A Critical Review of International Unitisation Agreement (IUA) Signed by Timor-Leste and Australia on 6 of March 2003
by Tomas Freitas
On 1 September 2017 in Copenhagen, Denmark, the Permanent Court of Arbitration called a press conference to update the results of the conciliation between Timor-Leste and Australia. According to the announcement both parties are to be congratulated on their achievements. However, an interpretation of the statements from the Timor-Leste chief negotiator Xanana Gusmao and Australian Foreign Minister Julie Bishop, leave more questions to be answered. As per Xanana Gusmao:
“I thank the commission for its resolve and skill in bringing the parties together, through a long and at times difficult process, to helps us achieve our dream of full sovereignty and to finally settle our maritime boundaries with Australia. This is an historic agreement and marks the beginning of a new era in Timor-Leste’s friendship with Australia” (Permanent Court Arbitration, 2017,pp1)
A similar declaration was spoken by Julie Bishop: “This is a landmark day in the relationship between Timor-Leste and Australia. This agreement, which supports the national interest of both our nations, further strengthens the long-standing and deep ties between our Governments and our people. I thank the commission for its role in bringing both parties together” (Permanent Court Arbitration, 2017, pp2).
Both declarations seem to have their own foundation; let’s examine these statements. On the Timor-Leste side Xanana Gusmao is very confident that the country will achieve the dream of “full sovereignty” which can be interpreted that Timor will have a median line and lateral lines, or in other words that Timor-Leste and Australia will fully draw the lines for their maritime borders. On the other hand, Julie Bishop believes that the agreement has supported both of the national interests. What is the meaning of national interest for Australia?
According to the Australian National Interest document which was tabled on 14 May 2003, Australia has eight fundamental reasons for implementing the International Unitisation Agreement (IUA). One of the essential reasons is that “under Annex E of the Timor Sea Treaty, the Greater Sunrise field is to be unitised on the basis that 20.1% of the fields are located within the JPDA, the remaining 79.9% being attributed to Australia. In line with the general revenue-sharing provisions of that treaty, of the 20.1% of the Greater Sunrise field attributed to the JPDA, 90% of the Petroleum Resources and therefore revenue goes to East Timor, with 10% going to Australia”. (Journal of the Senate, 2003) full document can be read on the Lao Hamutuk website, (Government of Australia, 2003).
by Tomas Freitas
On 1 September 2017 in Copenhagen, Denmark, the Permanent Court of Arbitration called a press conference to update the results of the conciliation between Timor-Leste and Australia. According to the announcement both parties are to be congratulated on their achievements. However, an interpretation of the statements from the Timor-Leste chief negotiator Xanana Gusmao and Australian Foreign Minister Julie Bishop, leave more questions to be answered. As per Xanana Gusmao:
“I thank the commission for its resolve and skill in bringing the parties together, through a long and at times difficult process, to helps us achieve our dream of full sovereignty and to finally settle our maritime boundaries with Australia. This is an historic agreement and marks the beginning of a new era in Timor-Leste’s friendship with Australia” (Permanent Court Arbitration, 2017,pp1)
A similar declaration was spoken by Julie Bishop: “This is a landmark day in the relationship between Timor-Leste and Australia. This agreement, which supports the national interest of both our nations, further strengthens the long-standing and deep ties between our Governments and our people. I thank the commission for its role in bringing both parties together” (Permanent Court Arbitration, 2017, pp2).
Both declarations seem to have their own foundation; let’s examine these statements. On the Timor-Leste side Xanana Gusmao is very confident that the country will achieve the dream of “full sovereignty” which can be interpreted that Timor will have a median line and lateral lines, or in other words that Timor-Leste and Australia will fully draw the lines for their maritime borders. On the other hand, Julie Bishop believes that the agreement has supported both of the national interests. What is the meaning of national interest for Australia?
