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East Timor gas outlook is decreased by Santos
Wall Street Journal - February 24, 2014
Santos Ltd. said Friday that a new assessment of the Bayu-Undan field, in waters shared by East Timor and Australia, showed that the Australian energy company's share of remaining gas reserves were around a fifth smaller than earlier estimates.
For Santos and partners, such as Houston-based ConocoPhillips, lower reserves would be a small dent in cash flow. But for East Timor, it is a major problem. The country's petroleum revenue topped $3.5 billion in 2012, dwarfing the amount raised domestically from other sources, including taxes.
East Timor Finance Minister Emilia Pires has said that revenue from oil and gas supports 90% of the country's budget.
That ranks East Timor alongside South Sudan and Equatorial Guinea as the most oil-and-gas-dependent countries in the world, said Charles Scheiner, a researcher for the nonprofit La o Hamutuk in East Timor's capital, Dili.
Once a Portuguese colony, East Timor declared independence in the mid-1970s, only to be invaded by Indonesia nine days later. Almost a quarter of East Timor's population died during 24 years of civil war, while Indonesian forces burned about 80% of the country's government buildings and infrastructure, leaving East Timor the poorest nation in Asia.
East Timorese voted overwhelmingly for freedom in a 1999 referendum supervised by the UN, but the vote set off a wave of violence by the Indonesian military and its supporters. East Timor achieved full independence in 2002, and relations with Indonesia are much improved.
Unlike many resource-rich developing countries, East Timor didn't squander the cash, instead setting up a sovereign-wealth fund to save revenue from Bayu-Undan.
Officials hoped that returns from the fund would help offset shrinking revenues from the Bayu-Undan field, which began piping gas to a processing plant in Darwin, Australia, in 2004 – just as oil prices began a sharp rise that would take them to a peak above $147 a barrel in 2008. From an initial balance of $370 million in 2005, the fund's size increased to $11.78 billion at the end of 2012, according to the finance ministry.
On Friday, Santos said it had reduced its estimated share of the remaining reserves at Bayu-Undan by eight million barrels of oil equivalent. Santos, which has an 11.5% stake in the field, said the revision reflects "reservoir performance and updated modeling."
Bayu-Undan isn't the only active oil-and-gas field generating revenue for East Timor. The smaller Kitan oil field, operated by Italy's Eni SpA, started production in 2011. But East Timorese officials say output at both fields has peaked.
"The government will have to take a close look at what these revised reserves mean for the petroleum fund and what the impact is on what it has available," said Shane Rosenthal, the Asian Development Bank's representative in East Timor. East Timor's finance ministry wasn't available to comment.
Another big offshore gas project in waters shared by Australia and East Timor, Greater Sunrise, is stalled by a disagreement between the government in Dili and investors led by Woodside Petroleum Ltd. East Timor wants a gas-export plant for the project built on its coast to guarantee local jobs and form the centerpiece of a petrochemical hub. Woodside and partners, including Conoco and Royal Dutch Shell PLC, say that a facility that can process the gas at sea would be more profitable.
A lower estimate of reserves at Bayu-Undan – and the possibility that the field could run out of gas within a few years – troubles observers like Mr. Scheiner, because East Timor has begun raiding the sovereign-wealth fund to pay for infrastructure projects like roads. Withdrawals in 2012 came to $1.5 billion, about $830 million more than the fund's managers estimate is sustainable.
Mr. Scheiner said La o Hamutuk's modeling suggests that the petroleum fund will be able to finance state spending for only about five years after production ceases at Bayu-Undan. Other industries, such as coffee exports, are too small to take up the slack. "The problem for East Timor is that it's poor in everything other than oil" and gas, Mr. Scheiner said.
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