if ConocoPhillips intends to sell its 30% share, one of these companies could purchase it to prevent it from going to someone else. Media reports indicate that Woodside may exercise this power, which would prevent Timor-Leste from buying the share from ConocoPhillips.

  2. Australian and Timor-Leste government regulators will have to approve the purchase. The sales contract and Joint Venture agreement must also be approved by the Council of Ministers and reviewed by the Audit Court.

  3. Timor-Leste will have to pay $350 million to ConocoPhillips early next year, sort of a down payment on much larger financial obligations in the future (see #5 below).  The $350 million – more than twice as much as Timor-Leste spends each year to educate our children – will be taken out of the Petroleum Fund, probably as part of the 2019 State Budget which the Government will propose to Parliament in November. We hope that Parliament’s debate on the Budget will fully explore this issue, including financial and other obligations that Timor-Leste assumes by joining the Joint Venture.

  4. Even after Timor-Leste owns  a 30% share of Greater Sunrise, it will need to persuade Shell and Woodside to approve a pipeline to Timor-Leste, which may reduce the profitability of the project. Most Joint Ventures require unanimous approval for a major decision like this one.
         ConocoPhillips wanted to process the gas in Darwin, perhaps because it is the principal owner of the soon-to-be-idle LNG plant there that has been processing gas from Bayu-Undan. They persuaded Shell and Woodside to support their position. Before that, the Joint Venture had preferred Floating LNG; Timor LNG was always the third choice for all the partners.
         Without ConocoPhillips, the Sunrise JV will have less financial resources and technical and administrative expertise, and other partners may ask for compensation to accept the increased cost and technical and security risks of a deep-water pipeline to a new LNG plant in Beaçu, as well as the additional infrastructure and regulatory support that it will require.
         Potential buyers for the LNG will also have to approve the development option and will want assurance that the price, continuity of supply, and security of operation meet their needs.
  5. Timor-Leste will need to pay at least 30% of the capital cost to develop the Sunrise field, which will be several billion dollars. This investment is not only for the pipeline and LNG plant, but for drilling exploratory and production wells, building the infrastructure to process oil and gas at the field (probably including  a Floating Production Storage and Offloading (FPSO) vessel to store and sell oil from Sunrise), operational infrastructure, and other costs. If this money is borrowed, Timor-Leste will have to pay it back with interest.  Although everyone hopes that this investment can be recovered a few years after the field starts production in 6-12 years, the money will need to be paid up front, and recovery is not certain.
  6. After the partners and governments agree and the capital investment financing has been secured, the Joint Venture has to design and build the project, subject to regulatory and environmental approval and best practice.

Safeguards

The oil and gas industry has caused pollution, spills, accidents, fires and explosions all over the world, and we need to take appropriate measures to protect our beloved country. Nothing anywhere near this scale has ever been built in Timor-Leste, and virtually nobody here has ever experienced the potential environmental disasters it comes with.

Our regulatory agencies and environmental authorities do not yet have the knowledge, understanding, or perspective to manage a project like this, and they often find it difficult to stand up to political pressure. Although this scientific and administrative capacity could be developed over time – with support from people who have already had major responsibilities on similar projects – the learning curve is long and the consequences of mistakes are huge. “Learning by doing” is not acceptable when billions of dollars and thousands of lives are at risk.

The oil industry is secretive by nature, and projects of this magnitude all over the globe, involving payments of hundreds of millions of dollars to dozens of entities, are often riddled with corruption.  After Timor-Leste becomes an owner of Sunrise, our country and our money will be a magnet for thieves and scammers who want a piece of the action, and we may end up paying much more than we should or expect to.  With a project of this size and complexity, Timor-Leste needs to implement transparency, oversight, accountability, and checks and balances all along the way. We do not yet have the necessary safeguards in place, and we need to develop them immediately.

Conclusion

In summary, everyone in Timor-Leste needs to be certain that this long journey is one which will lead to a good place. Timor-Leste has already spent more than $250 million on the Tasi Mane project, mostly for Suai airport and the Suai-Fatukai highway. We are about to spend $350 million more to buy into Greater Sunrise, to be followed by several billion to prepare to extract its oil and gas. We may spend another $5-$10 billion to build the rest of the Tasi Mane project.

In other words, the country will spend most of our $17 billion Petroleum Fund – which finances education, health care, roads, water, electricity, veterans, PNTL, F-FDTL and many other things – to pursue the gas from Greater Sunrise. It is not too late to seriously consider its costs and benefits, and to see if the petroleum path is the most promising, practical and productive way to use the nation’s finite economic resources.  Should we invest our time, money, political capital and administrative skills in the Sunrise and Tasi Mane projects – or should we take the more certain, less dangerous path of diversifying our economy, building on our human and agricultural resources?

If we make the wrong decision now, it will be even harder to change course in the future, and we may continue to throw good money after bad.

International media have written many articles about this deal over the last two months, and we link to some of them here to make more information and perspectives easily available:

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