STATEMENT ON OIL AND GAS DEVELOPMENT IN TIMOR-LESTE
Secretary of State for Tourism, Environment and Investment
23 August 2004
I would like to welcome to all of you, and thank you for coming to this event.
As you well know, Timor-Leste has significant petroleum resources and we are meeting here over the next three days to examine the best legal framework for the development of these resources.
As the international and commercial negotiations relating to Bayu-Undan and Sunrise were being conducted in 2002 and 2003, a background review of potential institutional structures, issues and fiscal terms for Timor-Leste’s petroleum sector was being considered. At the end of 2003, the Prime Minister established a working group to propose a petroleum regime for Timor-Leste.
The goal of the Timor-Leste government in regard to its petroleum resources, as Prime Minister Alkatiri stated on ABC Radio in November 2003:
“What we are looking for in managing these resources is using them to develop other sectors of the economy – agriculture, fisheries, tourism. We want economic development that will be sustainable for our people so that they are not dependent on non-renewable resources.”
I would like to take this opportunity to briefly outline the direction that the Timor-Leste government is following to meet this goal. I will also briefly outline the role to be played by the set of draft laws and contracts before you, which will constitute the legal regime governing the development of Timor-Leste’s petroleum wealth, including in areas subject to the Timor Sea Treaty.
I would like, first, to introduce the petroleum regime drafting group. It consists of advisors and staff from the Timor Sea Office (TSO), the Designated Authority (DA), the Ministry of Planning and Finance (MOPF) and the Energy and Mineral Resources Directorate (EMRD). And I would like to take this opportunity to note that many of the members of this drafting team are supported by Timor-Leste’s development partners – the Asian Development Bank (ADB) and the United States Trade and Development Agency (USTDA), among others.
As will be outlined in later presentations, over the last months, this group considered petroleum regulation and taxation in other countries, with a view to creating a petroleum regime for Timor-Leste that is internationally competitive. There is a fine balance to be struck here. We want to attract investors, but we also want to maximize the returns to the people of Timor-Leste.
The goal of the working group was also, and importantly, to create a regime that is stable, transparent and fair. The World Bank has recently recognised that Timor-Leste’s management of its petroleum industry – including the proposed regime before you today – constitutes international best practice.
II. Importance of Petroleum to Timor-Leste
Now, and even more so, once the full extent of the resources is known, nothing will be more important to the future of Timor-Leste than the proper management of this petroleum wealth. The Government estimates that petroleum income will contribute over 75% of fiscal revenue and over 50% of gross domestic product (GDP) in coming years. Petroleum revenues will play a vital role in addressing our challenges of entrenched poverty and under-development.
The development of this set of documents and its presentation at this meeting marks a significant milestone in our national struggle for economic independence. Initially, there has been strong dependence on oil & gas income from the JPDA. There is now a need to begin development of petroleum resources in other areas of Timor-Leste. The proposed regime will underpin further development of Timor-Leste’s petroleum sector, with a view to sustainable development in Timor-Leste more generally.
It is essential that the activities of this sector are properly regulated so as to maximize returns to the people of Timor-Leste. Beyond this, the Timor-Leste government is also that it needs to insulate the local economy from the dangers of volatile oil and gas annual state revenues – the recent increase in oil prices to almost 50 dollars per barrel is an illustration of this volatility – and to ensure that future generations benefit from resources. The Timor-Leste government intends to implement a revenue saving mechanism to accomplish these goals. The Timor-Leste government intends to put in place a Petroleum Fund in the next year.
I. Timor-Leste Potential Hydrocarbon Resources
Timor-Leste’s natural resources, particularly oil and natural gas, are potentially abundant.
There are known world-class oil and gas deposits in the JPDA.
Outside of the JPDA, Timor-Leste has been practically unexplored, aside from a couple of wells drilled prior to 1970. However, numerous oil and gas seeps can be observed in heavily thrust-faulted onshore areas: Saui, Ainara, Betano, Suete, etc. Although some low technology exploration took place prior to 1975, the near-offshore area south of Timor-Leste is virtually unexplored: only one well is believed to have ever been drilled. Further, the area north of the Timor Trough exhibits distinct geological characteristics similar to the shallower and better known JPDA.
