Production Sharing Contracts now on-line

Oil and gas exploration activities in the Joint Petroleum Development Area (JPDA) and in Timor-Leste Exclusive Area (TLEA) are conducted under Production Sharing Contracts (PSCs) between the companies and the National Petroleum Authority or its predecessor, the TSDA. Under the 2005 Petroleum Act and the Interim Petroleum Mining Code, PSCs are public documents.

PSCs signed in 2006 were posted to government websites which have been allowed to die. Since these very important documents are no longer on the internet, La'o Hamutuk has posted them to our website. We encourage the government to implement their legal obligation for transparency.

Making the oil companies pay what they owe

Timor-Leste is the most petroleum-export-dependent country in the world. Oil money pays for about 90% of everything the Government does. But the oil companies cheat – they pay as little as they can get away with. After six years, Timor-Leste is beginning to scrutinize their tax returns, and has discovered what should have been expected – that companies have not paid all that they owe.  We have already collected tens of millions in back taxes and penalties from ConocoPhillips and other companies, and further investigation is likely to reap much more.

La’o Hamutuk has posted an article to our website explaining the tax system and some of the difficulties and irregularities Timor-Leste has encountered, as well as some recent successes. This blog entry is a greatly abridged version of that 4-page article.

When taxes are calculated, the oil companies are entitled to deduct the expenses of operating the project through a process called cost recovery. This means that Timor-Leste effectively reimburses the company for expenses related to the project. There’s a lot of room for cheating. 

In November 2010, after several months of investigation, Timor-Leste sent a $32.4 million bill to ConocoPhillips (USA) and its joint venture (JV) partners Santos (Australia) and Inpex (Japan) for a cost the companies wrongly recovered from the Bayu-Undan project in 2005.

The illegitimate cost was for an exploratory well named Firebird (sometimes called Phoenix, the red circle on the map). In 2003 ConocoPhillips reassessed old data and concluded that there could be a valuable natural gas field west of and under the Bayu-Undan field.

Under their contracts, oil companies are required to give back parts of the contract area that they no longer want to explore, and they were supposed to relinquish the  pink area in 2004. The companies asked the Timor Sea Designated Authority (TSDA) regulator for time to drill one more well at Firebird, which they thought might contain 1.4 tcf of gas, about ¼ as much as Bayu-Undan.

The TSDA granted the extension in February 2004, but told the companies not to charge Firebird costs against Bayu-Undan revenues. They would only be able to recover these exploration costs if Firebird became a commercial project.

The Firebird well drilled at the end of 2005 found only small amounts of gas, and the well was plugged and abandoned. The companies relinquished the area.

Contrary to their agreement with TSDA, the companies charged the $32 million cost of the well against Bayu-Undan revenues, reducing their tax payment by $9.7 million.

Timor-Leste reopened this issue this year. On 24 November 2010, Timor-Leste ordered ConocoPhillips, Inpex and Santos to pay $32.4 million, including $9.7 million in back taxes, as well as a 100% penalty for gross negligence and 1% per month interest and penalties for late payment.

In early December, Inpex paid $7.1 million, Santos paid $5.1 million, and ConocoPhillips has agreed to pay $19.5 million (although the companies could still appeal within the Ministry of Finance).

Oil companies often buy and sell their ownership in different projects. If they get more for selling their shares than they spent on developing them, they have to pay capital gains tax, which is 30% in Timor-Leste. Although several such sales have occurred in the JPDA, the companies have not paid this tax. Current investigations are likely to produce payments for overdue taxes from Woodside, Santos and other companies, which is discussed in more detail on our website.

In December 2010, Timor-Leste’s National Directorate of Petroleum Revenues will begin to audit Bayu-Undan tax returns since 2005, the first time Timor-Leste has audited petroleum tax returns. External audits have turned up nothing, which is not surprising since the auditor has been paid by the companies. Timor-Leste has recently obliged the companies to keep copies of records in Timor-Leste, which will make audits possible.

Timor-Leste is the owner of the oil and gas in the ground, and it writes the contracts and the laws. For our people’s sake, we are glad that they are finally being enforced more effectively.

Submisaun husi LH kona-ba OJE 2011 ba Komisaun D, Parlamentu Nasional

Iha loron 26 Novembru, La'o Hamutuk hetan konvite atu partisipa iha audiensia Komisaun D (Agrikultura, Floresta, Rekursu Naturais no Ambiente) Parlamentu Nasional, atu fahe hanoin kona-ba orsamentu. Tuir mai, ami hakerek submisaun ida ba Komisaun D (mos Ingles).

