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15 November 2008

East Timor Talks Tough on Greater Sunrise

The Australian Financial Review Friday 14 November 2008 by Angus Grigg Jakarta - Woodside Petroleum's $14 billion Greater Sunrise project may be delayed indefinitely as relations between East Timor and the energy major turn openly hostile over the location of a downstream processing plant.

The East Timorese government has hardened its rhetoric in recent weeks and is now prepared to block the development rather than yield to Woodside's terms. 'I, for one, [would] prefer to forgo Greater Sunrise than surrender to the dictates of a bunch of oil executive millionaires,'President Jose Ramos Horta said in a recent speech.

Woodside decided against piping the gas to a liquefied natural gas plant in East Timor earlier this year and favours processing the gas either in Darwin, via a pipeline, or by building a floating plant in the Timor Sea.

But neither plan is acceptable to East Timor, which wants the facility built on its southern coast to stimulate its fledgling economy and develop a skilled workforce.

Flushed with oil money the tiny nation can now afford to wait. For Woodside, however, the deadlock could delay one of its most promising projects for as long as a decade. 'It has become very difficult for us to accept any other alternative than bringing the plant to East Timor,' Oil Minister and Natural Resources State Secretary Alfredo Pires told The Australian Financial Review. 'We would like to see the field developed but we are not in a hurry. We have money and so we can wait.'

Pires, an Australian-educated engineer, accused Woodside of failing to give due consideration to building the plant in East Timor and so has hired an American consulting firm to make the case.

'The East Timor option is much more viable than we have been led to believe,' Pires says. From such entrenched positions compromise looks unlikely. Woodside, as the operator, will finance the project's development, which Goldman Sachs J. B. Were has estimated will cost $14 billion.

Sunrise is one of three major multi-billion dollar LNG developments that underpin the company's long-term growth. The company's other two major projects are not without their own problems.

Construction of the $14 billion Pluto LNG project in Western Australia is underway, but the company is struggling to identify sufficient gas reserves to support the development of a second 'train', or processing line, which would greatly enhance the project's economics. The huge $35 billion Browse project, meanwhile, appears to be vulnerable due not only to its mammoth financing requirements, but also because of its likely significant exposure to any emissions trading scheme. The gas at Browse has comparatively high carbon dioxide levels.

The company has said while the Sunrise field is closer to East Timor than Darwin the existence of a deep ocean trench between the field and the island nation makes running a pipeline more expensive and technically risky.

Some consultants have raised doubts about whether such a pipeline would techincally feasible.

Analysts also say East Timor does not have the skills required to build or operate the plant and the country is more politically risky, despite the stability of recent months.

'We believe East Timor is the least desirable commercial option due to a huge submarine trench separating it from Greater Sunrise and a lack of infrastructure [and] workforce,' UBS analyst Gordon Ramsay says.

But for East Timor it's about more than just hard numbers. The plant has become an issue of national pride and the first step in allowing it to develop a skilled oil and gas workforce.

There is also no hurry.

The country's petroleum fund, established in 2005 to manage oil and gas revenue from the Bayu Undan field, is forecast to top $US5 billion ($7.5 billion) by the end of next year. Even with the oil price halving to about $US60 a barrel this still gives the government about $US200 million in earnings each year.

At this stage it's more money than the country can spend.

Delays to Sunrise could be painful for the project's backers. Already, UBS's Ramsay believes his forecast 2015 starting date for first production out of Sunrise is likely to be pushed out.

At a time when an unprecedented rush of LNG projects are being studied and developed, delays to Sunrise's development could see Woodside and its partners beaten by rivals in the race to snare long-term customers.

Alan Dupont, director of the Centre for International Security Studies at Sydney University, says East Timor is in a strong negotiating position. 'What does the country have to gain by going ahead with the development on unfavourable terms when they don't need the money,' he says. 'Global energy supply and demand favours East Timor in the long term.'

And East Timor has the power to kill the deal, as the Greater Sunrise development plan must be approved by the island nation's parliament and its president. 'Nationalists see it as an iconic issue for Timor and it has become very emotional,' says Dupont.

Damien Kingsbury, from the school of International and Political Studies at Deakin University, says East Timor could delay the project indefinitely if it felt 'bloody minded'. 'If it was East Timor or nothing I don't think Woodside would go ahead with it,'he says. 'There are three good arguments for not having the plant in Timor - lack of skills, political risk and cost- and no good arguments for having it there.' Kingsbury says there is also an argument that the government would be better to wait than go ahead with Sunrise in the short term. 'There reality is the government has more money than it has capacity to spend,' he says.

Woodside declined to comment ahead of today's investor presentation.

In a recent speech to the Northern Territory Parliament President Ramos Horta swung wildly between open hostility and conciliation. He accused Woodside of being 'dogmatic' and 'political' then said pure economics should determine where the processing plant is located. Crucially the President said such a decision should not be made 'unilaterally' by Woodside but rather by an 'independent credible' study.

'Timor-Leste cannot and will not bow to pressures from the Woodside CEO millionaires,' he said. 'We will not bow to unilateral decisions made by these infamous CEOs who mismanaged world multinationals. I, for one, prefer to forgo Greater Sunrise than surrender to the dictates of a bunch of oil executive millionaires.'

Oil Minister Pires, while not using the same inflammatory language, endorsed the President's comments. He is a close allay of Prime Minister Xanana Gusmao, which indicates that both President and Prime Minister are in agreement on the issue.

The opposition Fretelin Party, the largest in parliament, also does not favour the deal if the processing plant is to be housed in Darwin.

The President's 'independent study' has already been commissioned and should be completed by year's end, according to Peres.

The government has commissioned US consulting firm DeepGulf Inc to study the economics of running a pipeline across the 3.3km deep Timor Trough.

The company did not respond to calls and emails from the AFR but recently told the Associated Press the pipeline was 'feasible'.

Pires says DeepGulf's survey had shown it was 'safer' to build the pipeline to Timor as there was a lower chance of seismic activity. 'Woodside actually found the opposite,' he says. 'We wonder if Woodside is prudently looking at the East Timor option.' Pires says the South Korean government and Malaysia's national energy company, Petronas, were interested in developing Timor's oil and gas assets. 'We are in a very different position from last time around,' he says referring to the development of the Bayu Undan field, which was East Timor's first. 'This money has given us time.'

Charlie Scheiner from local think tank La'o Hamutuk has long argued that East Timor should delay development of the Sunrise field for at least a decade. He says East Timor needs time to develop its civil service and regulations and gain experience in managing petroleum revenues.

'After a few years the danger of corruption and miss-management will be significantly less,' he says.

Scheiner says that technology would be better and therefore make extraction and processing cheaper, while political risk should also be lower.

'East Timor will have a generation long record of as a peaceful, stable, democratic nation,'' he says. 'This will reduce perceptions of political risk by oil companies, removing the need for East Timor to make concessions in negotiations.'

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