III. Practical Challenges
Timor-Leste obviously faces certain practical challenges in the development of its petroleum resources. Aside from the scarcity of modern technical petroleum data mentioned above, no commercial production has been established onshore in Timor-Leste, and Timor-Leste lacks infrastructure (refinery or gas network) to serve potential local markets.
Despite this, international oil companies have expressed interest in exploring for oil and gas in Timor-Leste.
IV. Strategic Directions
In order to take advantage of this interest, and to use its petroleum resources to the maximum benefit of the people of Timor-Leste, the Timor-Leste government has identified the following strategic directions for the development of Timor-Leste’s petroleum sector:
1. Assess the nation’s resource potential;
2. Enable and encourage investment in exploration & production by international petroleum companies;
3. Implement a prudent scheme for deriving income from petroleum resources;
4. Implement the processes necessary to ensure that Timor-Leste receives all income owing;
5. Increase the technical and managerial skills of Timorese nationals and encourage the use of Timorese goods and services;
6. Ensure protection of the environment.
Now what I would like to do is elaborate on each of these strategic directions. As will be clear, the proposed petroleum regime that we will discuss over the next days is an integral part of the Timor-Leste government’s petroleum strategy.
1. Assess resource potential
This is obviously the first step in developing Timor-Leste’s petroleum sector. We need to have an idea of what resources we have, and where they are.
As I outlined earlier, there has been petroleum activity in Timor-Leste over the last 30 years. However, very little of the data related to that prior activity is in Timor-Leste. As such, one of the first things we need to do it to create, populate and maintain a national technical petroleum database.
Over the past few years, the EMRD has been attempting to locate and collect existing information, with a focus on Indonesia & Australia. In addition, it has been working with a number of companies and consultants in assessing onshore and offshore prospectivity.
We are also enabling the collection of further data. As will be described in later presentations, this is contemplated in the draft regulatory laws before you, which provide legislative authority to grant prospecting permits to qualified companies.
Even in advance of the promulgation of these laws, however, we are moving forward on this. The Timor-Leste government has opened bidding for seismic data acquisition rights. I have good news to report: Multiple bids have been received for these rights, and the EMRD is in the process of reviewing those bids in the hope of naming a winner and kicking off the project within the next month.
To ensure that we are not beholden to others for data, as you will see, the proposed regulatory laws establish that the State is the legal owner of all data acquired in petroleum activities.
2. Enable and encourage investment in exploration & production by international petroleum companies.
Once we have data regarding our resrources, because developing these resources are very expensive to develop, we have to attract international petroleum companies to invest. In order to do so, we need to put in place a regulatory and fiscal regime that is clear, stable and attractive. As will be shown this afternoon, Timor-Leste is in global competition for petroleum investment dollars. So the challenge to the drafting group was to design a regime that would allow a return commensurate with petroleum company expectations, while still forwarding the State’s development goals, including a fair share of revenues.
Timor-Leste already has experience with petroleum operations through its 90% share of the JPDA. The drafting group drew on this experience in the JPDA in articulating a petroleum regime for Timor-Leste.
3. Implement a prudent scheme for deriving income,
From what we know, Timor-Leste’s petroleum sector in the future will involve everything from small-scale operations – for example, exploitation of surface seeps – to world-class offshore developments like Bayu-Undan and Greater Sunrise. The economics of small fields are very different from large ones.
The challenge to the drafting group was to create a regime that would maximize the economic value of all sizes and types of petroleum deposit for Timor-Leste. This requires creating incentives to invest in small, marginally profitable projects, while ensuring those incentives do not allow excessive profits on larger projects.
4. Implement the processes necessary to ensure that Timor-Leste receives all income owing
Oil and gas operations are commercially complex. For example, the Bayu-Undan project in the JPDA operates pursuant to over a dozen negotiated instruments – tax arrangements, contracts etc. Timor-Leste is a party to, or has oversight of, all of these instruments.
Ensuring that Timor-Leste receives what it is due, when it is due, will require that we have in place proper procedures and trained individuals.
Further, the task will be simplified, the more straightforward the regime. As will be described in the fiscal presentation, the drafting group has significantly simplified the petroleum fiscal regime, so as to streamline its administration and decrease the potential for manipulation by petroleum companies.
