Exclusive: East Timor warns Woodside over Sunrise gas project

John Kehoe, Financial Review Economics editor, Parliament House, Canberra. 26 Aug 2022.

East Timor’s Minister for Petroleum has warned Woodside Energy and told the Albanese government that offshore gas located between the two countries must be piped to East Timor and that other Asian countries are circling to develop the potential $US50 billion ($71 billion) energy resource.

Amid the escalating standoff with project operator Woodside over the stalled Greater Sunrise development in the Timor Sea, national security experts said if the gas was not developed soon one of Australia’s closest neighbours could run out of money by 2030 and be vulnerable to manipulation by China.

The Greater Sunrise oil and gas field in the Timor Sea is located 150km south of East Timor and 450km north-west of Darwin. East Timor controls 56.56 per cent, Woodside 33.44 per cent and Japan’s Osaka Gas 10 per cent.

East Timor’s petroleum minister, Víctor da Conceicao Soares, said in an exclusive interview that Woodside and the Australian government must be “fair” by enabling the liquefied natural gas processing from Sunrise to be undertaken at East Timor’s south coast, not Woodside’s preferred option of Darwin.

“The government of Timor-Leste’s position is clear and unambiguous that the only acceptable option for the people of Timor-Leste is for the pipeline to be built from the Greater Sunrise to the south coast,” he told The Australian Financial Review via a video call on Monday.

“It is the best option, both commercially and technically.”

In the joint interview, the president of East Timor’s National Authority of Petroleum and Minerals, Florentino Soares Ferreira, said Australia’s tougher climate emissions targets and the global energy crisis fuelled by energy-rich Russia’s invasion of Ukraine meant East Timor was best placed to process the gas to generate economic development.

The rare public comments come at a sensitive time during tripartite negotiations between the two governments and Woodside over governance and production sharing arrangements for the yet-to-be-finalised project.

East Timor’s petroleum minister met Resources Minister Madeleine King in Woodside’s home-city of Perth in July, and East Timor has lobbied Foreign Affairs Minister Penny Wong about the proposed LNG processing plant.

The Albanese government wants Greater Sunrise developed as soon as possible, with gas processing at either East Timor or Darwin, to deliver royalties worth 70 per cent to 80 per cent or the project’s total tax take to East Timor’s impoverished nation.Woodside chief executive Meg O’Neill has insisted that processing the gas at the established energy hub of Darwin is the only commercial option for Greater Sunrise to go ahead, while energy industry experts the Financial Review spoke to broadly agreed.

A major engineering challenge to pipe the gas to East Timor is the 3000-metre deep “Timor trench”.

Credit Suisse energy analyst Saul Kavonic said: “Developing Sunrise via existing LNG infrastructure in Darwin is always going to be more economically compelling than via a new site in East Timor.

“Unless a government is willing to provide a multibillion-dollar subsidy on geopolitical grounds, Sunrise is either going to be developed in Darwin, or not developed at all, in our view.”

An independent report during maritime boundary arbitration in 2018 estimated that East Timor would require a $US5.6 billion subsidy to build the project locally, to achieve an adequate rate of return that would attract equity and debt financing.

Alan Dupont, an Australian former senior national security adviser and former adviser to East Timor, said Australia must look at the situation strategically, beyond pure commercial terms.

“If we don’t support East Timor’s economic development, that opens up the opportunity for China to exploit it as they have in other places,” Dr Dupont said.

“The East Timor elites are fully committed to getting this processing facility in East Timor.

“If Woodside doesn’t come to the party, I’m pretty certain East Timor will look elsewhere and China would be the logical place to look.”

A spokeswoman for Australia’s Department of Foreign Affairs and Trade said: “The Australian government is committed to developing the Greater Sunrise gas and condensate fields in a way that supports the economic development of Timor-Leste and maximises the benefits to all parties, consistent with the Maritime Boundary Treaty between Timor-Leste and Australia.”

In the joint interview on Monday, Florentino Soares Ferreira backed up the East Timorese petroleum minister’s comments by arguing “most of the resources offshore lies within Timor-Leste’s jurisdiction. It would be naive of us to let a foreign country to develop this to their coast.

“You’ve had the chance to develop Bayu-Undan [an oil and gas field in the Timor Sea] for the past 18 years.

“The fundamental objective is developing our economy.

“Australia cannot afford to have a poor neighbour while continuously extracting the resources or developing the resources that a major proportion of lies within Timor-Leste’s jurisdiction.”

The global energy price surge had triggered renewed interest from companies and countries in south-east Asia and the Asia Pacific in Greater Sunrise, he said.

“I have to be frankly honest with you, there have been companies who have approached us mainly because of the increase in energy demand.

“But we are being a good government and we want to continuously engage Woodside in one way or another.”

He said their public statements were being made without prejudicing the ongoing negotiations with Woodside and the Albanese government.

Mr Soares Ferreira dismissed assertions by Woodside and energy industry analysts that the project would cost more and be more risky to pipe the gas to East Timor.

“Independent reports have proven that it is technically viable,” he said.

“Ultimately, now they’re [Woodside] just blindly rejecting the Timor projects, but they’re not the majority shareholder.

“Ultimately, having them inside the project is up to them.”

A confidential report prepared for East Timor’s government and leaked to the Financial Review last month found that the stalled gas project could be built and run at a similar cost in East Timor, instead of Darwin.

The ERCE consultancy report, commissioned by state-owned Timor Gap, estimated that the total capital expenditure for the LNG project construction would be $US11.8 billion in Darwin and $US14.1 billion in East Timor, according to the report finalised in July 2021.

ERCE estimated that annual operating costs for upstream, midstream and downstream gas processing would be $US1.3 billion a year cheaper in East Timor at $US5 billion, versus $US6.3 billion in Darwin.

Underlining differing views between Woodside and East Timor, a footnote in the report says some of the operating costs are based on Timor Gap’s “upstream and downstream cost estimates which differ from operator” Woodside.

The energy price spike and search for new sources of oil and gas outside Russia have led to calls from Woodside chief executive Ms O’Neill for “serious consideration” to be given to kick-starting stalled gas mega-projects, including Sunrise.

Ms O’Neill said in April the energy crisis fuelled by Russia’s invasion of Ukraine “may help pick up the pace in progressing those discussions” on the Sunrise scheme’s production-sharing contract.

Woodside is adamant that East Timor’s stipulation that an LNG plant is built on its southern coast is not viable.

“The economics of taking gas to Timor-Leste and building new plants just are prohibitive – so that’s something that needs to get cracked – but the PSC [production sharing contract] terms need to get sorted out first,” Ms O’Neill said.

“The field is closer to existing LNG infrastructure. There’s potentially some interesting opportunities there to use existing facilities. So just from an economics perspective, taking the gas to Timor-Leste and building a brand-new plant just doesn’t make sense.”

With the existing Bayu-Undan oil and gas field in the Timor Sea due to run dry this year, East Timor’s $US18 billion sovereign wealth fund is on track to be empty by around 2030, leaving the government financially constrained.

But Mr Soares Ferreira said East Timor was “not desperate” and was progressing 16 other oil and gas projects including partnerships with Santos.

“We have alternatives in place, but we want Sunrise to be developed in Timor within this decade,” he said.

Woodside declined to comment further on Monday.

The company has its half-year results due on August 30 and is likely to update the market on the Sunrise project then.

Source HERE

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