According to the Australian National Interest document which was tabled on 14 May 2003, Australia has eight fundamental reasons for implementing the International Unitisation Agreement (IUA). One of the essential reasons is that “under Annex E of the Timor Sea Treaty, the Greater Sunrise field is to be unitised on the basis that 20.1% of the fields are located within the JPDA, the remaining 79.9% being attributed to Australia. In line with the general revenue-sharing provisions of that treaty, of the 20.1% of the Greater Sunrise field attributed to the JPDA, 90% of the Petroleum Resources and therefore revenue goes to East Timor, with 10% going to Australia”. (Journal of the Senate, 2003) full document can be read on the Lao Hamutuk website, (Government of Australia, 2003).
As mentioned above, the Timor Sea Treaty 2002 generated the Annex E and the International Unitisation Agreement (IUA) specifies in detail about Annex E. The document was signed on 6 of March 2003 by the former minister of Foreign Affairs Alexander Downer and the former Minister of the Council of Ministers Ana Pesoa. The agreement entered into force on 23 February 2007 after the Timor-Leste National Parliament ratified it on 21 February 2007 and it was signed by the former Speaker of the Parliament Francisco Guterres Lu Olo, currently President of Timor-Leste. The files detail the 79.9/20.1 split of the Sunrise and Troubadour fields between the two countries, which is clearly explained in Article 7 below:
ARTICLE 7
Apportionment of Unit Petroleum
Production of Petroleum from the Unit Reservoirs shall be apportioned between the JPDA and Australia according to the Apportionment Ratio 20.1:79.9, with 20.1% apportioned to the JPDA and 79.9% apportioned to Australia.
The ratio of 79.9% not only includes the size of reservoirs and the revenue from the fields but also controls the natural resources with all Australian laws and regulations as stated in the Article number 4, which concerns Application of Laws (IUA, 2003, pp 4). However, Timor-Leste could try to explore Article number 8 to challenge Article number 7 of the IUA, as one of the possibilities to change the apportionment of the Greater Sunrise fields.
ARTICLE 8
Article number 8 describes the possibilities of Reapportionment of Units of Petroleum in the Greater Sunrise fields. The ratios of 20.1% and 79.9% could change if:
“(a) Either Australia or Timor-Leste may request the Unit Operator to undertake a redetermination of the Apportionment Ratio.
(b) Australia and Timor-Leste shall have regard to the desirability of minimising the number of reviews of the Apportionment Ratio.
(c) Any redetermination of the Apportionment Ratio shall not occur within five (5) years of any prior redetermination, except that a redetermination may occur within twelve (12) months of the commencement of production from the Unit Reservoirs.
(d) The Unit Operator shall use only commercially available software in a redetermination of the Apportionment Ratio. Only data that is available to both Governments as at the date the redetermination is requested shall be utilised by the Unit Operator and all data and analyses pursuant to the Unit Operator’s proposal for the redetermined Apportionment Ratio shall be provided to both Governments with the proposal. The Unit Operator shall use all reasonable endeavours to complete the redetermination within 120 days.
(e) Any change to the Apportionment Ratio arising from a redetermination requested under subparagraph (a) has effect when it is agreed by the Regulatory Authorities or, if referred to an expert for determination, when the expert makes a final decision.
(f) Any change to the Apportionment Ratio shall be retrospective and past receipts and expenditures shall be adjusted.
(2) Notwithstanding paragraph 1, either Australia or Timor-Leste may request a review of the Apportionment Ratio. Following such a review, the Apportionment Ratio may be altered by agreement between Australia and Timor-Leste.” (IUA, 2003, pp5)
Point A states that either Australia or Timor-Leste may request the Unit Operator, in this case Woodside, to undertake a redetermination of the Apportionment Ratio. However, Timor-Leste does not have a good relationship with Woodside because of the debate about the pipeline, which Timor-Leste wants to be located at the future Bee-Asu LNG rather than the floating LNG proposed by the Unit Operator. The question is will Australia comply with a request to change the apportionment ratios?
