The new Timor Gap

In November 1991 our medium-sized oil exploration company was awarded a slice of acreage in the Timor Gap, becoming a joint venture partner in ZOCA-13. In the same month the Australian media was saturated with news on the massacre of unarmed civilians in a Dili graveyard. Earlier that year, Portugal initiated proceedings against Australia before the International Court of Justice in The Hague over the legality of the Timor Gap Treaty.as usual' was not going to be easy, it seemed.

The treaty has as its foundation a 'model of reality' which described the troubled territory - without question or qualification - as 'the Indonesian province of East Timor'. Yet empirical data suggested an alternative reality: a low intensity war Indonesia could never 'win'.

It became apparent to me that until the East Timor conflict was resolved, exploration expenditure in the Timor Gap was subject to significant political risk. My colleagues in the oil and gas industry did not share this view. At that time the stock response was 'the Indonesians will never leave'.

Successive Australian governments became hostage to the integration model - now consolidated into national legislation through the Timor Gap Treaty, making it effectively 'irreversible'. Integration was now a bipartisan doctrine.opinions became heretical.

In early 1996 I reviewed a US$1 million engineering study to develop the Bayu field, prepared by Bechtel for our joint venture operator, Phillips Petroleum. This was a world class and exciting offshore petroleum project. But how could the required capital investment be secured when the project's legal and fiscal regime had such shaky foundations?

Around this time, in May 1996, Richard Woolcott, former head of Australia's Foreign Affairs and Trade Department, reassured the oil industry by declaring East Timor's independence a 'lost cause'. A short time later, Jose Ramos-Horta predicted independence would be achieved by the end of the century. History has now shown who was the true realist and who was simply shortsighted.

On August 17, 1975, just before the invasion, the same Woolcott, then Australian ambassador in Jakarta, had advised Canberra that 'a treaty on the oil and gas-rich seabed could be more readily negotiated with Indonesia than with Portugal or independent Portuguese Timor'. What was meant and understood by this statement was that Indonesia, if it were allowed control of Portuguese Timor, would accede to 'joining the Timor gap' in the seabed boundary agreed in 1972 between Australia and Indonesia (see map). Portugal's view had been that it would be inequitable to simply join the 'gap'.

The 1972 seabed treaty was based on the now superseded international law principle of 'natural prolongation' of the continental shelf. In October 1972 when this treaty was concluded, Canberra had celebrated a 'diplomatic coup', having gained sovereignty over 85% of the maritime area under negotiation. When Professor Mochtar, the leader of the 1972 Indonesian delegation, arrived back in Jakarta, he was roundly condemned for having 'sold the farm'. However the young 'New Order' regime, born in violence and needing international legitimacy, may have benefitted in other ways by giving so much ground to Australia.

Before the 1975 Indonesian invasion of East Timor, Australia had asserted its sovereignty right up to the seabed boundary 'gap' by issuing two oil exploration permits. An alarmed Portugal in December 1974 issued overlapping permits to a Denver-based company, Oceanic Exploration.

In October 1976 when informal talks between Australia and Indonesia commenced, the sticking point was the legal status of East Timor. Indonesia wanted de jure recognition as a precondition to seabed boundary talks. Australia finally relented in February 1979. Having got what it wanted from a poorly advised Australian government, Indonesia now moved to adopt new thinking in international law - already supported by Portugal - which emphasised equity and distance rather than seabed geomorphology. This position - today well understood by East Timorese leaders - can be described as the 'median line settlement'.

But in 1979 it would have been politically impossible for Australia to agree to Indonesia's median line claim. How would the editorial writers react if, having already betrayed the East Timorese, Australia received nothing of material value from Indonesia? It was also difficult for a nationalistic Indonesia to now agree to Australia's demand that they 'join the gap'. In the words of Foreign Minister Mochtar, Indonesia was 'taken to the cleaners' by Australia in the 1972 seabed negotiations. The Indonesian team was not about to repeat the same mistake.

