Shell Heads Singapore Talks On East Timor Hydrocarbon Tax Wrangle

by Mary Swire, Tax-News.com, Hong Kong

04 September 2001

Talks in Singapore over the last few days have gone some way towards resolving the problems over natural gas processing in the Timor Sea which have been aggravated by uncertainty over the tax split on hydrocarbon revenues between Australia and East Timor.

A grouping known as the Sunrise consortium was to have piped gas from a Phillips Petroleum concession to a new processing plant in Darwin, but after Australian and UN-led Timorese negotiators agreed a tax structure seen to be unfavourable to the project, Shell (another member of the consortium) proposed a $4bn floating processing platform which could feed tankers with gas from its own, separate concession, which is largely outside the area covered by the Australian/Timorese tax proposal, and would fall under more beneficial Australian tax legislation.

Phillips Petroleum had obtained a large contract for the gas from US gas utility El Paso, which Shell is offering to fulfil, thus bypassing the Sunrise Consortium, in effect, because Shell proposes 100% ownership of the processing platform. Shell would sign a take or pay contract to buy gas from the Sunrise joint venture and guarantee to fulfil the $20 billion order for 4.8 million tonnes of liquefied natural gas a year starting in 2005 for El Paso.

Talks between the parties had become acrimonious, and the Singapore talks were intended to sort matters out. Shell has clarified its intentions, but the oil and gas giant has said to US company Phillips Petroleum and Perth-based Woodside Petroleum (another Sunrise partner) that if they want a slice of the action, they have to take part of the risk. But yesterday the company said that was not set in concrete. "It's obviously something that can be discussed," a spokesman said, "But if you want to share in the value, you have to share in the risk, and we have already said we are prepared to stand behind it."

The UN/Australian Timor Sea taxation agreement, which would still apply to Phillips gas supplied to Shell's platform for processing (a cheaper route than the pipeline), disfavours Australia for complicated historical reasons. In a nutshell, Australia (the only country to accept East Timor's sovereignty) agreed to a 90/10 split of tax revenues in favour of East Timor on the hydrocarbon because it would benefit from extra tax on the pipeline operations. Obviously if the Shell scheme goes ahead there won't be any pipeline revenue . . .

East Timor's own future revenue base is heavily dependent on tax from the Timor Sea gas deposits, so the UN (on its behalf, because East Timor doesn't exist as a nation yet) has a strong interest in seeing that the Phillips concession does get exploited.

The talks in Singapore involved all the parties in the cooperative agreement covering the exploitation of the Greater Sunrise gasfields - Shell (26.6 per cent), Phillips Petroleum (30 per cent), Woodside Petroleum (33.4 per cent and operator) and Osaka Gas of Japan (10 per cent). Sunrise gas is required for the Darwin LNG plant in 2006 under the terms of the original Sunrise cooperative arrangement.

A stake in the FLNG project would most likely be attractive to Phillips and Woodside because it would be more profitable than just being a straight gas supplier. Under Shell's proposal condensate and gas to supply markets in Australia would also be processed for the Sunrise joint venture on the FLNG barge for a fee.

Shell claims its project would be 40 per cent cheaper than the Phillips proposal and that once the technology was proved other remote offshore gasfields in Australia could be commercialised using FLNG barges.

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