Bills Digest No. 6 2003-04
Petroleum
(Timor Sea Treaty) Bill
2003
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Petroleum
(Timor Sea
Treaty) Bill 2003
Date Introduced:
5 March 2003
House: Representatives
Portfolio: Industry, Tourism and
Resources
Commencement:
On the day of Royal Assent
but, where relevant, various provisions in the Bill are made
retrospective in operation to coincide with the date of the signing
of the Timor Sea Treaty between Australia and East Timor (20 May
2002).
This Bill is part of a package of Bills to
give effect to the Timor Sea Treaty signed by Australia and the
newly independent nation of East Timor on 20 May 2002.
Background
[This Bill was the subject of urgent passage
and passed both Houses on 6 March 2003. This Bills Digest has been
prepared after the debate.]
The Timor Gap Treaty between Australia and Indonesia
As a courtesy, it is noted that the nation of
East Timor prefers the name Timor L'Este.(1) For
convenience, references in this Digest will be to East Timor,
consistent with the name used in the legislation and in the Timor
Sea Treaty.
In 1975, East Timor was incorporated into
Indonesia and was annexed the following year. The United Nations
did not recognise Indonesia's annexation and continued to regard
East Timor as under the administration of Portugal. Australia was
the only country to recognise Indonesia's annexation. In 1989,
Indonesia and Australia concluded negotiations over a treaty for
joint exploration and production of oil and gas under the Timor Gap
Treaty. The Timor Gap Treaty was signed on 11 December 1989.
Australia gave effect to the Timor Gap Treaty
by enacting the Petroleum (Timor Gap Zone of Cooperation) Act
1990. The Timor Gap Treaty provided a provisional settlement
of a dispute over the seabed boundary line and it established a
ministerial council and joint authority involving Australia and the
Republic of Indonesia to jointly develop the rich reserves of oil
and gas in the Timor Sea area. The Timor Gap Treaty included
annexes dealing with a Petroleum Mining Code and a taxation
code.(2)
The use of the word 'gap' reflected a
long-standing delimitation issue involving Portugal, Australia and
Indonesia concerning the seabed boundary line of the Timor Sea.
Portugal maintained that the boundary line was the median distance
between East Timor and Australia. Australia maintained that the
boundary was delimited by the Timor Trench, a deep seabed
depression closer to East Timor and which Australia asserted was
the edge of its continental shelf. Indonesia recognised the
Australian position.
The boundary issue is significant because the
disputed area contains the major Bayu-Undan oil and gas field.
Another field, the Greater Sunrise Field, straddles the boundary
with 79.9% of the field within Australian
jurisdiction.(3) Where a resource field straddles an
international boundary an International Unitisation Agreement (IUA)
can be negotiated to define the scope of the resource and to
provide terms for the administrative and regulatory regimes that
will apply. The field is then treated as a single unit.
East Timor separated from Indonesia on 26
October 1999 and after a period of civil unrest, which was brought
under control by United Nations peacekeepers, became an independent
nation on 20 May 2002. On separation, Indonesia no longer had
jurisdiction over East Timor. Between separation and independence
the continuation of exploration and development of the oil and gas
resources was the subject of an agreement between Australia and the
United Nations Transitional Administration in East Timor
(UNTAET).
The Timor Sea Treaty between
Australia and East Timor
Australia signed the Timor Sea Treaty with
East Timor on 20 May 2002. The treaty was tabled in Parliament on
25 June 2002.
At the time that the treaty was signed it was
envisaged that the negotiations for the IUA for the Greater Sunrise
field would be concluded by December 2002. The Joint Standing
Committee on Treaties recommended (at Recommendation 2) that:
[T]he Government of Australia use its best
endeavours in accordance with the Memorandum of Understanding
signed in Dili on 20 May 2002 to conclude the International
Unitisation Agreement for the Greater Sunrise fields on or before
the date on which the Timor Sea Treaty is ratified and in any event
before 31 December 2002 as this would serve the best interests of
both nations.(4)
The ratification of the Timor Sea Treaty is a
fundamental condition precedent to the exploitation of the gas and
oil resources. Contractual obligations of the commercial venture
partners for the Bayu-Undan field were premised on ratification of
the treaty, preferably by the end of 2002, to enable sufficient
lead-time for infrastructure, such as on-shore facilities, to start
construction. This Bill, to enable the ratification of the Timor
Sea Treaty, required urgent consideration on 5 and 6 March 2003
because the deadline for the Bayu-Undan commercial contract was the
11 March 2003. At the time the Bill was debated in the House of
Representatives on 5 March 2003, the IUA for the Greater Sunrise
field remained unsigned. It was signed on 6 March 2003.
