Thread: Onward Young Timor-Leste

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In a lot of ways, Timor-Leste is a minor success story of decolonization and democratization. Friday marks the 20th anniversary of the referendum that, after a final orgy of militia violence, brought Indonesia’s 25-year occupation to an end.

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At independence in 2002 the Timorese were left with nothing. Portugal had neglected it through centuries of colonization. Indonesia’s occupation had killed around 100,000 people. And Australia, which had been its defender in the 1999 crisis, was about to betray it.

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As this great @4corners episode this week explored, Canberra used the cover of an aid program to install bugs and eavesdrop on the Timorese government while negotiating the division of undersea oilfields, and win a larger share for itself.

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But Timor-Leste has done a decent job of picking itself up from the floor. Infant mortality has been cut in half and secondary school enrollment doubled since 2002. Unlike more recently-independent states like Montenegro and South Sudan, it’s also a functioning democracy.

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In addition, its petroleum wealth has been managed wisely, with a sovereign wealth fund that, in proportion to GDP, is bigger than those in Saudi Arabia, Kuwait or Norway. Corruption scores around the same levels as Brazil and Colombia. Pretty good in the circumstances.

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There’s a problem though. The Bayu-Undan oilfield on which this wealth was built will run out in 2022 or thereabouts. The Petroleum Fund will be used up a few years later, absent huge budget cuts.

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Everything now hangs on developing the offshore field that was at the heart of Australia’s 2004 spying campaign, Greater Sunrise.

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After that spying case was exposed, Timor-Leste was able to sue for a renegotiation and managed to get a better share of the revenues than the original 50-50 split — 80-20 of the upstream revenue in its favour, or 70-30 if the downstream processing is done in Timor itself.

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Therein lies the problem, though. Building giant new petroleum projects isn’t quite the boom market it was when Bayu-Undan started up — as @liamdenning notes in this piece on BP’s exit from Alaska.

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Greater Sunrise was already at the margin of investability, especially given the way conventional gas investment has collapsed in recent years. The engineering and political-risk challenges of putting the downstream infrastructure in Timor-Leste may be the last straw.

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Timor-Leste’s government would love the country to develop on a path like that trod by Singapore or Mauritius, small island countries that became rich against all odds. So it sees building an onshore processing plant as a nation-building project.

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Commercial investors in Greater Sunrise don’t see it that way. @shell and @conocophillips sold their stakes to the Timorese government over the past year and @WoodsideEnergy has said it won’t put money into the Tasi Mane onshore project.

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That means that if Timor-Leste insists on going ahead with Tasi Mane, it must either fund its majority share of the ~$12 billion cost from the $15.8 billion remaining in the petroleum fund, or find another lender.

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The most likely candidate for this is likely to be China’s Belt and Road Initiative. Chinese state-owned companies are already sucking up hundreds of millions building white-elephant projects across Timor-Leste, as this great @JasonVScott report shows:

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China has so far denied that anything is in the works on this front, but for fragile small countries looking to finance uncommercial, multi-billion dollar projects in the Asia-Pacific, the Belt and Road is the only game in town. If it doesn’t invest, no one will.

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It’s also worth reflecting on how this could compromise Timor-Leste’s decent corruption record. Giant infrastructure projects in fragile developing countries are the most notorious money pit for corrupt side-deals there is. It would be miraculous if Timor-Leste avoided this fate.

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It’s very understandable that a proud country that’s been mistreated by Portugal, Indonesia, and Australia over the years is determined to be self-reliant. But it risks drifting towards another abusive relationship with China, with a future of budget and current account crises.

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The better deal, I think, is to grab the opportunity of developing Greater Sunrise with floating or existing Australian processing infrastructure, while investors will still fund it. Timor-Leste will get 80% of upstream revenues. LNG plants only employ skeleton staff, anyway.

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Looming around the corner is the fact that these are 20-year projects, and natural gas demand has a ~30-year sunset clause if we’re to get to net zero emissions by 2050. There’s no guarantee that the project can get up at all if it’s delayed much further.

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Per that @iea data on gas investment, there’s a strong argument that oil and gas companies are already giving up on these sorts of projects because they recognize the way the wind is blowing.

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Shell, one of the original Greater Sunrise investors, is already IMO behaving like a sunset stock (geddit?) which sees an end to demand growth for petroleum.

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Timor-Leste shouldn’t let the perfect be the enemy of the good. A Greater Sunrise project without Tasi Mane gives it 80% of something, which is surely better than 70% of nothing.