ZOCA in trouble if Indonesia, Australia disagree over Timor

Oct. 1, 1999
The small province of East Timor voted for its independence from Indonesia earlier this year, a vote that has not been highly favored by the government of Indonesian President B.J. Habibe.
The ZOCA is located between Indonesia and Australia. If East Timor problems persist, the future of the treaty could be in jeopardy.
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The small province of East Timor voted for its independence from Indonesia earlier this year, a vote that has not been highly favored by the government of Indonesian President B.J. Habibe. The result has been fighting and a declaration of marital law in East Timor. The fighting threatens one of the strongest and fastest growing oil plays in the region.

Civil disputes have been around longer than the oil industry and are perceived as a normal impediment to doing business internationally. Operators justify their involvement by the volume of reserves versus the degree of risk. An example of this risk versus reward balance has been the oil industry involvement in Angola throughout the years of civil war. Oil companies set up their compounds surrounded by armed guards and land mines, and continued on with the business of exploring and producing the country's oil reserves.

But, Indonesia is a quite different case. While it is possibly the most prospective area in the Asia-Pacific realm, the reserves are not proven to be yet great enough to overcome the associated risk, as in Angola. This renewed turbulence, compounded with the collapse and slow recovery of the Asian economy as a whole, has made it somewhat unattractive to oil firms at this time. For the time being, the slowdown in investment has not affected operators there. Unocal, the leading operator in the area, said "the situation has not had an effect on our operations."

Neighboring Australia and the United Nations have expressed their support of the Timorese, and were poised to send peacekeeping forces into the region. Much to their chagrin, Indonesia's president delayed inviting the troops into the region and refused to step in and stop the violence. This is where the oil industry could feel the impact.

If relations between Indonesia and Australia begin to falter, the Timor Gap Treaty between the two countries could be in jeopardy. Australia and Indonesia entered into the Timor Gap Treaty in 1989, which defined the zone of cooperation area (ZOCA). The ZOCA is divided into three zones - A, B, and C. Indonesia governs the northern Zone C, Australia administers Zone B to the south, and Zone A lies in the middle and is ruled by a 50-50 Joint Authority comprising an equal number of Ministers from both countries.

The oil industry has invested millions in exploration efforts in the region. About 41 wells have been drilled, with all but seven discovering hydrocarbons. Several key fields lie in the area such as Sunrise-Troubadour, Elang, Kakatua, Kakatua North, and the massive Bayu-Undan. If problems are not resolved, the future of this investment, although not in danger at present, will become questionable.

One of the key players in the region, Phillips, has been making major moves in the region. In March, the company acquired BHP's interests in all of these fields. The company has expressed concern with the problem. A representative from the company's Australia office said, "We are concerned about the situation, and it is very distressing. Bayu-Undan is located 300 km offshore so the violence is not making an immediate impact on our operations. Of course, we do not operate Bayu-Undan, but we do operate some fields nearby. The Elang, Kakatua, and Kakatua North fields are in production.

"Should East Timor become independent, it will be important that they accept the current Timor Gap Treaty. Based on some recent comments made by several key East Timorese leaders who support continued petroleum development under the terms of the treaty, Phillips believes that outcome is likely.

"But, until such time that as a decision is made, Phillips expects both Indonesia and Australia to fulfill their obligations under the treaty, just as we intend to do.

"Maintaining the treaty 'as is' is our hope and we believe that is a likely situation because these petroleum resources are significant to the economic future of East Timor."

If independence is reached, a re-negotiation of the treaty may be needed, with East Timor possibly demanding a share of the royalties - an outcome that will not likely sit well with President Habibe. The Indonesian government has decided to revamp its oil and gas concession award regulation, while the government has said it will switch from a direct appointment basis of awards to a tender protocol in which the production sharing contractor with the highest bid will win the concession.

The Ministry of Mines and Energy has said that this new system is geared towards giving the government more functions and a stronger role as well as allowing state-owned Pertamina to deal exclusively in the oil and gas business. It has not been announced when the new tenders will open, but it would seem that the government would wait until the outcome of East Timor has been finalized and things have cooled down.

Cambodia, Thailand trying to settle dispute

Cambodia and Thailand are beginning to make progress over dispute of overlapping oil concessions. The governments of the two countries are discussing a possible joint venture to exploit the reserves of the disputed area. The Petroleum Exploration and Production Authority of Thailand (PTT) and Prime Minister Hun Sen of Cambodia have been in talks in which more advanced PTT has promised to help Cambodia in advancing its oil industry expertise.

Cambodia has pushed for a joint development, but has been stalled due to the dispute. Cambodia has urged Thailand to enact a similar agreement to what the country has with Malaysia under the Malay-Thai joint development area.

Hun Sen said that the country must pursue the prospect of exploiting oil with Thailand because Cambodia needs development to guarantee long stability.

Australia awards permits

Australia has awarded 16 new offshore petroleum exploration permits. Both Australia and Western Australia have granted awards to acreage put on offer in 1998. Australia granted nine permits and Western Australia granted seven (all in the the prospective, under-explored Western Australia North West Shelf). The following awards were made in the Australian offer: NT98-1 - Woodside, Shell, and BHP; NT98-1 - Roma and Guinness Peat; NT98-6 - Woodside and Shell; W98-2 - Magellan; W98-3 - Magellan; W98-26 - BHP; W98-27 - BHP; W98-31 - Premier; T98-1 - Roma, Guiness.

The following awards were made in the Western Australian offer: W98-12 - BP, Petroleum, Shell, Chevron; W98-13 - Oryx, British Borneo; W98-14 - Woodside, BP Petroleum, Shell, Chevron, Japan Australia LNG, BHP; W98-15 - Woodside, BP; Petroleum, Shell, Chevron, Japan Australia LNG; W98-18 - Idemitsu, Agip, OMV; W98-19 - Woodside; W98-22 - Magellan Petroleum.

Australia is now making preparations for the 2000 release of Offshore Petroleum Exploration Area. The new release will include vacant acreage in the Perth Basin, Exmouth Plateau, Wetern-most Bonaparte Basin, and Petrel Sub-Basin.