The deep Timor Trench precludes pipeline
delivery for on-shore processing in East Timor. Instead, on-shore
infrastructure will be constructed in and around Darwin. The likely
investment in the Northern Territory by the developers associated
with the Bayu-Undan field is estimated at $3 billion for a pipeline
to Darwin and a liquid natural gas (LNG) plant at Wickham Point,
near Darwin.(5)
The former Timor gap area was referred to as
the Zone of Cooperation. Under this legislation that area will be
known as the Joint Petroleum Development Area (JPDA). The Timor Sea
Treaty provides that the title to all petroleum in the JPDA belongs
to both East Timor and Australia on the basis of 90% of the
petroleum attributed to East Timor and 10% to Australia. In the
case of the Greater Sunrise Field, which straddles the JPDA
boundary line, East Timor is likely to be entitled to 90% of the
20% of the field that falls within the JPDA i.e. 18% of the total
field. The expected revenue stream to East Timor from its share of
the oil and gas resources is likely to be significant and critical
for this emerging nation.
Unless there is a permanent delimitation of
the Timor Sea seabed, the Timor Sea Treaty will remain in force for
30 years.(6) The treaty does not prejudice territorial
claims. To that extent, the treaty is regarded as a practical
provisional arrangement under international law (see Article 2 of
the Timor Sea Treaty).
Clause 4 authorises specified
regulatory bodies to exercise the rights and responsibilities of
Australia in relation to activities covered by the Timor Sea
Treaty. These bodies are the 'Ministerial Council' (the
Australia-East Timor Ministerial Council) and the 'Joint
Commission' (the Australia-East Timor Joint Commission). The Joint
Commission in turn designates the 'Designated Authority' under
Article 6 of the Timor Sea Treaty. The Designated Authority has the
power to contract and to be party to legal proceedings. It is
responsible for the day-today regulation and management of
petroleum activities under the Timor Sea Treaty.
Clause 6 and Clause
7 prohibit prospecting or production, respectively, within
the JDPA without the approval of the Designated Authority.
Clause 7 recognises that approval extends to
parties to a production sharing contract concluded with the
Designated Authority.
Clause 8 confers and
specifies the powers of inspectors who are certified and appointed
to ascertain whether 'petroleum activities' in the JDPA comply with
the Petroleum Mining Code and with relevant contract terms and
conditions.
Clause 9 confers federal
jurisdiction on appropriate State and Territory courts to hear
civil litigation by Australians (including a permanent resident)
for damages or expenses relevant to JPDA activities.
Clause 10 applies the civil
laws of the Northern Territory for litigation referred to in Clause
9.
Clause 12 applies the Timor
Sea Treaty and its Taxation Code to Australian tax laws that deal
with fringe benefits, income tax and the superannuation guarantee.
The Medicare levies are treated as income tax (Clause
13). The Alert Digest (No. 3 of 2003) of the
Senate Standing Committee for the Scrutiny of Bills has noted, in
the context of any likely retrospective effect to Part 3
Tax provisions in the Bill, that there:
is no assurance in the Explanatory Memorandum that
the commencement of that Part on 20 May 2002 will not adversely
affect taxpayers. (7)
Clause 15 provides a formula
to determine the gross tax payable for a person who is not a
resident of Australia but who derives income from the JPDA. That
person is entitled to a 90% rebate on the gross tax payable.
This Division applies the Taxation Code
contained at Annex G of the Timor Sea Treaty as a 'new taxation
code' and it continues the operation of the 'old taxation code'
that was included in the now redundant Timor Gap Treaty (the Zone
of Cooperation established by Australia and Indonesia in 1989) up
to 20 May 2002 when the 'new' Timor Sea Treaty was signed with East
Timor. This Division is necessary because the key date of 20 May
2002 falls within a financial year for income tax purposes.
Clause 19 provides a
short-term taxation exemption to an individual who is a resident of
East Timor. East Timorese are not liable to pay tax on income
derived from the JPDA until 1 July 2003. This concession recognises
that the resident should not be taxed where they had no prior
awareness of an obligation to pay the specific taxes imposed by the
Timor Gap Treaty.
This Part contains provisions that allow the
validation (retrospectively, where necessary) of approvals,
contracts and actions taken under the authority of the Timor Gap
Zone of Cooperation legislation including the former Petroleum
Mining Code.
Clause 23 allows the Joint
Commission to adopt an Interim Petroleum Mining Code, if necessary,
pending final agreement to any new Petroleum Mining Code.
Schedule 1 Timor Sea Treaty and its
Annexes
The Schedule contains the Timor Sea Treaty and
its Annexes. The Timor Sea Treaty is comprised of a series of
Articles agreed to by Australia and East Timor.
Article 3 establishes the
Joint Development Petroleum Area (JDPA) by reference to the
coordinates specified in Annex A to the Treaty.
Article 6 establishes the
regulatory bodies consisting of a Designated Authority, a Joint
Commission and a Ministerial Council. The Ministerial Council will
have an equal number of Australian and East Timorese Ministers. If
the Council is deadlocked, either country may invoke the dispute
resolution procedure in Annex B. The Joint Commission has
Commissioners appointed by Australia and East Timor but East Timor
shall have one more Commissioner than Australia. The Joint
Commission is responsible for policies and regulations and it
oversees the work of the Designated Authority. The powers and
functions of the Designated Authority are specified at Annex C and
include:
day-to-day management of petroleum activities
lines of communication for security, air traffic and search and
rescue activities
controlling movements within the development area
pollution prevention measures, and
reporting requirements.
