EAST TIMOR: SEALING THE GAP.

ACFOA’S POSITION PAPER ON THE NEGOTIATIONS OF THE TIMOR GAP ZONE OF COOPERATION TREATY

10 December, 2000

TABLE OF CONTENTS

• EXECUTIVE SUMMARY
• SECTION 1 – BACKGROUND INFORMATION
• SECTION 2 – THE TIMOR GAP ZONE OF COOPERATION TREATY
• 2.1. _ THE NATURE OF THE TIMOR GAP TREATY
• 2.2. _ THE ZONE OF COOPERATION
• 2.3.  _ OBJECTIONS TO THE TIMOR GAP TREATY
• SECTION 3 –THE RENOGOTIATION OF THE TIMOR GAP TREATY
• 3.1. – EAST TIMOR INDEPENDENCE
• 3.2. – EAST TIMOR POSITION ON THE NEGOTIATIONS OF THE TIMOR GAP TREATY
• SECTION 4 – ACFOA’S DRAFT POLICY POSITION AND RECOMMENDATIONS

EXECUTIVE SUMMARY

Following two informal meetings held in August 2000 in Australia, the Australian Government and UNTAET, representing East Timor, met in Dili from 9 to 12 October 2000 to start the first formal round of negotiations on the Timor Gap Zone of Cooperation Treaty.

The present report discusses the legitimacy of the East Timorese claims in the current negotiations of the Timor Gap Treaty.

For these purposes it clarifies the nature of the Timor Gap Treaty through an analysis of the context in which it was created and its current status. In addition, this report highlights the importance of Australia adopting a generous approach to the Timor Gap Treaty so that we contribute to the medium and long term economic development of East Timor and lessen its dependency on foreign aid.

Finally, the report makes several recommendations to the Australian Government which are consistent with the support Australia has given to the East Timorese people.
 

SECTION 1 – BACKGROUND INFORMATION

• In 1972 Australia and Indonesia defined their seabed boundary through the “International Sea-bed Agreement”.
• In December 1975 Indonesia annexed East Timor. Though this act was condemned by the international community the annexation remained.
• In October 1976 Australia and Indonesia held informal negotiations to establish the seabed boundary between Australia and East Timor. The legal status of East Timor became the main impediment to these negotiations. However, Australia adopted an abstention rather a support position to the UN Resolutions which condemned Indonesia’s annexation of East Timor.
• In February 1979 formal negotiations begun to define the Australian and East Timorese seabed boundary. These negotiations occurred in parallel with Australia’s de jure recognition of East Timor’s incorporation in Indonesia. Nevertheless, Australia and Indonesia again did not reach an agreement on this matter.
• In December 1982 the UN Convention on the Law of the Sea (UNCLOS III) was created. This Convention favored Indonesia’s “median line settlement”ⁱ position in defining the polemic boundary.
• On December 11, 1989 a joint development zone (JDZ) was formed and the Timor Gap Zone of Cooperation Treaty signed. The Treaty was given domestic legal effect by the Commonwealth Petroleum Australia-Indonesia Zone of Cooperation Act 1990.
• In February 1991, Portugal initiated proceedings against Australia before the International Court of Justice (ICJ) in The Hague over the legality of the Timor Gap Treaty.
• In November 1994 UNCLOS III entered into force when it received the required 60 ratifications.
• In March 1997 Australia and Indonesia concluded a Treaty on the water column boundary between East Timor and Australia which adopted the modern international law of the sea principle, the median line settlement.
• In February 1999 Indonesia confirmed it would relinquish its claim to the Timor Gap if East Timor would vote for independence.
• On April 19, 1999 Australia accepted the “successor state model”ⁱⁱ trough the Attorney General’s Department submission to the East Timor Senate Enquiry.
• On 5 May 1999, Indonesia, Portugal and the UN agreed on a popular ballot whereby the East Timorese would decide to stay part of Indonesia or to became independent from it.
• On 30 August 1999 the ballot took place and the East Timorese voted overwhelmingly ( 78.5%) in favor of their independence.
• On 19 October, the Indonesian Parliament (MPR) endorsed the East Timor vote and officially renounced its claim over East Timor.
• On 26 October 1999 the UNTAET replaced Indonesia in the Timor Gap Treaty.

