Event

Timor-Leste and Australia have signed a new maritime boundary treaty which establishes the division of existing hydrocarbon reserves in the Timor Sea between both countries. Earlier in July, each national Parliament ratified the new treaty. This is a significant milestone towards the future exploitation of the crucial Greater Sunrise gas deposits.

Impact

Twenty years after its independence, Timor-Leste has concluded a revised landmark maritime agreement with its top trade partner, Australia. This long-awaited deal is of paramount economic importance for the small South-East Asian democracy. Its high economic and budget reliance (more than 80%) on oil and gas revenues is indeed putting the country in an increasingly delicate situation, as the Bayu-Undan gas field is close to depletion – it is expected to run dry by 2023 or 2024.

Fortunately, Timor-Leste’s authorities have a comfortable “Petroleum Fund” at their disposal (equivalent to five times the country’s GDP), withdrawals from which allow continuity in public spending and time to find alternative revenues. This will not last forever, though. At the current pace, it might be exhausted in ten years’ time. Therefore, over the past years, the government has been active on two fronts.

First, it is committed to the difficult task of diversifying the predominantly rural economy and collecting fiscal revenues away from the hydrocarbon sector that, besides, generates little employment. Second, the authorities want to fully exploit the 70% of the Greater Sunrise gas field that, according to the new treaty, lies in Timor-Leste’s waters. They will have to wait until it is operational, that is, not before 2026 at the earliest, which means the country’s public finances will hugely depend on the PF in the meantime. The last pending decision is whether to process the LNG from the Greater Sunrise field in Timor-Leste or in Australia. The President and the Prime Minister prefer to play the more patriotic first option as they hope it will deliver more jobs and bring a larger contribution to the local economy. It is nevertheless considered as a costlier and less commercially viable choice given the lack of necessary infrastructures. This decision has been delayed due to political tensions, as President Guterres has been strongly hindering PM Ruak’s policy-making since Guterres’s Fretilin party (the historical independence party) lost the legislative elections to the opposition in May 2018.

To overcome the future funding and infrastructure challenges involved by the Greater Sunrise field, Timor-Leste’s government has been courting China and Australia for increased economic cooperation. Both are contending for strategic and economic influence in the Pacific region and have therefore pledged to make large investments in the country, which will be integrated in the national “Tasi Mane” development plan. Thus, after having achieved projects in the transport and power sectors, Beijing announced mega infrastructure investments (e.g. a pipeline, a port, roads, petrochemicals…) that will accompany the processing of onshore LNG and are considered to be part of the Belt and Road Initiative. In addition, like that of a few other Asian countries, China’s rising influence is also financial, as Timor-Leste’s authorities are negotiating large loans from Beijing. The growing dependence on China is a divisive issue in this young country. Besides, the future Greater Sunrise gas field exploitation could also lead to higher corruption and slow the government’s diversification efforts.

Although the recent maritime deal with Australia and bold foreign investments plans are positive developments, Credendo’s MLT political risk remains unchanged at 6/7, given remoteness and persisting uncertainty around future LNG exports, and the need of quality macroeconomic management in the years following the depletion of current gas reserves.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com