It is possible to apply point B, if both parties desperately want to increase their production, which means that this point cannot be undertake while production has not yet started. It doesn’t make sense for both parties to agree to changes which would benefit just one party.
But It does make sense for point C, that the Unit Operator needs five years to examine all the requests and proposals before re-determining the apportionment ratios.
The Unit Operator shall use only commercially available software for examining and redetermination of the ratios. However, one party has more advanced technology software than the other party.
Timor-Leste may have a chance to counter Article number 7 by using Article number 8. Although it may be favourable for Timor-Leste to apply article number 8, still both parties would have to amend another Article which is Article number 2, as stated below:
ARTICLE 2
Without prejudice
(1) Nothing contained in this Agreement, no acts taking place while this Agreement is in force or as a consequence of this Agreement and no law operating in the Unit Area by virtue of this Agreement
(a) shall be interpreted as prejudicing or affecting the position of either Australia or Timor-Leste with regard to their respective maritime boundaries or rights or claims thereto; and
(b) may be relied on as a basis for asserting, supporting, denying or limiting the position of either Australia or Timor-Leste with regard to their respective maritime boundaries or rights or claims thereto, (IUA, 2003, pp 3).
Article number 2 clearly does not allow Timor-Leste and Australia to claim their maritime boundary rights. If either party wishes to alter an article, they must follow Article 26 which about Settlement of Disputes, as outlined below:
ARTICLE 26
Settlement of Disputes
(1) Any disputes about the interpretation or application of this Agreement shall be, as far as possible, settled by consultation or negotiation.
(2) Subject to paragraph (3), if a dispute cannot be resolved in the manner specified in paragraph (1) or by any other agreed procedure, the dispute shall be submitted, at the request of either Government, to an Arbitral Tribunal set out in Annex IV.
(3) If a dispute arises concerning a proposal for a redetermined Apportionment Ratio pursuant to Article 8(1) or concerning the measurement, pursuant to Article 24, of quantities of gas and liquids, an expert shall be appointed by Australia and Timor-Leste to determine the matter in question. The two Governments shall, within 60 days of notification by either of them of such a dispute, try to reach agreement on the appointment of such an expert. If, within this period, no agreement has been reached, the procedures specified in Annex V shall be followed. The expert appointed shall act in accordance with the terms of Annex V. The expert’s decision shall be final and binding on both Governments and on the Sunrise Joint Venturers, save in the event of fraud or manifest error. (IUA, 2003, pp 13)
If either party wishes to apply point number one, will they have enough time for consultation and negotiation considering there is only one month left to reach a final agreement? And if the dispute cannot be resolved as specified in point number 1, will both parties start again by registering a new case at the arbitration tribunal? Considering resources and timing, would they be willing to do this again? And if the dispute is in relation to the quantities of gas and liquids, both parties must appoint an expert to act in accordance with the rules and procedures of Annex V; however, at the beginning of this conciliation process, the Australian Foreign Minister Julie Bishop questioned the capability of the commission to exercise their mandate to pursue this case. If it comes to it, will Australia respect the experts?
Conclusion
This paper has analysed in detail any possibilities for Timor-Leste to challenge the IUA; however, the IUA has been designed to benefit one party, which in this case is Australia. The writer believes that both parties may reach a final agreement by ignoring the claims for a maritime boundary and sticking to the original apportionment of ANNEX E. it could also be that both countries just agree to commence exploration by re-adopting the “creative solution” which is a 50:50 share of profits. in this case both Timor-Leste and Australia desperately want to commence the development of Greater Sunrise because Timor-Leste has almost exhausted revenue from Bayu-Undan and Australia’s Wickham Point LNG storage facility might be abandoned in coming years without a supply of gas.