The resulting stalemate was never resolved. It took twelve years of talks before both sides, possibly from 'negotiation fatigue', agreed to disagree. A compromise joint development zone (JDZ) was created and sealed with a toast in an airplane over the Timor Gap on December 11, 1989. The treaty was not 'readily negotiated' as Woolcott had foreshadowed. On the contrary, the long and laborious negotiations were a setback to oil exploration and resulted in a treaty as unstable today as it has always been.

The UN Convention on the Law of the Sea (UNCLOS III) in December 1982 strengthened the Indonesian position and would have pressured Australia to give ground. However when the Timor Gap Treaty was signed, UNCLOS had not yet entered into force. This occurred only in November 1994, when it had received the required 60 ratifications.

Lessons

There are two lessons here for current East Timorese negotiators. The first is summed up by Jeffrey J Smith, a Canadian oceanographer and barrister who has been researching East Timor's maritime boundary claims for the past 12 months:

'The legal irony of East Timor's ocean claims thus becomes apparent. The passage of time has entitled the new state to the full benefit of recent developments in international law, developments not available to Indonesia as it attempted to maximise continental shelf claims in the Timor Sea. Those developments strongly suggest that a median line will ultimately form the Exclusive Economic Zone (EEZ) boundary between East Timor and Australia'

The second lesson is that inflexible pragmatism has its inherent risks, since today's interests may be shortsighted tomorrow. Compliance with now well-defined international law principles may offer more long-term stability.

For the past two years the 'successor state scenario' has been the primary focus for interested parties, having been first gently introduced in July 1998 by the CNRT in what is believed to have been a tactical policy switch. The CNRT statement served to rob the Australian government, editorial writers, and the Timor Gap contractors of reasons for arguing that independence in East Timor would 'tear up the Timor Gap Treaty'. Under this position, East Timor would simply replace Indonesia in the existing Timor Gap Treaty. The maritime area would remain a zone of disputed sovereignty and the two nations would agree to equally share the benefits of the offshore petroleum.

Prior to the 1998 CNRT statement, Jose Ramos-Horta was quoted as supporting the median line policy, effectively claiming East Timor sovereignty over the entire Zone A including the proven Bayu-Undan petroleum reserves. Recently Mari Alkatiri, the CNRT's Timor Gap spokesman, has resurrected speculation that the CNRT is considering the pro's and con's of moving back to the median line policy position. The move from principle to perceived pragmatism and then back to principle simply illustrates the dilemma facing diplomats balancing these often-conflicting forces.

The successor state model was given a boost in August 1998 by a 'paradigm-shifter' in the form of media headlines shouting 'BHP talks to jailed guerilla leader'.

The Australian Labor Party took note of developments. On September 16 1998, Shadow Minister for Foreign Affairs Laurie Brereton supported the CNRT statement by asserting that an independent East Timor can 'stand in the shoes of Indonesia' in relation to the Timor Gap Treaty. Brereton, ably assisted by his key researcher/ adviser Dr Philip Dorling, would issue several groundbreaking Timor Gap press releases over the ensuing months, each one 'moving the goal posts' for his counterparts on the government benches.

In February 1999, Indonesian resources minister Kuntoro Mangkusubroto confirmed that Indonesia would relinquish its claim to the Timor Gap if East Timor voted for independence. Finally, the Australian Government gave its official blessing to the successor state model through the Attorney General's Department submission to the East Timor Senate Enquiry on 19 April 1999.

In March 1997 Australia, then believing East Timor would never become an independent state, concluded another treaty with Indonesia. This created a permanent 'water column boundary' between East Timor and Australia coincident with the median line or the southern boundary of Zone A. The median line is also the earlier (1981) Provisional Fisheries Surveillance and Enforcement Line (PFSEL). The 1997 treaty 'delimited' the two nations' overlapping EEZ's in accordance with modern international law. However, the seabed boundary (governing oil and gas) was left unresolved to honour the existing Timor Gap Treaty.

An East Timorese policy favouring a permanent seabed boundary with Australia and under UNCLOS would be based on the same logic as already used by Australia to create a permanent water column boundary - that is, based on the median line. Put simply, it is not logical to have a seabed boundary separated from the water column boundary.