SECTION 2 – THE TIMOR GAP ZONE OF COOPERATION TREATY

The Timor Gap Zone of Cooperation Treaty, hereinafter referred to as Timor Gap Treaty, was created to circumvent a long dispute between the Australian and the Indonesian Government in establishing a seabed boundary between East Timor and Australia. In addition it also “reflected a long standing interest of the Commonwealth Government in securing rights to petroleum exploration and exploitation over the continental shelf under international law”ⁱⁱⁱ. Moreover, it had an important political component attached to it as it emphasized “the mutual respect, friendship and cooperation” between the Indonesian and Australian Governments^iv. However, the enhancement of good diplomatic relations between the two countries was done at the expense of the right of the East Timorese to self-determination.

2.1. _ THE NATURE OF THE TIMOR GAP TREATY
In 1972 Australia and Indonesia concluded the “International Sea-bed Agreement” which delimited their seabed boundary. This delimitation was done according with the international law of the sea principle argued by Australia, the “natural prolongation’ of the continental shelf.  However, the 1972 Agreement did not define the seabed boundary between Australia and East Timor since by the time it was signed East Timor was still under Portuguese colonial administration. For this reason, after Indonesia’s occupation of the territory in 1975, the Australian and the Indonesian Governments undertook several rounds of negotiations in order to seal that gap.

Nevertheless, and despite Australia’s de jure recognition of East Timor’s annexation by Indonesia in 1979, these two countries never reached an agreement on that matter. While Australia defended the international principle of natural prolongation of “the continental shelf” in establishing its seabed boundary with East Timor, Indonesia argued for the new principle in the international law of the sea, “the median line settlement”.

UNCLOS Article 83/3 declares that States with opposite coasts that did not reach yet an agreement to delimitate their continental shelf should “enter into provisional agreements of a practical nature”. Therefore, on December 11, 1989, a joint development zone (JDZ) was created and the Timor Gap Zone of Cooperation Treaty signed. The Treaty and the Taxation Code annexed to it, were given domestic legal effect by the Petroleum (Australia-Indonesia Zone of Cooperation) Act 1990.

The Timor Gap Treaty as a temporary nature and its arrangements “shall be without prejudice” to a final “position of either contracting States” in agreeing on a permanent continental shelf delimitation for the Zone of Cooperation^v. The Treaty is expected to remain in force for forty years^vi and after this date for successive terms of twenty years, unless the contracting states agree otherwise or at the end of each term conclude an agreement on permanent continental shelf delimitation for the Zone in question^vii.

2.2. _ THE ZONE OF COOPERATION
The Treaty defines a Zone of Cooperation which comprises on the Timor Sea a region between Darwin and the Timor Trench. This region is divided into three areas in the following manner: Area A is jointly controlled and developed by the contracting States who share on a equal basis its oil revenues; Area B is administered by Australia who is to make certain notifications to and pay Indonesia 16% of net Resource Rent Tax collected^viii; In Area C occurs the reverse with Australia receiving 10% of Contractors’ Income Tax collected^ix;

Zone of Cooperation A (ZOCA )
Zone A is the key area at stake.  There are two reasons for this, firstly this is the area of disputed maritime boundary settlement and secondly the largest area where the majority of gas and petrol fields from the Timor Sea lies.

According to Article 3/1 of the Timor Gap Treaty, the rights and responsibilities of the contracting States in relation to ZOCA are exercised by a Ministerial Council and a Joint Authority. In addition, the petroleum operations in this zone are carried out through production sharing contracts.  The Ministerial Council has an equal number of Ministers which are designated by each contracting State^x and it has “ the overall responsibility for all matters relating to the exploration and exploitation of the petroleum resources in Area A”^xi. The Joint Authority has two Executive Directors, appointed by the contracting States, and four Directorates: Technical, Financial, Legal and a Corporate Services^xii (Article 9). The Authority is responsible to the Council for the daily management of all “activities relating to exploration and exploitation of the petroleum resources in” ZOCA.^xiii.  Finally, the Authority is “financed from fees collected under Part VI of the Petroleum Mining Code”^xiv.

The Authority, with the approval of the Council, has an exclusive authority to contract for petroleum operations in ZOCA. These contracts are regulated by the Model Production Sharing Contract (MPSC) which is subject to the Treaty and the Petroleum Mining Code^xv. The term of these contracts is 30 years^xvi under the condition that within six years “petroleum is discovered in commercial quantities in the contract area”^xvii. If after this date petroleum production remains, the Authority can extend the term of the contracts until production ceases permanently. In the case of a natural gas project, this term is automatically extended to the end of the term of the natural gas sales contract^xviii (Section 2/2.5.).