References
Government of Australia., 2003. ‘Australian National Interest’, available at http://www.laohamutuk.org/Oil/Boundary/2002/IUAnia.pdf
International Unitisation Agreement., 2003. Available at http://www.laohamutuk.org/Oil/Boundary/IUA.pdf
Permanent Court of Arbitration, 2017., ‘Conciliation between the Democratic Republic of Timor-Leste and the Commonwealth of Australia’, Press Release, No 9, 31st of September 2017. Available at https://pcacases.com/web/sendAttach/2230
The Parliament Of The Commonwealth Of Australia., 2003. ‘Australian National Interest’, Journal of The Senate. No 76. 14 May 2003. Available at http://www.aph.gov.au/binaries/senate/work/journals/2003/jnlp_076.pdf
ARTICLE 7
Apportionment of Unit Petroleum
Production of Petroleum from the Unit Reservoirs shall be apportioned between the JPDA and Australia according to the Apportionment Ratio 20.1:79.9, with 20.1% apportioned to the JPDA and 79.9% apportioned to Australia.
The ratio of 79.9% not only includes the size of reservoirs and the revenue from the fields but also controls the natural resources with all Australian laws and regulations as stated in the Article number 4, which concerns Application of Laws (IUA, 2003, pp 4). However, Timor-Leste could try to explore Article number 8 to challenge Article number 7 of the IUA, as one of the possibilities to change the apportionment of the Greater Sunrise fields.
ARTICLE 8
Article number 8 describes the possibilities of Reapportionment of Units of Petroleum in the Greater Sunrise fields. The ratios of 20.1% and 79.9% could change if:
“(a) Either Australia or Timor-Leste may request the Unit Operator to undertake a redetermination of the Apportionment Ratio.
(b) Australia and Timor-Leste shall have regard to the desirability of minimising the number of reviews of the Apportionment Ratio.
(c) Any redetermination of the Apportionment Ratio shall not occur within five (5) years of any prior redetermination, except that a redetermination may occur within twelve (12) months of the commencement of production from the Unit Reservoirs.
(d) The Unit Operator shall use only commercially available software in a redetermination of the Apportionment Ratio. Only data that is available to both Governments as at the date the redetermination is requested shall be utilised by the Unit Operator and all data and analyses pursuant to the Unit Operator’s proposal for the redetermined Apportionment Ratio shall be provided to both Governments with the proposal. The Unit Operator shall use all reasonable endeavours to complete the redetermination within 120 days.
(e) Any change to the Apportionment Ratio arising from a redetermination requested under subparagraph (a) has effect when it is agreed by the Regulatory Authorities or, if referred to an expert for determination, when the expert makes a final decision.
(f) Any change to the Apportionment Ratio shall be retrospective and past receipts and expenditures shall be adjusted.
(2) Notwithstanding paragraph 1, either Australia or Timor-Leste may request a review of the Apportionment Ratio. Following such a review, the Apportionment Ratio may be altered by agreement between Australia and Timor-Leste.” (IUA, 2003, pp5)
Point A states that either Australia or Timor-Leste may request the Unit Operator, in this case Woodside, to undertake a redetermination of the Apportionment Ratio. However, Timor-Leste does not have a good relationship with Woodside because of the debate about the pipeline, which Timor-Leste wants to be located at the future Bee-Asu LNG rather than the floating LNG proposed by the Unit Operator. The question is will Australia comply with a request to change the apportionment ratios?
It is possible to apply point B, if both parties desperately want to increase their production, which means that this point cannot be undertake while production has not yet started. It doesn’t make sense for both parties to agree to changes which would benefit just one party.
But It does make sense for point C, that the Unit Operator needs five years to examine all the requests and proposals before re-determining the apportionment ratios.
The Unit Operator shall use only commercially available software for examining and redetermination of the ratios. However, one party has more advanced technology software than the other party.
