Negotiator seeks best outcome for East Timorese

WITH the Timor Gap framework agreement between the United Nations Transitional Administration in East Timor and Australia put to bed, UN appointee and chief negotiatior Peter Galbraith is back home in Vermont, US.

Rumoured by company insiders and some media to be full of ill will towards Australia and Australians, some may be glad.

The story may just be beginning, however.

Both the new treaty and anything concluded between now and August 30 will have to be ratified by the East Timor Government, which will be elected on that date.

And while ready to resume an academic life as professor at the National Defence University in Washington, Mr Galbraith remains the chief negotiator for East Timor’s Timor Gap policy.

Denying he was anti Australian and describing such views as “naive”, Mr Galbraith said his role would continue through the elections and then be subject to how the elected government decided to resume things.

“My job is to get the best possible deal for East Timor and this is what I’ve been after. I owe it to the UN to do the best for East Timor and I think I’ve done that,” he said.

“One needs to be grown up about these things.”

Major developments proposed for the Darwin region are in the balance while companies in the Timor Sea haggle over East Timor’s production tax policy for the Timor Gap.

Mr Galbraith said the East Timor framework had retained company investment credits, embedded in the former Timor Gap Treaty signed by Indonesia and Australia in 1989, when East Timor was still annexed.

But he confirmed it was clearly understood by Australia that the new country would reserve its right to tax back all, or part of, the value of those credits.

This is the sticking point for US-based Phillips Petroleum, operator and 50.3 per cent stakeholder in the Bayu-Undan gas and gas condensate fields, and major partner in the only commercial production project in the region, the Elang/Kakatua oil fields.

Phillips and partners Inpex, Kerr-McGee, South Australia’s Santos, and Perth-based Petroz (under the Phillips group), have deferred further investment, including the construction of a subsea pipeline to deliver gas to Darwin and a number of potential industry and transmission projects there.

But Mr Galbraith told Business News UNTAET considered the credits were political, rather than economically justifible, and “way out of line with regional standards”.

While he said the companies had an exclusive right to decide whether to go ahead with these projects, the taxing decision likewise was the exclusive right of East Timor.

Mr Galbraith believes companies, including Phillips, Shell and Woodside are still “digesting” ideas put forward by UNTAET technical experts in Darwin in July, but does not believe projects like Bayu-Undan, or Greater Sunrise, in which all three are involved, are at stake.

All partners signed a cooperative agreement earlier this year to develop the reserves and actively pursue LNG exports. Potential customers include giants El Paso Corporation and Methanex, with Methanex proposing to use the gas for a methanol plant near Darwin.

“The investments subject to our taxes are the ones that have already been made,” Mr Galbraith said. “What’s being put on hold is not subject to those taxes.”

The pipeline was not subject to East Timor taxes, but to a 30 per cent Australian marginal tax rate.

Mr Galbraith said discussions would continue and he did not expect Phillips to walk away from the Timor Sea.

“Obviously we want to reach an arrangement in which the (Bayu-Undan) project is profitable but also on which there is a fair return for the people who own the resource, which are the people of East Timor,” he said.

“We’ve done our part and we’re waiting to hear from the companies.”

East Timor would have to consider “other options” if the investments did not go ahead, but Mr Galbraith was unprepared to discuss what he termed a “full range of options”.

“It doesn’t make economic sense for the (Bayu-Undan to

Darwin) pipeline not to go ahead. The pipeline represents

only between 20 and 25 per cent of the total investment in

Bayu-Undan, but it will deliver half the value,” he said.

“It doesn’t make sense in putting it on hold and I think they will go ahead with it. And why? Because they’re going to make money out of it. They’re going to make lots of money.”

Mr Galbraith views Phillips’ public accusations, exclusively against East Timor’s tax arrangements, as a not uncommon tactic in negotiations, and assumes it’s one through which the company is seeking to influence the country’s tax system.

“But we will have a deal which will give a fair return to the East Timor people and which will be significantly profitable for the companies,” he maintained.

“The source of the problem is the treaty which Australia and Indonesia made about a territory that belonged to neither of them, and the companies went ahead and invested in territory that they knew did not belong to either Australia or Indonesia.

“And in return for that investment, they expected an extraordinary rate of return. They knew they were taking a risk.

“No East Timorese was ever consulted about these contracts. No East Timorese ever agreed to them and no East Timorese would ever have seen $1 from those contracts.

“I think the East Timorese have been incredibly reasonable, because they’ve simply agreed to continue the terms that make sure it’s profitable. And these tax issues are really not that large.

“I’ve also never believed that the reason for this delay is just about East Timor’s tax policy. I just think there are other issues that are out there. Look at the announcement about FLNG from Shell. There are issues related to the timing and there are also Australian tax issues.

Australian Petroleum Production and Exploration Association executive director, Barry Jones, has expressed concern at the current impasse.

“East Timor must understand if it pushes too hard, it won’t be a matter of how much extra revenue it will get, it will simply get no revenue,” Mr Jones said.

“And if Australia concentrates on how much future revenue it might defer, there’ll be no revenue, because the investor money will walk. Saying we can’t sacrifice our revenue is a nonsense argument if we lose everything.”

Meanwhile Mr Galbraith observes: “At the moment it’s our period of time to be the bad guy.”

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