2.3.  _ OBJECTIONS TO THE TIMOR GAP TREATY
On 22 February 1991, the Timor Gap Treaty was challenged by Portugal next to the International Court of Justice (ICJ) on the basis that Australia had interfered with the rights of Portugal as the administering power of East Timor and “the right of the people of East Timor to self-determination”^xix. At the same time it defended the right of the East Timorese to all resources on their seabed which should be determined according to the median line principle under UNCLOS III. The court dismissed the action because to invalidate the agreement it would needed to decide on the legality of Indonesia’s annexation of East Timor. However this could not be done since Indonesia did not recognize the jurisdiction of the Court.

SECTION 3 –THE RENOGOTIATION OF THE TIMOR GAP TREATY

3.1. – EAST TIMOR INDEPENDENCE
On 30 August 1999 the people of East Timor voted on a popular referendum in favor of their independence.

On 19 October 1999 the Indonesia Parliament (MPR) voted to formally renounce its sovereignty over East Timor. On 25 October 1999, the Security Council established the UNTAET, through its 1272 Resolution, for an initial period of 16 months until 31 January 2001^xx. This resolution empowered  UNTAET to take “all necessary measures to fulfill its mandate” such as the “establishment of conditions for sustainable development” in East Timor^xxi.

Within this spirit, on 10 February 2000,  through the diplomatic exchange of notes, a memorandum of understanding (MOU) was signed by UNTAET and the Australian Consul in East Timor. This agreement substituted Indonesia in the Timor Gap Treaty by UNTAET and also gave continuation to the terms of the Treaty until UNTAET fulfills its mandate^xxii. Consequently, this agreement will not bind the future East Timorese government as it will expire when East Timor becomes independent. Hence, the importance of the current negotiations on the Timor Gap Treaty “to avoid a legal vacuum when this occurs and to provide commercial certainty for the petroleum industry” in the Timor Gap.^xxiii

3.2. – EAST TIMOR POSITION ON THE NEGOTIATIONS OF THE TIMOR GAP TREATY
From 9th to 12th October 2000 the first formal round of negotiations between the UNTAET representing East Timor and the Australian Government on the Timor Gap Treaty took place in Dili. This is the first round of negotiations before any agreement can be reached “on a replacement Treaty for the Timor Gap to enter into force on East Timor’s independence”, Alexander Downer, Nick Minchin and Darryl Williams said in a joint statement^xxiv.

The issue surrounding the current negotiations of the Timor Gap Treaty is whether the East Timorese representatives will continue or review the terms of the Treaty and the contracts concluded under it or instead opt to negotiate the establishment of a permanent seabed boundary. Their recent public statements seem to indicate preference for the later option as they consider the Timor Gap Treaty illegal, for the reasons already mentioned^xxv. If the outcome of the negotiations favors this position East Timor will control Areas A and C under the present Treaty which means that it will access almost all oil and gas revenues on the Timor Gap.

Alternatively, there could be a re-negotiation of the oil and gas revenue shares going to both parties. Of immediate interest for East Timor is the royalty shares from the Bayu-Undan gas and liquids development in the Timor Sea, the biggest development in the area to date, and those coming from the Elang-Kakatua oil field. On 18 October 2000, East Timor received its first royalty payment from the later field worth over US$3 million.  On 7 May 2000 Ramos Horta said that East Timor should take 90% of the oil and gas revenues while Australia 10%^xxvi. However, on 9 October 2000, Alfredo Pires, energy adviser for CNRT, said that the “final amount of revenue sought by East Timor from the Zone of Cooperation could be offset by guarantees on training and employment opportunities for East Timorese”. This statement followed the announced made on 4 October 2000, by Senator Nick Minchin, the Minister for Industry, Science and Resources, on behalf of the Ministerial Council for the ZOCA, of two measures aimed at that purpose.