Ami nia submisaun rekomenda katak:

1. Mantein nafatin gastus iha nivel sustentavel, bazeia ba projeksaun presu mina-rai iha futuru ne’ebe prudente. Proposta orsamentu ne’ebe sai maka’as ba 2011 no 2012 tenke limita, no atu foti osan husi Fundu Petroleu iha tinan oin mai labele liu Rendimentu Sustentavel Estimadu.
2. Halo klaru katak gastus tenke iha koneksaun ho rendimentu, no rendimentu mina-rai ne’ebe sae iha relasaun ho rendimentu estadu ne’e sei akontese temporariu deit.
3. Fo fundus adisional ba Ministeriu Agrikultura no Peskas no enkoraza nia atu implementa politika ida ne’ebe bele hatan ba nesidade agrikultor lokal.
4. Insiste ho klaru kona-ba kustu informasaun no rendimentu no projeksaun kampu servisu ba siklu projeitu tomak iha projeitu Tasi Mane, hodi nune’e Parlamentu bele deside karik projeitu sira ne’e razoavel atu halo investimentu rekursu estadu nian.
5. Evalua katak gastu ho montante boot husi osan povo nian atu prepara planta LNG iha Beacu sei iha valor no vantazem, tamba kompania ho poder atu halo desizaun lakohi atu konsidera opsaun ida ne’e.
6. Prioritize dezenvolvimentu ne’ebe maka’as ba iha seitor ekonomia naun-petroleu, ba dala uluk ba agrikultura, atu troka industria mina no rendimentu petroleu temporariu.
7. Rejeita alokasaun orsamentu ba kompania mina-rai nasional PETRONATIL to kompania ne’e estabelese husi lei Parlamentar ida ho salvaguarda ida ne’ebe adekuadu, iha akuntabilidade no transparansia.
8. Rejeita alokasaun orsamentu ba Institutu Petroleu no Geologia nudar institutu autonomu, maibe alokasaun nafatin iha strutura SERN.
9. Rejeita atu estabelese Fundu Infraestrutura to’o kustu annual nian kompleta no deitalhadu. Kampu servisu, informasaun orariu ba kada projeitu, no to’o Parlamentu aprova ona Planu Estratejiku Dezenvolvimentu Nasional, ho Lei no orgaun ne’ebe nesesariu.
10. Insiste katak orsamentu tenke fo prioridade ba edukasaun sidadaun Timor-Leste iha Timor laran duke haruka funsionariu publiku balun ba eskola iha rai liur ne’ebe karun teb-tebes.
11. Permite atu aumenta funsionariu sira ba ministeriu xave sira hanesan saude, edukasaun no agrikultura, no mos atu jere no taumatan ba infraestrutura foun ne’ebe foin haluan ba. 

Bele hetan informasaun tan kona-ba proposta Orsamentu Estadu 2011, inklui dokumentu sira, relatoriu ezekusaun no komentariu ruma iha http://www.laohamutuk.org/econ/OGE11/10OJE2011Te.htm.

LH Submission on 2011 Budget to Committee D

On 26 November, La'o Hamutuk was invited by Timor-Leste's National Parliament Committee D (Agriculture, Forests, Natural Resources and Environment) to share perspectives about the proposed General State Budget for 2011. After the hearing, we prepared a 10-page submission for the Committee (also Tetum).

Our submission made these recommendations

1. Keep spending within sustainable levels, based on prudent projections of future oil prices. The proposed massive budget increases for 2011 and 2012 should be limited, and withdrawals from the Petroleum Fund in future years should not exceed the Estimated Sustainable Income.
2. Emphasize that expenditures are connected with revenues, and that the current surge in petroleum-related income is only temporary.
3. Provide additional funding to the Ministry of Agriculture and Fisheries and encourage it to implement policies which address the needs of local farmers.
4. Insist on clear cost information and revenue and employment projections for the full project cycle of the Tasi Mane projects, so that Parliament can decide if they are a reasonable investment of state resources.
5. Evaluate whether spending large amounts of public funds to prepare for a possible Beaçu LNG plant is worthwhile, since the company with decision-making power refuses to consider that option.
6. Prioritize development of a strong non-oil economy, primarily based on agriculture, to replace transient oil revenues and industry.
7. Reject funding for the PETRONATIL national oil company until it has been established by Parliamentary law with adequate safeguards, accountability and transparency.
8. Reject funding for the Institute of Petroleum and Geology (IPG) as an autonomous institute, but provide for it within the structure of SERN.
9. Refuse to establish the Infrastructure Fund until complete and detailed annual cost, employment and schedule information is provided for each project, and until Parliament has approved the National Strategic Development Plan, with necessary organs and laws.
10. Insist that the budget give priority to education of Timor-Leste citizens in Timor-Leste, rather than sending a few public servants for expensive schooling overseas.
11. Allow hiring of additional personnel for key ministries like health, education and agriculture, as well as to manage and maintain newly expanded infrastructure. 

More information on the budget, including budget documents, execution reports and analysis, is available at http://www.laohamutuk.org/econ/OGE11/10OJE2011.htm.

TL falls in MCC annual ratings

Every year, the U.S. Government's Millennium Challenge Corporation evaluates countries for their eligibility to receive large grants under the MCC program. Countries which fall below certain levels can receive "Threshold" funding to help bring their scores up, and Timor-Leste entered this category in 2007, after its scores fell from previous years. Click here for more information about MCC and Timor-Leste.

MCC just released its scores for 2011. Timor-Leste did worse on 11 criteria compared with the previous year, and improved on 4, with two unchanged. Timor-Leste fell from 21% to 10% in the key "Control of Corruption" indicator, continuing a downward trend since 2006.

