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TIMOR LESTE PANORAMA

Timor-Leste, born out of a protracted struggle for independence from Portugal colonization and Indonesian invasion and occupation, officially gained sovereignty in 2002. Asia’s youngest country has navigated the ups and downs of post-conflict nation-building. The new nation started its life as the poorest, on a per capita GDP basis, in Asia and one of the poorest in the world.

Since regaining independence in 2002, Timor-Leste has effectively embraced democratic governance, marked by four constitutional changes of government. Operating under a semi-presidential parliamentary model, the political system has experienced peaceful transitions of power. Timor-Leste stands as a unique case where the economy heavily relies on oil, yet civil and political rights are upheld, democracy thrives, and state actions predominantly adhere to the rule of law.

Despite these accomplishments, the dominance of political figures from the 'Generation of '75,' particularly Xanana Gusmão and Mari Alkatiri, has intermittently unsettled the political landscape. The rivalry between these influential figures introduces complexity to the nation's political trajectory, creating anticipation and uncertainty among the next generation poised for leadership roles.

A SMALL AND YOUNG ECONOMY

A STABLE DEMOCRACY WITH COMPLEX DYNAMICS

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TIMOR LESTE

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THE ECONOMIC DEPENDENCY ON OIL

The infusion of revenue from offshore oil and gas production since 2005 has significantly impacted Timor-Leste's economic landscape. The Petroleum Fund, a sovereign wealth fund based on  a Norwegian model, peaked at almost $20 billion in 2021 and held $18 billion at the end of 2023. In 2008-2009, when the PF was entirely invested in bonds issued by foreign governments, it was the only sovereign wealth fund in the world which didn’t lose value in the global financial crisis.

Revenues from exporting offshore oil and gas, channeled through the Petroleum Fund, pay for more than 80% of public spending used to build new infrastructures after Indonesia razed the country to the ground in 1999. Infant and maternal mortality have seen significant reductions, malaria and leprosy are virtually eliminated, and a larger portion of the population now enjoys improved access to electricity, education, and healthcare. Between 2009 and 2016, Timor-Leste experienced a notable reduction in multidimensional poverty, decreasing from 70% to 47%, signaling a noteworthy improvement that still requires further enhancement.

WHAT OIL HAS PERMITTED 

THE LOOMING THREATS OF OIL DEPENDENCY

The country heavily relies on imports to meet the daily needs of its people and institutions. Timor-Leste manages its trade deficit by utilizing funds from petroleum revenues and investment returns. However, with oil production expected to cease by 2024 and projections indicating that the Petroleum Fund could be depleted by 2034 without further development, the nation faces a critical fiscal challenge.

With over 80% of government revenue sourced from the Petroleum Fund, Timor-Leste is vulnerable to a looming and significant fiscal risk. The Ministry of Finance has stated that Timor-Leste is approaching a fiscal cliff that will necessitate a radical reduction in spending. This will probably include substantial cuts in public employment and procurement, which are the livelihood of about half of the workforce in the cash economy. The World Bank has also highlighted the macro-fiscal cliff in the coming decade.

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RESOURCE CURSE MANIFESTATIONS

Regardless of political party affiliation, successive governments since 2008 have consistently embraced a shared fiscal policy approach, characterized by rapid increases in government spending and the maintenance of high non-oil fiscal deficits. Despite public expenditure equaling approximately 86% of non-oil GDP between 2008 and 2019, it failed to contribute significantly to the diversification of Timor-Leste's economy. According to La’o Hamutuk's 2021 analysis, only about a quarter of the 820,000 working-age population is engaged in the formal economy.

AN ECONOMY RELIANT ON PUBLIC SPENDINGS

LIMITED HUMAN DEVELOPMENT FOR THE MAJORITY

Timor-Leste has experienced an average GDP growth since independence that is lower than all ASEAN members, except for Brunei, with a 2.4% growth rate. This is a cause for concern, particularly considering that GDP per capita is a powerful indicator of progress and development, even though it has its limitations by counting dollars rather than human metrics such as poverty, malnutrition, or health.