5. Increase the skills of Timorese nationals and encourage the use of Timorese goods and services
The approach of the Timor-Leste government to its petroleum resources is not merely to collect income. Rather, it is to use the development of these resources as a springboard for increasing the skills and capabilities of Timor-Leste, and for developing the ancillary goods and services industries that grow up in an active petroleum environment.
Since ratification of the Timor Sea Treaty, for example, the percentage of Timorese employed by the Designated Authority has [statistic from DA], and we have seen the establishment of a fully-staffed Dili office that is increasingly replacing the Darwin office.
To ensure that we can achieve this goal, under the proposed regime, any company awarded petroleum rights will have obligations relative to the local hiring and training of Timorese and sourcing of Timor-Leste goods and services. Additionally, these companies will be obligated to establish legal residence, and physical operation, in Timor-Leste.
6. Ensure protection of the environment
It is the policy of the Timor-Leste government that the environment cannot be sacrificed for the sake of petroleum revenues. Therefore, the proposed regime mandate and provides for enforcement of sound environmental practices, including provisions for abandonment of facilities which require monies to be set aside to ensure proper site restoration.
V. Calendar of Consultation and Promulgation
In terms of timing, it is the Prime Minister’s publicly-stated intention that: “Timor-Leste offer its first license for petroleum exploration by 28 November 2005”. This means that the 30th anniversary of our declaration of independence will be marked by another important step on the road to economic independence.
A list of requisite tasks and their associated timetable to meet this goal were developed. In conjunction with this work, the Timor Sea Treaty called for the updating of its regulating documents and contractual structure.
Three primary task areas were identified. First, a determination of Timor-Leste’s geologic prospectivity, which involves a data acquisition round. Second, the drafting of a regime for Timor-Leste’s petroleum sector, including regulatory laws, model contracts and petroleum tax laws. Third, the promotion of Timor-Leste as an investment destination, which would be initiated with the 1st license round in November 2005.
Determination of prospectivity: seismic data acquisition round
In May of this year, the Timor-Leste government, together with advisors, met with seismic companies to determine the level of interest in Timor-Leste.
Prime Minister Alkatiri announced data round in his June 7th speech. A draft Terms of Reference was released to companies on Jun 11th for their input.
A formal Terms of Reference for this round was issued June 30th. Multiple bids were received by the August 13th due date. They will be considered over the coming weeks with a view to awarding rights by August 31st.
The seismic survey acquisition will then take place between September and December of this year, such that the processed data will be ready for to invite bids for exploration and development rights by the beginning of 2005.
Drafting of petroleum sector regime
The proposed petroleum regime was released by the Timor-Leste Council of Ministers for public comment on July 23rd. The next three days will provide you with an important opportunity to review and comment on these documents.
In addition to the comments that will be made in the course of this forum, the working group will also take into written considerations submitted by September 21st, including from those present at this forum, and from the petroleum industry and other interested parties.
Once these comments have been considered, and any amendments made to the draft documents, the proposed regime will be resubmitted to the Council of Ministers for their approval.
The legislation will then be sent to the relevant bodies for approval – the Timor-Leste Parliament in the case of Timor-Leste laws.
The aim is for the regime to be in place by early 2005, to provide the framework for bidding on, and award of, Timor-Leste’s 1st petroleum rights.
Promotion of Timor-Leste as an investment destination: bidding for Timor-Leste’s 1st petroleum rights
This will involve a number of different tasks, imcluding the preparation of a seismic data package that can be purchased by interested companies. Presentations about Timor-Leste will then be made in a few key petroleum markets, most likely Singapore, London and Houston. After the road show and preliminary input form the industry a bid packaged will be prepared and issued. As requested, Timor-Leste will hold clarification meetings. Bids will likely be due in the September/October timeframe with a view to awarding licenses/authorizations on the 30th anniversary of Timor-Leste’s independence.
Again, I welcome you all to this important meeting, and trust that your contributions over the next three days will help to build on what we have presented. In order for these three days to be a success, we need your input. The agenda and the timing of presentation have been built to allow a significant amount of time for you to ask questions or make comments, and for discussion about these questions and comments.
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)