When signing the Timor Gap Treaty, Australia actually endorsed the principle that an agreed seabed boundary is preferable to the treaty itself. The treaty regards itself as provisional and has a wind-up clause triggered when 'the two Contracting States have concluded an agreement on a permanent continental shelf delimitation in the area covered by the Zone of Cooperation'.

Australia formally conceded to the international community in its submissions in the 1995 Timor Gap ICJ case (Portugal v. Australia) that the treaty would not bind an independent East Timor.
Cash flows.

The graphs give indicative cash flows from Phase 1 of the Bayu-Undan gas project in 'Zone A' of the Timor Gap (details at www.phillips66.com/bayuundan/). Phase 1 denotes the production of natural gas liquids (LPG and condensate), returning the lean gas back into the reservoir. Phase 2 - involving the desired sale of over 3 trillion cubic feet of natural gas - is more challenging since a market for the gas does not currently exist. I have presented indicative revenue from Phase 1 only, to avoid excessive expectations arising from the 'upside potential' represented by Phase 2.

These figures are based on the Timor Gap Treaty fiscal regime with price and production assumptions generally accepted within the industry. Assumptions can change from day to day. The joint venture partners assess likely risks and rewards by studying how each variable impacts on profitability. It is clear that East Timor will benefit significantly by 'stepping into the shoes of Indonesia'. However, a median line settlement under UNCLOS will enable East Timor to receive almost twice the benefit offered by a treaty Indonesia and Australia concluded in darker times.

The wisdom of the transition period concept, always strongly promoted by Xanana Gusmao and Jose Ramos-Horta, is now apparent. The successor state model, now enthusiastically embraced by Australia, requires a state to succeed the treaty. The CNRT cannot make any binding decisions until it is duly constituted as a legitimate democratically elected government. UNTAET likewise cannot commit the East Timorese people to any binding agreement. This appears to be the cause of considerable frustration for Australian government officials eager to ensure the continuation of the treaty. But for the East Timorese, the transition period presents a great advantage, for it will protect them from the current Australian pressure to make a hasty decision.

East Timorese policy makers will of course have a pragmatic desire to work with Australia. Nevertheless, there are multiple factors tilting the balance towards a permanent median line seabed boundary settlement.
� Indonesian-educated East Timorese activists may challenge 'selling the farm' by their Portuguese-educated leaders. They do understand the issue.
� The Joint Authority under the present treaty will, more likely than not, lead to episodic operational difficulties, given that East Timorese representatives will play 'second fiddle' to Australia.
� The Timor Gap Treaty fiscal regime, modeled on the Indonesian Production Sharing Contract (PSC) system, is onerous by world standards and discourages development of smaller discoveries. A median line settlement will allow the future East Timorese government to give significant tax concessions to joint venture partners. This will have a hugely positive effect on development economics. The oil companies will support it.
� Time is on East Timor's side, enabling the young nation to pursue its own national interests based on sound research. Overworked CNRT officials are at present vulnerable to being overly influenced by the Australian point of view. Funds are needed so their representative can attend reputed training courses at non-Australian centres of maritime boundary research, such as at the University of Durham, UK.
� As explained by one maritime law specialist, 'The median line settlement of an overall EEZ is preferred, wholly supported and even mandated by the present customary international law of the sea'. Australia by making the 1997 EEZ delimitation treaty with Indonesia has put itself in a weak position internationally if it wishes to argue that the seabed boundary (governing oil and gas) should be at a different location than the water column boundary (governing fisheries).
� Australia's foreign minister raising a champagne glass with his Indonesian counterpart is the treaty's unforgettable symbol. Asking the East Timorese to 'honour' the treaty indicates a certain insensitivity on the part of Australia. There will be strong public pressure for East Timor to make a symbolic break with the past.
An historic opportunity now exists to remove the Timor Gap from the very short list of the world's disputed maritime areas. The ideal procedure is direct talks between Australia and a democratically constituted government of East Timor. Failing that, the dispute can always be resolved by international arbitration.

Geoffrey A McKee ([email protected]) is a chemical engineer with wide experience in the oil and gas industry. Interested readers are invited to email him for the full text of this abridged article.

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