The Southeast Asian nation of East Timor celebrates 10 years of independence tomorrow night facing a challenge that has eluded emerging economies across the world: How to stop oil wealth wrecking your economy.
After a decade of contract delays, deadlocked oilfield negotiations with Woodside Petroleum Ltd. (WPL) and a political crisis that almost precipitated civil war, East Timor has moved from the poorest country in Asia, dependent entirely on international aid, to one with a $10 billion resources fund and almost entirely dependent on oil.
East Timor is trying to beat an economic trap called the resource curse where dependence on mineral exports hurts other industries by boosting the currency, and workers are drawn from agriculture and business, making the country reliant on imports of food and other goods. Success may make Prime Minister Xanana Gusmao’s 20-year development plan a guide for other oil- dependent nations such as Chad, Angola and Gabon.
“The real responsibility of the government is to ensure that the oil revenues are not just consumed in a quick binge -- that’s the resource curse,” Columbia University professor Jeffrey Sachs said. “This country started out impoverished, war-torn, under a long era of colonial rule, so there’s a lot of building to be done.”
This year is a critical test for the nation, formally known as Timor-Leste. Gusmao, now prime minister, faces a general election in July and outgoing president and Nobel laureate Jose Ramos-Horta hands over his role this weekend to former army chief Jose Maria Vasconcelos, known by his nom de guerre Taur Matan Ruak. United Nations peacekeepers are scheduled to leave by the end of the year.
The last time they pulled out, in 2005, was followed a year later by a dispute within the country’s military that escalated into an attempted coup and violence across the country that killed 37 people and forced 155,000 people, or 15 percent of the 1.1 million population, from their homes.
“We were on the edge of a civil war, a failing state,” said Ramos-Horta, who also survived an assassination attempt by rebels in 2008. “We have to make sure that we have a stable and credible government.”
At the heart of East Timor’s future are offshore energy deposits that the country needs to wean it off international aid and build an economy before the biggest field currently producing, Bayu-Undan, starts to run dry in about 2023. Extending the revenue stream will require the government to break an impasse with Woodside, which leads a consortium including Royal Dutch Shell Plc (RDSA), ConocoPhillips (COP:US) and Osaka Gas Co. (9532) to develop the larger Sunrise gas field.
While East Timor gets revenue from the fields under a UN- brokered agreement with Australia, about 500 kilometers (310 miles) to the south, it doesn’t control them because they lie partly in a disputed area known as the Timor Gap.
East Timor wants to pipe the gas to a processing plant on its soil that would liquefy the gas for shipment by tanker. Woodside, Australia’s second-largest oil and gas producer, and its partners including Royal Dutch Shell Plc, want to use a floating LNG plant.
“By early 2013 we’ll reach an agreement,” Ramos-Horta said in a May 4 interview in Singapore. “It’s in our common interest to develop that area in such a way that’s fair, equitable and brings real tangible benefits to our people.”
Ramos-Horta said East Timor would consider Woodside’s option as long as the company proved it was more economic for both sides and his country will “benefit from downstream activities, such as supply services based on East Timor.”
Woodside Chief Executive Officer Peter Coleman said the company is prepared to consider alternatives including locating some production facilities in Australia or East Timor.
“I’m hoping 2013 is the year we agree,” Coleman said in a May 14 interview in Adelaide.
Sunrise, which was discovered in 1974, a year before Portugal ended two centuries of colonial rule, could produce 4 million metric tons of LNG per year, according to Deutsche Bank. That’s worth about $3.2 billion a year at current prices.
East Timor and Australia share royalties from the field 50/50. The project could cost $13.2 billion to develop and would export its first cargo by 2017, analysts at Deutsche Bank said in a May 11 report.
The government appointed State Street Global Advisors to manage its oil fund and said in a March 17 e-mail it plans to increase investment in global stocks by June to as much as $2 billion, or 20 percent of the fund. The MSCI World Index of stocks has since dropped more than 9 percent.
Assets in the fund, all invested in U.S. government bonds until 2009, were $9.9 billion in February.
The money is needed to rebuild infrastructure, much of which was destroyed during a rampage by Indonesian militia who burned schools and hospitals and wrecked power pylons across the country in 1999 after the Timorese voted in a referendum to end 24 years of Indonesian occupation.
East Timor’s Finance Minister Emilia Pires remembers trying to get through Indonesian immigration before independence.
“I was shaking, so scared,” she told bankers and investors in a May 5 presentation in Manila. “I went to the counter and was putting money and more money on top of it as a bribe so I could get through. And the guy looked at me and said no because my name was on the blacklist.”
Relations have improved with Indonesia, whose West Timor shares a land border on Timor island. In March 2011 former guerilla fighter Gusmao visited Jakarta, where he spent six years in prison in the 1990s, to sign an agreement that will see the former occupiers help train officials in tourism, trade and education and invest in infrastructure.
Reconciliation with its neighbor may help East Timor’s goal of joining the Association of Southeast Asian Nations in 2013.
“We have been very much supported by Indonesia,” said Ramos-Horta. “Right now, we’re the odd man out in the region.”
Meantime, East Timor is trying to use existing oil revenue to help rebuild. The country has adopted the U.S. dollar as its currency, partly shielding it from the resource curse.
The government is upgrading about 3,000 kilometers of roads and plans to build two ports in the next five years, Pires said.
“We are investing in basic infrastructure,” she said. “No one can do that for us. We have to do it. In four years, we turned the country around. We have grown by double digits in the past four years, and we plan to do that in the next decade.”
Still, the country has far to go. In the World Economic Forum’s ranking of global competitiveness published in September, East Timor came 131st out of 142, the lowest in Asia. Of the 22 countries in a May 2011 Bloomberg Economic Momentum Index for Developing Asia, a measure of ability to maintain steady and rapid growth over the next five years, East Timor was last.
“There are tremendous challenges ahead and the road is not a smooth one,” said Noeleen Heyzer, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific in Bangkok. “They are trying extremely hard to avoid the resources curse. Now, they should be capitalizing on fisheries, agriculture and tourism and not just oil and gas.”
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