Timor-Leste may have a chance to counter Article number 7 by using Article number 8. Although it may be favourable for Timor-Leste to apply article number 8, still both parties would have to amend another Article which is Article number 2, as stated below:
ARTICLE 2
Without prejudice
(1) Nothing contained in this Agreement, no acts taking place while this Agreement is in force or as a consequence of this Agreement and no law operating in the Unit Area by virtue of this Agreement
(a) shall be interpreted as prejudicing or affecting the position of either Australia or Timor-Leste with regard to their respective maritime boundaries or rights or claims thereto; and
(b) may be relied on as a basis for asserting, supporting, denying or limiting the position of either Australia or Timor-Leste with regard to their respective maritime boundaries or rights or claims thereto, (IUA, 2003, pp 3).
Article number 2 clearly does not allow Timor-Leste and Australia to claim their maritime boundary rights. If either party wishes to alter an article, they must follow Article 26 which about Settlement of Disputes, as outlined below:
ARTICLE 26
Settlement of Disputes
(1) Any disputes about the interpretation or application of this Agreement shall be, as far as possible, settled by consultation or negotiation.
(2) Subject to paragraph (3), if a dispute cannot be resolved in the manner specified in paragraph (1) or by any other agreed procedure, the dispute shall be submitted, at the request of either Government, to an Arbitral Tribunal set out in Annex IV.
(3) If a dispute arises concerning a proposal for a redetermined Apportionment Ratio pursuant to Article 8(1) or concerning the measurement, pursuant to Article 24, of quantities of gas and liquids, an expert shall be appointed by Australia and Timor-Leste to determine the matter in question. The two Governments shall, within 60 days of notification by either of them of such a dispute, try to reach agreement on the appointment of such an expert. If, within this period, no agreement has been reached, the procedures specified in Annex V shall be followed. The expert appointed shall act in accordance with the terms of Annex V. The expert’s decision shall be final and binding on both Governments and on the Sunrise Joint Venturers, save in the event of fraud or manifest error. (IUA, 2003, pp 13)
If either party wishes to apply point number one, will they have enough time for consultation and negotiation considering there is only one month left to reach a final agreement? And if the dispute cannot be resolved as specified in point number 1, will both parties start again by registering a new case at the arbitration tribunal? Considering resources and timing, would they be willing to do this again? And if the dispute is in relation to the quantities of gas and liquids, both parties must appoint an expert to act in accordance with the rules and procedures of Annex V; however, at the beginning of this conciliation process, the Australian Foreign Minister Julie Bishop questioned the capability of the commission to exercise their mandate to pursue this case. If it comes to it, will Australia respect the experts?
Conclusion
This paper has analysed in detail any possibilities for Timor-Leste to challenge the IUA; however, the IUA has been designed to benefit one party, which in this case is Australia. The writer believes that both parties may reach a final agreement by ignoring the claims for a maritime boundary and sticking to the original apportionment of ANNEX E. it could also be that both countries just agree to commence exploration by re-adopting the “creative solution” which is a 50:50 share of profits. in this case both Timor-Leste and Australia desperately want to commence the development of Greater Sunrise because Timor-Leste has almost exhausted revenue from Bayu-Undan and Australia’s Wickham Point LNG storage facility might be abandoned in coming years without a supply of gas.
References
Government of Australia., 2003. ‘Australian National Interest’, available at http://www.laohamutuk.org/Oil/Boundary/2002/IUAnia.pdf
International Unitisation Agreement., 2003. Available at http://www.laohamutuk.org/Oil/Boundary/IUA.pdf
Permanent Court of Arbitration, 2017., ‘Conciliation between the Democratic Republic of Timor-Leste and the Commonwealth of Australia’, Press Release, No 9, 31st of September 2017. Available at https://pcacases.com/web/sendAttach/2230
The Parliament Of The Commonwealth Of Australia., 2003. ‘Australian National Interest’, Journal of The Senate. No 76. 14 May 2003. Available at http://www.aph.gov.au/binaries/senate/work/journals/2003/jnlp_076.pdf
