In April, Australia and Timor-Leste reached agreement on their maritime boundaries in the Timor Sea. This resolved a longstanding source of contention between them.
The potential benefits of this historic breakthrough are now in peril, because the critical issue of how the shared oil and gas of the Timor Sea are to be developed remains in dispute.
Breakthrough on maritime boundaries
Australia and Timor-Leste’s boundary agreement was achieved thanks to a unique dispute resolution process: the United Nations Compulsory Conciliation Commission. The commission was initiated under the United Nations Convention on the Law of the Sea (UNCLOS).
Because both Australia and Timor are parties to UNCLOS, Timor was able to invoke a compulsory conciliation process. It was the first time this has occurred.
Australia was at first reluctant to engage in the UNCC process. It lost its argument that the commission did not have the competence to negotiate the dispute. Australia did then engage with the process in good faith.
Indeed, the success of the UNCC was in large part due to the willingness of both parties to participate in good faith. A series of “confidence building” measures in 2016 helped build trust between the states.
By January 2017, Australia had agreed to terminate the existing Certain Maritime Agreement on the Timor Sea (CMATS). In return, Timor-Leste dropped two international legal cases it had initiated against Australia.
The process set up a neutral commission to run facilitated negotiations over a year, although sessions ultimately ran from July 2016 to February 2018. While participation in the conciliation was compulsory for the parties, it differed from an arbitration process, such as an international court, because the commission’s recommendations could only be non-binding. A crucial aspect of these facilitated negotiations were the discussion papers that allowed both states to think creatively about solving the dispute.
Ultimately, the process succeeded in its primary aim of helping Australia and Timor-Leste to resolve their long-running dispute in the Timor Sea. The breakthrough came in July 2017, when the countries outlined to the commission the points on which they were willing to compromise.
On August 30, an agreement on maritime boundaries, revenue split and an action plan for their engagement in the joint venture was reached. The maritime boundary treaty was signed on April 6 2018.
Deadlock over downstream developments
On May 9 2018, the commission, to little media fanfare, released its report and recommendations on the conciliation.
The report provides valuable insights into the ongoing disputes over development of the Greater Sunrise complex of gas fields located in the Timor Sea – a critical issue for Timor-Leste’s future economic security and development.
Australia and Timor-Leste asked the UNCC to extend its mandate to include the development concept for Greater Sunrise. This extended the sessions beyond the initial one-year period.
Despite its significant success in helping the states agree on maritime boundaries in the Timor Sea, the report indicates little progress was made on the question of how Greater Sunrise gas would be processed.
Crucially, Timor-Leste’s lead negotiator and newly re-installed prime minister, Xanana Gusmao, has consistently advocated a pipeline to the south coast of Timor-Leste to support the development of a Timorese oil and gas processing hub.
The Sunrise Venture Partners (SVP), led by Woodside, have preferred either a floating platform or, more recently, back-filling an existing processing plant in Darwin. Australia, for its part, describes itself as “pipeline neutral”, but supports the decision of the commercial venture partners.
To address this issue, the SVP was invited to participate in the commission process. The report suggests very little progress has been made between the three parties – Australia, Timor-Leste and the SVP – on this dispute.
The commission considered two development concepts, based in Darwin and Timor Leste respectively. According to Gusmao, the pipeline to Timor-Leste is “non-negotiable”. Yet, there is little impartial evidence that this concept would be commercially viable.
In an effort to find a way out of the impasse, the commission employed an independent consultant from a London-based firm, Gaffney, Cline & Associates, to comparatively analyse the two development concepts. The specialist’s assessment, provided in Annexe 27 of the report, said that for a Timorese processing hub to achieve an acceptable return, the Timorese government or another funder would have to subsidise the project to the tune of US$5.6 billion. This is about four times Timor-Leste’s annual GDP, or more than one-third of its Petroleum Wealth Fund.
A letter from Gusmao leaked to the commission in February 2018 – after the last round of UNCC meetings – accused the commission of lacking impartiality, preferring the Darwin concept to the Timor-Leste concept.
The letter also rejected the comparative analysis provided by the independent expert. It accused the technical expert of not having the “appropriate experience or understanding from working in Timor-Leste” and of having failed to consider the socioeconomic development benefits of the Timorese proposal.
In contrast, the commission’s report noted that Gaffney, Cline & Associates had previously worked for Timor-Leste, but that Australia had not objected to the appointment.
The report suggests that the three parties – Australia, Timor-Leste and the SVP – are no closer to agreement on how to process Greater Sunrise gas.
A looming threat to Timor-Leste’s development
The need to resolve the development issue is increasingly urgent. Timor-Leste is rapidly running out of revenue and development options. Over 90% of its annual budget comes from revenues from oil fields that are expected to be depleted within the next five years. Economically, Timor-Leste does not appear to have a plan B if its strategy for bringing gas to the southern shores of Timor-Leste fails.
Given its precarious situation, one might wonder why Timor-Leste is taking what appears to be a risky approach to this issue, and about what kind of agreements it has sought with other actors or states. In any case, the central element of the Timor Sea dispute seems far from resolved.