As of 2021, a significant challenge persists, with over 1 million people (83% of Timor-Leste's population) residing in rural areas without access to clean water. The levels of child malnutrition and food insecurity in the country rank among the highest globally. More than 40% of the population lives in poverty, struggling to afford daily necessities. Timorese children bear a disproportionate burden of malnutrition compared to their peers in Southeast Asia and the Pacific. Over half of children under the age of five in Timor-Leste are stunted, marking the country as the third worst in the world in this regard.

MISSED OPPORTUNITY IN RENEWABLE ENERGY

The destruction of Timor-Leste's electricity system by Indonesia in 1999 inadvertently opened a door for the creation of a modern, renewable, and decentralized electricity infrastructure powered by solar and wind energy across the nation. However, decision-makers chose a 19th-century approach, employing centralized, oil-fueled plants and a national grid.

This decision proved costly and not effective. With construction costs surpassing twice that of a renewable system, Timor-Leste bears an annual burden of about $75 million in public funds spent on importing fuel. Despite these expenditures, a significant rural population, especially those far from the newly constructed grid, still lacks access to electricity.

FOOD INSECURITY AND CLIMATE CHANGE VULNERABILITY

Timor-Leste experienced severe flooding and landslide impacts from Cyclone Seroja in 2021, emphasizing the vulnerability to climate change consequences, which also affects crop cycles and livelihoods. Timor-Leste, teetering on the edge of food insecurity with a Global Hunger Index ranking 112th out of 128 countries and importing 60% of its food.

Higher-quality agricultural inputs are essential for efficiency and output. Despite growing public discourse on the need for economic diversification, agriculture receives minimal budget allocation, creating a gap between intention and resource allocation. In the 2024 state budget, agriculture gets 2.2% of expenditures, although it is the livelihood of 65% of the population.

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BAYU-UNDAN: HISTORICAL FIELD RUNNING OUT

Since the mid-2000s, Timor-Leste has heavily depended on the Bayu-Undan field under the Timor Sea for its oil and natural gas revenue. The Bayu-Undan project involves the extraction of both oil and natural gas, with the oil processed on a floating production storage and offloading (FPSO) facility, and the gas transported through pipelines to a processing plant in Darwin, Australia. The processed gas is converted to liquefied natural gas (LNG) and exported.

From 2005 to 2023, oil and gas revenues generated by the Bayu-Undan field contributed $23.3 billion to the Petroleum Fund, from which $16.1 billion has been withdrawn to cover state expenditures and generated more than USD 9 billion in investment return.

However, by 2021, Timor-Leste had already received 99% of the expected revenue from the nearly depleted Bayu-Undan. The future of oil extraction in Timor-Leste remains tied again to further development in the Timor Sea, situated along the Australian maritime border.

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GREATER SUNRISE RESERVE : AN ELUSIVE MIRAGE

Greater Sunrise reserve was discovered in 1974, but its development was delayed by Indonesia’s illegal occupation of Timor-Leste, and then by Australia’s continuing occupation of the new country’s maritime territory. Even after the Maritime Boundary Treaty was agreed in 2018, Timor Leste and the companies of the joint venture couldn’t agree on a development model of the field. The extracted crude oil could either be processed in Australia using the existing Darwin LNG plant, or on Timor Leste south coast shores in the projected new facilities in Beaçu

The private contract holders (Woodside, Shell, ConocoPhillips, and Osaka Gas) estimate that a gas pipeline to Darwin would be more profitable than one to Timor-Leste, while Timor-Leste leaders, led by independence hero and newly elected Prime Minister Xanana Gusmão, view the northern Australia option as a challenge to their sovereignty : "Australia got the Bayu-Undan pipeline, so it's only fair for Timor-Leste to have one from Sunrise.". This political rallying cry is all the more as it is deeply rooted in lingering mistrust of the Australian government which supported Indonesia’s illegal invasion and occupation in the 1970s.

