East Timor’s only shot
Barely six years old, the country’s sovereign wealth fund is ranked as the third best-run in the world and already has $3 billion under management, growing at $180 million a month. But its cautious approach to investment is proving frustrating in one of the world’s poorest countries. Chris Wright reports.
In dire need of credit
PICTURE TWO COUNTRIES. One has an infant mortality rate of almost 10% and a male life expectancy of 47, while 40% of the population lives under the poverty line. The other has $3 billion in a burgeoning sovereign wealth fund fuelled by oil and natural gas reserves, a figure that will reach $20 billion before long even if market conditions deteriorate. East Timor is both of these places at the same time.
There is surely no country in the world where the sovereign wealth fund is so crucial to the future, the very sustainability of its people’s existence. East Timor is the world’s newest nation, a sovereign state since just 2002, and its oil and gas fields in the Timor Sea really are its only shot. The government estimates $1.39 billion in revenues for 2008 – all but $27 million from oil and gas. Coffee, the second-ranked contributor, accounts for $8 million, 170 times less.
All of this makes the story of the Petroleum Fund, founded in 2005, so remarkable. The Peterson Institute for International Economics, a Washington DC-based independent research group, ranks it the third-best-run sovereign wealth fund in the world based on structure, governance, transparency and accountability, behind those of New Zealand and Norway. The Abu Dhabi Investment Authority ranks 32nd on the same list.
It gets this accolade for its peerless transparency and its commitment to build for the future rather than to spend today: a bid to make sure there’s something left for the country when the oil runs out. On its website one can find up-to-date reports detailing everything it holds, how much it manages, even thoughtful responses to public queries about such things as bond valuations – a far cry from some of its Middle East contemporaries. Its mandate states that in any one year it can only withdraw what it calls estimated sustainable income, which in practice means 3% of the likely near-term assets of the fund, on the grounds that a 3% reduction should be readily replenished by prudent investment. This display of discipline tends to win it applause from overseas commentators but is a source of criticism from people on the ground wondering why they don’t have enough roads and hospitals while oil revenues sit in long-term investments.
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Political instability: President Jose Ramos-Horta survived an assassination attempt in February |
It’s a discipline that comes from having watched others fail. "Where poor countries like Timor-Leste have quickly attained vast amounts of money very quickly, while their human resources and infrastructure still need to be developed, the outcome is usually a failure," says Alfredo Pires, secretary of state for natural resources. "I don’t think I could name a single good example in the world. The challenge is for us to be the first ones to avoid the oil curse."
As of June, the fund had $3 billion under management, a product of revenues from the Bayu-Undan oil and gas field being exploited by a team led by ConocoPhillips. East Timor gets 90% of the taxes and royalties from this field, with Australia taking the other 10%.
This field ought to be good until 2023, and has proven reserves of about 4 trillion cubic feet of natural gas and about 500 million barrels of condensate. Pires estimates that it ought to bring about $10 billion to East Timor over its life.
Then there’s the Greater Sunrise field, with almost twice as much natural gas and about 300 million barrels of condensate besides. It would take a book to describe the painstaking negotiations between Australia and Timor over the development of this field and the maritime boundaries affecting other, still-to-be-found fields (indeed, one has been written: Shakedown by Paul Cleary, who advised the Timorese on the deal) but the outcome was a 50/50 split with Australia on royalties and taxes. Still to be decided, and an increasingly fractious issue, is how Greater Sunrise will be developed: although the field is closer to Timor than to Australia, there is a trench more than 2,000 metres deep on the Timorese side, a geological curiosity that has been at the heart of decades of dispute about maritime law. One side wants the pipeline to go to Darwin, the other to Timor, while the site operator, Woodside Petroleum, is believed to be leaning increasingly to another option altogether – a floating LNG plant. Development won’t start until the involved parties come to a decision. But whatever the outcome, Timor’s revenues from this field ought to reach at least $10 billion too.
What they’ve got
That’s before anything else is considered. For any finds within an area called the Joint Petroleum Development Area, Timor will take 90%. There are proven fields, albeit small ones, within Timorese waters. And nobody has really started looking onshore yet. So, although unpredictable oil and gas prices don’t help with projections, the worst case is really that this fund is going to enjoy $20 billion of revenues, and it is common to hear people talking about $50 billion, and sometimes even twice that.
That creates all sorts of wacky statistics: since the national population is barely 1 million, Timor could end up with a theoretically higher per capita GDP than Australia (although since it has the world’s highest fertility rate – more than seven children per woman – that imbalance is unlikely to stay in place for long). But suffice it to say that the management of the fund is a vast responsibility and of great importance. It is, as David Edwards, vice-president in worldwide securities services at the fund’s custodian JPMorgan, says, "basically all they’ve got".