Australia’s fuel security is far more precarious than we might realise. Not only do we not have the internationally mandated 90-day stockpile, but the ongoing closure of Australia’s refineries means we are on track to be 100% reliant on imported petroleum by 2030.
Australian refineries import roughly 83% of the crude oil they process from more than 17 countries, mainly in Asia (40%), but also Africa (18%) and the Middle East (17%). We are a significant oil producer, but export 75% of our crude production, with the largest recipients being Indonesia and Singapore.
At the same time, the importance of importing refined petroleum from overseas is only increasing as our local production declines.
Currently, 51-53% of our imported refined petrol comes from Singapore’s refineries, with 18% from South Korea, 12% from Japan and the rest from a range of other countries. Asian refineries in particular are extremely competitive in terms of production and transport costs.
The consequences of disruption
Without significant fuel reserves, Australia could face serious consequences in the event of disruption to these imports. In any complex system, even temporary disruptions can cause “cascading failures” across other parts of the system, and these effects don’t stop the moment the supply is restored.
Maintaining our oil supply is not just about keeping our cars on the road. Any serious disruption would have consequences within days for our food supplies, medication stocks, and military capacity.
If a complex system is to be resilient, it needs redundancy. This means that it has backup processes that enable the overall system to continue to function even when some part of it breaks down.
Unfortunately, such backup systems are not efficient, because the system is doubling up on resources. Efficiency is therefore one of the enemies of system resilience – this is best demonstrated by the concept of “just in time” supply chains, in which stock arrives when it is needed, minimising the costs of holding excess inventory in stock. Such an approach is certainly efficient, but it is also fragile. This is a pretty good description of Australia’s current oil supply chains.
The 90-day oil reserve recommended by the International Energy Agency is a textbook example of system redundancy, as are local oil refineries. They provide onsite reserves (5-12 days) and local refining capacity. But in the interests of economic efficiency we have chosen not to invest in this redundancy.
Possible causes of disruption
Australia’s geographically dispersed oil supply chains mean that there are several places around the world where they can potentially be disrupted.
More than 40% of the world’s oil passes through the Strait of Hormuz, the only sea passage out of the Persian Gulf. Controlling the strait remains a clear (and possibly achievable) aim of Iran in any military confrontation.
This has arguably been made more likely by the US administration’s decision to reimpose economic sanctions on Iran. At the same time, the recent shale gas revolution in the United States has weakened the traditional US strategic imperative to keep the strait open.
The ongoing tensions in the South China Sea also threaten Australia’s other major supply route for oil, not least because of our difficult geopolitical position in the middle of the heavyweight rivalry between the US and China.
Finally, the apparent defeat of the Islamic State group in Iraq and Syria has led to concerns that radicalised Indonesians are returning home to continue the fight. The vulnerability of our supply lines through Indonesia has already been recognised.
Oil is often described as a “fungible commodity”. This means that oil from different suppliers is interchangeable, so if supply is disrupted we can just buy it from somewhere else.
But it is not as straightforward as that. First, the point in the system at which supply is disrupted is crucially important. For example, Australia’s fuel ports represent particularly problematic junctions, as a 2013 fuel security review for the National Roads and Motorists Association pointed out:
For example, the primary fuel port in South Australia is at Port Adelaide; a single, narrow, shipping channel services the port. A blockage of that channel, as the result of a shipping accident/incident, could result in significant and prolonged disruption to fuel supplies for Adelaide and a large part of the state … given the inability to transport sufficient fuel stocks overland to South Australia.
What’s more, while it is generally true that oil is fungible within an open global market, not all suppliers necessarily share this assumption. Thus China, faced with rising domestic consumption, is planning to outbid Western oil companies for contracts, or else buy the entire companies outright.
Just like the US, China sees oil more as a national security concern than as a fungible global commodity. Access to even a share of the global oil supply can be a tool of political or economic influence, as the OPEC embargo in the 1970s infamously showed.
In the end, while other countries move to secure their national fuel supplies, we continue in our misguided faith in an unfettered global oil market being able (or willing) to supply our needs in situations of crisis. Hopefully the proposed Fuel Security review will mean these challenges are finally taken seriously.
As the finances of Venezuela continue to deteriorate under the collapse of crude oil prices, the government of President Nicolas Maduro is becoming more paranoid and vindictive.
Venezuela derives the vast majority of its export earnings from sending oil overseas. With the largest endowment of crude oil reserves in the world, the oil-driven economy worked well for the late Hugo Chavez: he provided generous support for the poor, and built allies in the western hemisphere by dispensing cash and cheap oil in exchange for political allegiance.
But state-owned PDVSA has struggled to keep production up. Rather than using its earnings to develop more fields, much of its earnings have been diverted for political and social projects. Chavez also purged PDVSA of thousands of experienced workers, leaving the company short of well-trained staff.
Chavez could paper over the decay of PDVSA’s production base because oil prices were so high in his…
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