SECTION 4 – ACFOA’S DRAFT POLICY POSITION AND RECOMMENDATIONS

ACFOA calls on the Australian Government to adopt an approach to the current negotiations of the Timor Gap Treaty consistent with the support it has demonstrated since last year to the right of the East Timorese people. As the first National Congress of the CNRT emphasized, next year’s election of the future government of East Timor will not represent per se the independence of the territory. Real independence can only be achieved when the spiritual and material well being of all East Timorese will be secured. Consequently, it is critical to ensure that East Timor will have access and make good use of all its resources in order to enable the rehabilitation of its infrastructure and become in the medium term more economically self-sufficient and therefore less dependent on foreign aid.

With this in mind, ACFOA welcomes the release on the 7th of December 2000, of the final report of the Senate Foreign Affairs, Defense and Trade References Committee inquiry into Australian policy toward East Timor. Particularly, it welcomes and endorses the report’s recommendation that:
 the Australian Government in the negotiations of the Timor Gap Treaty takes into account the following aspects:

• the current position of the international law of the sea for the delimitation of seabed boundaries;
• Australian diplomacy history towards East Timor;
• the importance in establishing and  developing an amicable relationship with the East Timorese leaders;
• the need  for East Timor to have resources of income that might reduce dependency on foreign aid;

1. The East Timorese should be given a larger share of the oil and gas resources than the one they presently receive under the Timor Gap Treaty.

This can be done by:

• either reviewing the terms of the joint development zone so that a share of the oil and gas revenues is given in favor of the East Timorese on a 90-10 basis; or
• instead negotiating a permanent seabed boundary according with the now generally accepted  international law of the sea principle, the median line settlement;

3. Assist the building of the East Timorese capacity to create policies aimed at planning and managing oil and gas resources which take into account the potential risks of oil resource dependency.

ENDNOTES

i According to UNCLOS Article 15 States with opposite coasts should extend their territorial sea to an equidistant median line which is measured from their respective coast lines.
ii The successor State model means that East Timor would simply replace Indonesia in this Treaty.
iii Bills Digest N0 133 1999-2000, pag 2.
iv Preamble of the Timor Gap Zone of Cooperation Treaty.
v Timor Gap Zone of Cooperation Treaty, Article 2/3.
vi Timor Gap Zone of Cooperation Treaty, Article 33/1.
vii Timor Gap Zone of Cooperation Treaty, Article 33/2.
viii Timor Gap Zone of Cooperation Treaty, Article 4/1.
ix Timor Gap Zone of Cooperation Treaty, Article 4/2.
x Timor Gap Zone of Cooperation Treaty, Article 5/2.
xi Timor Gap Zone of Cooperation Treaty, Article 6/1.
xii Timor Gap Zone of Cooperation Treaty, Article 9.
xiii Timor Gap Zone of Cooperation Treaty, Article 8.
xiv Timor Gap Zone of Cooperation Treaty, Article 11.
xv Model Production Sharing Contract, Section 1/1.1.
xvi Model Production Sharing Contract, Section 2/2.1..
xvii Model Production Sharing Contract, Section 2/2.2.
xviii Model Production Sharing Contract, Section 2/2.5.
xix Portugal v. Australia, 30 June 1995, paras 23-37 (Summary at: http://www.icj-cij.org/icjwww/idecisions/isummaries/ipasummary950630.htm)
xx S/RES/1272 (1999), para 17.
xxi Bill Digest 133 1999-2000.
xxii http://www.un.org/peace/etimor/news/News11.html.
xxiii Dow Jones Newswires, September 18, 2000.
xxiv Dow Jones Newswires, September 18, 2000.
xxv On 15 June 2000, Dr Alkatiri speaking on behalf of CNRT said that “ the starting point needs to be the drawing of a maritime boundary between our countries and that means the Treaty would not have any effect any more”. The Australian, 15 June 2000.
xxvi Agence-France Press, 8 May 2000.

REFERENCES

The full text of the Timor Gap Treaty can be found at 9/22/1999:
http://www.mastiffassociation.org/docs/nation/austr/timgt.htm

Community Aid Abroad briefing Papers:
11/28/2000 http://www.caa.org.au/publications/briefing/timor_gap_treaty

Challenges to the Timor Gap Treaty:
11/30/1997 http://jinx.sistm.unsw.edu.au/~greenlft/1994/155/155p16b.htm

General articles posted on:

Ready to abrogate Timor Gap Treaty:
http://www.indonesia-ottawa.org/news/Timtim/ET-N.antara_090899_2.htm

Joint Authority for the Timor Gap Zone of Co-operation:
http://bayuundan.phillips66.com/content/authority.htm