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
Information and Research Services
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