MCC uses a pass/fail (green/red) system. To pass, Timor-Leste must be better than at least half of the low-moderate income countries rated. To become fully compact-eligible, (as we were in 2005-6),a country must be "green" for Corruption and the majority of scores on each line of the chart at right. Timor-Leste needs to pass Corruption, and at least two additional indicators in the "Investing in People" category, and one more in the "Economic Freedom" category to return to Compact Eligibility, which will be re-evaluated in a year or two, after the threshold program is implemented.

Gasta la Sustentavel sei Hamamuk Fundu Petroleu

Dokumentu Governu nian ne’ebe propoin Orsamentu Jeral Estadu 2011 ilustra frakeza fundamental iha planeamentu finanseiru — failansu ne’e atu fanun ita katak, karik estadu gastu osan barak husi Fundu Petroleu iha tempu badak nia laran, iha futuru osan sei menus.

Livru Orsamentu 1 inklui kapitulu sira kona-ba Rendimentu no Gastus. Iha kapitulu Rendimentu, balansu iha Fundu Petroleu no Rendimentu Sustentavel Estimativa (RSE) iha futuru bele projetadu ona ho asumsaun katak Governu sei bele foti deit montante RSE kada tinan-tinan. Ida ne’e hatudu iha grafiku iha leten, ho linha kor mean kot-kotu (eixu da direita) indika montante ne’ebe foti husi Fundu Petroleu kada tinan-tinan, no linha kor mean tomak hatudu katak balansu iha Fundu Petroleu. (Hanesan linha hotu iha grafiku ida ne’e, buat sira ne’e refleta katak asumsaun governu nian ne’e optimistiku liu katak investimentu Fundu Petroleu sei hetan retornu 4% as liu inflasaun, boot liu duke sira hetan dadaun.)

Maibe, kapitulu gastu nian esplika katak Governu iha planu atu foti tokon $418-$526 as liu RSE husi Fundu kada tinan-tinan hahu iha tinan 2012 (linha kor matak kot-kotu iha eixu da direita), estabelese ba kresimentu annual 3.5% iha gastu estadu nian hafoin eleisaun 2012. Iha kazu ne’e, balansu iha Fundu (linha kor matak tomak) hahu atu tun iha 2024, no Fundu sei uza hotu iha tinan 2035 karik laiha ona projeitu gas ka mina-rai atu mai tan.

Ba orsamentu 2011, Governu asumi katak futuru presu mina-rai nian sei sai 50% as liu duke asumsaun ne’ebe sira halo tiha ona ba Orsamentu Estadu 2010, ne’ebe La’o Hamutuk hare katak viola tiha rekizitu Lei Fundu Petroleu nian katak “asumsaun tomak ne’ebe halo tenke prudente.” Asumsaun ba presu as nian uza hela iha senariu rua ne’ebe diskute iha leten. Karik senariu ida kalkula fila fali dadus bazeia ba asumsaun presu mina-rai nian ba orsamentu 2010, ho nivel gastus nian iha orsamentu 2011, balansu Fundu Petroleu nian (linha tolu ho kor roxo) sei hotu tomak iha 2030.

Liga iha ne’e atu hetan dokumentu no informasaun tan kona-ba OGE 2011, inklui Kalendariu audensia Parlamentar no diskusaun plenaria nian.

Spending unsustainably will empty the Petroleum Fund

The Government’s documents proposing the 2011 State Budget illustrate a fundamental flaw in financial planning -- a failure to realize that if the state spends more money from the Petroleum Fund in the short term, less will be available for the future.

Budget Book 1 includes chapters on Revenues and Expenditure. In the Revenue chapter, future balances in the Petroleum Fund and the Estimated Sustainable Income are projected assuming that the Government will only withdraw the ESI amount every year. This is shown in the graph above, with the dashed single red line (right-hand axis) indicating the amount withdrawn from the Fund every year, and the solid single red line showing the balance in the Petroleum Fund. (Like every line in this graph, these reflect the Government’s very optimistic assumption that Petroleum Fund investments will earn 4% higher than inflation, much more than they have to date.)

However, the Expenditure chapter explains that the Government plans to withdraw $418-$526 million more than ESI from the Fund every year starting in 2012 (dashed double green line, right axis), settling down to a 3.5% annual increase in expenditures after the 2012 election. In this case, the balance in the Fund (solid double green line) starts to decline in 2024, and the Fund will be used up by 2035 if no new oil or gas projects come on-line.

For the 2011 budget, the Government has assumed that future oil prices well be about 50% higher than were assumed for the 2010 budget, which La’o Hamutuk believes violates the Petroleum Fund Law’s requirement that "all assumptions made shall be prudent.” The higher price assumptions are used in the two scenarios discussed above. If one re-calculates the data based on the oil prices assumed for the 2010 budget, with the level of expenditures in the 2011 budget, the balance in the Petroleum Fund (triple purple line) will be entirely exhausted by 2030.

Click here for more documents and information about the 2011 State Budget, including the calendar of Parliamentary hearings and plenary discussions.