A FIELD CRYSTALLIZING POLITICAL TENSIONS

PRIVATE COMPANIES ARE DISENGAGING

Since 2018, private companies have been gradually reducing their involvement in the development of Timor-Leste's oil sector. TimorGAP, the national petroleum company, borrowed $650 million from the Petroleum Fund and used the funds to acquire a 57% stake in the Greater Sunrise joint venture. ConocoPhillips and Shell opted to sell their shares, finding relief in being compensated for a non-productive asset and receiving cash for a project that had been stagnant for four decades. Timor-Leste now owns 57% of Sunrise and is responsible for 57% of the offshore capital costs and 100% of the onshore costs if there are set to be in Timor-Leste.

Due to shifts in the energy economy resulting from COVID-19 and other factors, Woodside, the operator and 33% owner of the Sunrise project, reassessed its value to zero in July 2020. TimorGAP followed suit at the end of 2020

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TASI MANE PROJECT: OIL DEVELOPMENT FORWARD ESCAPE

After the conclusion of Bayu-Undan production in November 2023, the Australian company Santos plans to repurpose the Darwin LNG plant to handle gas from Barossa, located in Australian waters. This Darwin LNG facility used for refining Timor crude oil is no longer an option for the Sunrise project, even if Timor-Leste or potential investors were to consider alternatives aside from Beaçu LNG.

ONLY OPTION LEFT FOR THE GREATER SUNRISE

A COLOSSAL AND FINANCIALLY QUESTIONABLE PROJECT

This expansive proposed Tasi Mane Project, situated on the south coast, encompasses an oil refinery, LNG plant, offshore gas and onshore oil pipelines, a supply base for offshore petroleum projects, highways, airports, and new towns. With an estimated construction cost of over $20 billion, financial uncertainties cast a shadow, and to date, no private investors have expressed interest.

The discussions, media coverage, and decisions surrounding Sunrise and Tasi Mane have predominantly been personalized, politicized, and driven by nationalism. Numerous political leaders persistently affirm, 'Hakarak ka lakohi, Projetu Greater Sunrise ita tenke kontinua' ('Like it or not, we must continue the Greater Sunrise project').

... HOLDING MINIMAL GUARANTEES FOR THE CITIZENS OF TIMOR-LESTE

Most of the billions allocated for construction will go to foreign companies. Once operational, these facilities will probably only provide a small amount of local employment or subcontracting. Economist Brett Inder from Australia suggests that investing in enhanced coffee production could generate six times more jobs and stimulate six times the GDP growth compared to investing the same amount in Tasi Mane.

To date, the only completed (or contracted) components of Tasi Mane are Suai airport and the initial one-fifth  of the highway. However, the airport remains unused and neglected, overrun by weeds. Additionally, the newly constructed highway, which divides families and makes access to farms difficult, collapsed during the first heavy rainfall after it was built.

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WHAT FUTURE FOR TIMOR-LESTE ?

In a hypothetical scenario, Timor-Leste secures Chinese loans and potential private investments, while the other joint venture partners agree to process the oil in Beaçu if Timor-Leste bears all associated costs. The capital investment required for constructing Tasi Mane is estimated over $20 billion, equivalent to the entire Petroleum Fund. This figure does not encompass operational costs and does not account for borrowing costs, which will make it even larger.

Even, under these circumstances, the likelihood of Greater Sunrise generating significant revenue before the late 2020s is close to zero, at best the project could be operational by 2031 and revenue would come later.

The extraction of Greater Sunrise (GS) will further extend Timor-Leste's reliance on oil and gas, diverting attention from sustainable development avenues such as agriculture, tourism, and small industries. This delays crucial decisions about the nation's future post-GS depletion. If an energy transition unfolds, reducing global oil demand over the next 25 years, investments in Tasi Mane may face the risk of becoming stranded assets.

Since 2012, Timor-Leste has already signed loan contracts totaling over $1 billion, of which about $300 million has been disbursed. Financing Sunrise and the Tasi Mane Project may necessitate borrowing additional billions, perhaps at commercial rates. Even with concessional rates, loan repayments diminish the assets in the Petroleum Fund. The forthcoming generations of Timor-Leste will inherit both the debt and its social consequences long after the oil wells have ceased production.

DETRIMENTAL STUBBORNESS IN OIL EXTRACTION

FINANCIAL COMPENSATION AND ECONOMIC DIVERSIFICATION

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