SUBJECT : AP.E.TIMOR PROTECTIVE OF OIL, GAS INDUSTRY

Subject: AP: E. Timor protective of oil, gas industry

SUBJECTE. Timor protective of oil, gas industry

JIM GOMEZ Associated Press

DILI, East Timor - East Timor's ramshackle capital is dotted with rundown buildings, old cars and squalid camps packed with thousands of people waiting to return home after months of violence. But billions of dollars in largely untapped oil and gas reserves lie just off the coast of Asia's newest and poorest nation.

East Timor is zealously guarding its nascent oil and gas industry, seen as a potential lifeline following centuries of colonial rule and foreign occupation that crippled it politically and economically. It is determined not to follow the path of several other mineral-rich countries that failed to prosper.

The tiny country created a petroleum fund last year to protect its mineral wealth for future generations, which was lauded by the World Bank and other international institutions. The government has vowed not to spend the money, which so far pools income from two offshore fields, on golden palaces and limousines but on roads, schools and health.

Rules that govern the fund - currently $600 million and growing - limit how much the government can withdraw, and theoretically ensure a sustainable annual income for the nation of less than 1 million inhabitants for decades to come.

"It's the absolute best way of preserving the nation's wealth," said Roger White, a British expert advising East Timorese energy officials under an eight-year consultancy program funded by a grant from Norway.

"It is to prevent the difficulties that many oil rich nations have had - either that their money is spent badly or when the oil and gas resources are gone, there is nothing left," he said.

East Timor was plunged to the brink of civil war in May when then-prime minister Mari Alkatiri - the fund's architect - dismissed 600 soldiers, sparking clashes between rival security factions that spilled into gang warfare, looting and arson attacks. Alkatiri was forced to resign as prime minister in July amid allegations that he helped fuel the unrest, something he denies.

At least 30 people were killed and another 150,000 fled homes in the capital, Dili, highlighting the country's continued political instability seven years after it voted for independence from Indonesia.

East Timor survived largely on international aid when it first became a new nation in 2002, following two years of U.N. administration, earning almost nothing from its nascent petroleum industry.

Australia has been drilling for oil and gas for several years in an offshore field that includes Bayo Undang, located on contested waters between the two nations. After East Timor became independent, it was able to negotiate a considerably higher share in oil and gas revenues.

Twenty million dollars in royalties from the Bayo Undang field were rolled into the petroleum fund. Today it's worth more than $600 million, thanks to production at the Bayo Undang and Elenka Katua fields, soaring oil prices and interest payments, Alkatiri said in an interview with The Associated Press.

With an estimated 12 trillion cubic feet of natural gas beneath the Timor Sea - slightly smaller than the reserves found under Brunei - the fund is expected to keep growing.

A treaty signed with Australia in January to develop the Greater Sunrise gas field - the largest in the Timor Sea - is expected to earn East Timor $4 billion over the expected 30-year life of the project.

Abraao de Vasconselos, general manager)of the Banking and Payments Authority, which manages the petroleum fund, said the money is invested in U.S. Treasuries and each government withdrawal requires parliamentary approval.

"The idea is to protect the fund for future generations," he said.

But others noted that East Timor's ability to hold on to oil and gas as a lifeline depends largely on the ability of the government - which is for the first time trying to tap into the resource fund to pay for the 2006-2007 budget - to effectively manage the revenues.

That means building an effective government and private work force by improving health and education, and investing in agriculture, infrastructure and rural development, said Jose Teixeira, Minister for Natural Resources, Minerals and Energy.

"Nothing will replace prudent economic and financial management," he said.

It also means avoiding pitfalls of other oil-rich developing nations like Chad, which saw a similar petroleum fund collapse after the government eased restrictions on spending of the oil money.

The World Bank responded by suspending $124 million to the Central African country, though the two sides have since signed an interim agreement restoring the loans.

Some critics at home wonder why East Timor is not taking advantage of its oil and gas reserves more quickly to rev up its economy and get people - who earn an average of less than a dollar a month - back to their homes.

"If we have the money, let's use it and not beg" from other countries, said Mario Carrascalao, a former East Timor governor. "It's not the way, we have to be responsible."

But White noted that East Timor, which was colonized for centuries by Portugal before coming under Indonesian occupation in 1975, needs to build an efficient bureaucracy before it can exploit the economic potential of its petroleum resources.

"There are very few experienced bureaucrats," he said. The country has had to start from scratch building all apparatus of government and does not necessarily know how to spend the money wisely, he added.

"It's the birth pains of a new nation," White said.

The recent instability also highlighted the risks of doing business in East Timor.

The government was forced to postpone signing oil and gas exploration contracts in other offshore areas with Italian oil and gas giant Eni SpA and India's Reliance Petroleum Ltd., said White. Gangs barged into a building that contains the offices of several senior energy officials and looted computers and supplies, he said. Several local staffers have yet to return to work, he added.

The deals are still on, Teixeira said, and they may be signed in the next few weeks.

"We were just within three weeks of signing these big contracts and having enormous work for the good of the country and now it's just waiting," White said. "It's an absolute tragedy."

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Dear Friends,

Please note the following errors in this article by Jim Gomez:

- Para 1: East Timor has not experienced 'months' of violence.

- Para 3: (I assume) The word 'not' is missing prior to 'on golden palaces and limousines'

- Para 4: There are no RULES that govern the withdrawal of revenue from the Petroleum Fund. The value of Estimated Sustainable Income is only a GUIDE. If Parliament wishes, it may withdraw greater than the value of ESI and the Petroleum Fund Act can not prevent this.

- Throughout: The petroleum field names are spelled incorrectly.

In response to the 'critics at home (who wonder why East Timor is not taking advantage of its oil and gas reserves more quickly)' Gomez refers to, the following should be noted:

- East Timor's Petroleum Fund Act was established in August last year. Since a Government budget has not been passed until now, there has not been until now an opportunity to withdraw from the Petroleum Fund via this mechanism.

- Prior to the establishment of the Petroleum Fund Act only FTP was saved and taxes from petroleum exploitation were spent. In that regard it could be argued that East Timor has already 'spent' some of its 'petroleum revenue'.

However, (Gomez quotes) Adviser Mr White is correct in explaining that an efficient bureaucracy must be built before much greater amounts of revenue (petroleum of otherwise) are committed to budget expenditure. It is noted that budget execution to date has been relatively poor so there is no point increasing sectoral budgets until they have the capacity to spend them wisely.

Finally, Mr Gomez neglected to mention that East Timor's oil and gas exploration bidding process was highly transparent; the Evaluation Commission reports of the Bid Process are published on the Government's Oil and Gas Directorate website (http://www.timor-leste.gov.tl/emrd/). This is, I understand, perhaps the first time a Bid Report has been published.

Regards

Jenny Drysdale

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