The specific powers and functions of the Joint
Commission are set out in Annex D.
Article 9 requires Australia
and East Timor to work 'expeditiously and in good faith' to reach
agreement on a joint IUA to cover a petroleum area that straddles
the boundary of the JDPA. The resource is then managed as a single
unit.
Article 10 requires Australia
and East Timor to use best means to protect the marine environment
from the harmful consequences of petroleum activities.
Article 11 encourages
measures that give preference to the employment of nationals or
permanent residents of East Timor.
Article 13 applies the
Taxation Code set out in Annex G. A detailed explanation of the
Taxation Code is provided in the Explanatory Memorandum to the
Bill. As mentioned above, the Alert Digest (No. 3 of 2003)
of the Senate Standing Committee for the Scrutiny of Bills has
noted, in the context of any likely retrospective effect to
Part 3 Tax provisions in the Bill, that there:
is no assurance in the Explanatory Memorandum that
the commencement of that Part on 20 May 2002 will not adversely
affect taxpayers. (8)
Article 14 applies the
criminal law of Australia or East Timor, respectively, to its
nationals (or permanent residents). A third country national is
subject to the criminal laws of both countries, except that only
one country's criminal law can be applied (Australia and East Timor
may consult as to which country will enforce their criminal law). A
flag State retains the right to apply its criminal law for unlawful
actions taken on board a vessel or aircraft in the development
area.
Article 18 allows
surveillance by Australia or East Timor in the development area.
Both countries will cooperate on and exchange information derived
from surveillance activities.
Article 22 provides that the
duration of the Timor Sea Treaty is 30 years from the date of its
entry into force, unless there is an earlier permanent delimitation
of the national seabed boundary between Australia and East Timor.
East Timor's long term
economic survival depends on the development of the oil and gas
reserves in the Timor Sea. UNTAET
estimates that the Bayu-Undan field will deliver $3 billion in
revenue to East Timor over 17
years.(9) Without this revenue stream, East
Timor would be heavily dependent on foreign aid. The
economy of East Timor has a likely future
potential in tourism, fisheries and agriculture (including
coffee).
The reports of the discussions
leading up to the Timor Sea Treaty indicate that the negotiations
were robust. Formal negotiations began in October 2000. In January
2001, it was reported that
Australia may have
underestimated how well prepared the East Timorese negotiators were
when entering the negotiations. In an article by
Hamish McDonald
with the title 'Oil is more important to us than
to Australia,
says Gusmao' in the Sydney Morning Herald of
15 January 2001, the
following statement was reported:
The Australian side never expected the
Timorese side would have prepared their position and would make the
claims we did. And from the East Timorese side we never expected
that the Australians would come with such a conservative position.
It was a real shock to both sides.(10)
(Dr Mari
Alkatiri, now Prime Minister of East
Timor)
The article states that the
initial Australia
position was a 60:40 split in favour of
East Timor. The Timor Sea
Treaty eventually established a 90:10 split in favour
of East
Timor.
A further issue that appears to
have caused concern during the negotiation period was
Australia's withdrawal in
March 2002 from the International Court of Justice's jurisdiction
to determine disputes on maritime boundaries. That move was
reported to have 'astonished the international
community'.(11)
The brief but intense debate on
the package of Bills in the Australian Parliament focused largely
on the delays encountered in settling the IUA relating to the
Greater Sunrise field and the obvious urgency of the ratification
legislation. In the Senate, the Australian Democrats and the
Australian Greens specifically recorded that they voted against the
legislation.(12)
The legislation passed the Senate
without amendment on 6 March
2003.
- See the comments of Mr K. W. Wilkie MP,
'Second Reading speech', in the House of Representatives,
Debates, 5 March 2003, p. 12299.
- The Hon Alan Griffiths MP, Minister for
Resources, 'Second Reading speech', Petroleum (Australia-Indonesia
Zone of Cooperation) Bill 1990, House of Representatives,
Debates, 8 May 1990, pp. 68. 70.
- For more detail, see The Timor
Sea Treaty Report 49, Joint Standing Committee on
Treaties, Parliament of the Commonwealth of Australia, November
2002.
- ibid.
- Office of Territory Development, Department
of the Chief Minister for the Northern Territory, internet website
information on Bayu-Undan, www.otd.nt.gov.au, updated on 1
April 2003.
- The Timor Sea Treaty
Report 49, Joint Standing Committee on Treaties, Parliament of
the Commonwealth of Australia, November 2002, p. 5.
- Alert Digest, No. 3 of 2003, Senate
Standing Committee for the Scrutiny of Bills, 19 March 2003,
p.11.
- ibid.
- Geoff Hiscock, 'Oil the fuel for East Timor',
CNN.com/business, 17 May 2002.
- Hamish McDonald, 'Oil is more important to us
than to Australia, says Gusmao', Sydney Morning Herald, 15
January 2001.
- Kalinga Seneviratne, 'Canberra slammed for
"bullying" Timor', Asia Times, 11 March 2003.
- Senate, Debates, 6 March 2003, p.
9399.
Brendan Bailey
28 July 2003
Bills Digest Service
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