East Timor possesses only 0.04% of the world's known oil reserves – with its known reserves around only half of those of Brunei, according to one estimate. But for a small, poor nation of roughly 1 million people, this is still very significant.

When the country gained independence in 2002, revenues were already streaming into Timorese coffers from the area south of the island called the Timor Gap. Even though Australia and East Timor have yet to agree on final maritime boundaries, the oil coming from Timorese oil fields is already the country's greatest source of revenue. (There is also yet-to-be-exploited natural gas in the Timor Gap.)

Image by SkyTruth shared under a CC license

Donors and Timorese leaders were keen to prove that petroleum resources could be a blessing and not a curse, calling in experts from Norway to learn from that country's famous Sovereign Fund.

The basic idea: set aside the massive influx of revenues and spend only what is earned from careful investment of that revenue. A sovereign fund, called the Petroleum Fund, was designed and its existence even alluded to in the Constitution. The subsequent Petroleum Fund Law has very strict and specific wording in relation to what can be withdrawn from the fund.

As Lu Olo, formerly a resistance leader, said in his (unsuccessful) 2007 presidential campaign [tet]:

Osan ne‘e foin maka iha tinan ida ne‘e, liu husi Orsamentu Jeral do Estado, nebé hasai husi Fundo Mina Rai. Osan mira rai nian, fahe tuir kanal estadu nian, la‘os fahe arbiru deit, hanesan esmola ne’eb’e ema riku fó ba ema kiak. Osan Mina Rai nian pertense ba povu.. Povu iha direito ba hetan benefísius dezenvolvimentu nian. Timor-Leste nia. ósan, fo tuir Fundu Komunitáriu nian, la‘os halo karidade. La halo hanesan, foin dadaun ema balu fahe mantas nebé mai husi rai seluk. Fundu Komunitáriu simu osan nebé transfere tuir leis, tuir direitos povu nian, hahú kedas hó Asembleia Konstituinte. Ne‘e osan povo nian ba ajuda povu. Ne maka independénsia. Hamrik no tani nafatin prinsipius nebé hamanas ita nia laran no halu ita luta ho brani iha Frente Armada, iha Frente Klandestina nor Frente Diplomatika Ne‘‘e maka nasionalismu lolós, ne maka independensia lolós.

The Petroleum Law states that no more than the Estimated Sustainable Income (ESI) shall be drawn down in any given year from the Petroleum Fund. The Law allows for the exceeding of this Income only with Parliamentary approval. The ESI is the key mechanism by which future generations are guaranteed benefits from the natural resources long after they have run out. On any given year the value of the ESI depends on the price of oil and other factors.

The current coalition government in Timor, which came to power in 2007, controversially drew down more than this “sustainable income” in 2008 and 2009 – invoking a clause in the Petroleum Fund Law allowing for exceptional transfers from Fund. The issue was taken to the highest level of the Timorese judiciary in late 2008.

Increases in recurrent expenses, such as subsidies for food and salaries for civil servants and parliamentarians, along with large infrastructure projects have dramatically increased government budgets.

West Timor's local petrol stations by Ernst Neumeister

In its Annual Report for 2009, local NGO Luta Hamutuk refers to people from Ermera District asking questions about the oil money during a community briefing

Participants asked for clarification in respect of petroleum fund law […] since reality had showed that government had taken beyond 3% [ESI] to be put into state general budget. Why after such money being taken, still that many of infrastructure projects like roads, schools, and clinics have been performed inappropriately? Where does the money go? Is there any indication of corruption?

Even powerful international institutions have sounded the alarm in their own way. La'o Hamutuk, an NGO set up to monitor Timor's post-independence development, quoted the World Bank's Country Director as saying in April 2009

If expenditure continued to expand at 25 percent per annum, and if medium-term oil prices were to stabilize at about $60 per barrel, which is not impossible, then the Petroleum Fund would be completely exhausted within 8-10 years.

Blog Loron Ecónomico pointed out [pt] that the Petroleum Fund's value actually decreased for the first time between November and December of 2009:

Por ele se pode verificar que entre o fim de Novembro e o fim de Dezembro passados o Fundo viu o seu capital baixar de 5.464,4 milhões de dólares para 5.376,6 milhões. Isto ficou a dever-se principalmente à combinação de dois factores: uma perda de valor dos títulos que constituem o Fundo Petrolífero devido à queda das bolsas internacionais, por um lado, e e à transferência para o Orçamento Geral do Estado de um pouco mais de 150 mil dólares.

Verificou-se, pois, uma queda do valor do Fundo durante o mês de Dezembro de 2009.

This year, the Petroleum Fund Law is up for review and this could lead to significant changes in the management of Timor's oil wealth.

Another potentially huge change is the creation of a National Oil Company. There may be political consensus around the idea, given that the current government is moving boldly ahead with the creation of the National Petroleum Authority, and the opposition while in government also appeared to favor a National Oil Company.

Last year, Vice Prime Minister (and one-time Governor of Indonesian Timor) Mário Carrascalão said to an international conference on the topic

80% of state revenues come from oil but those revenues are not produced by us. We are just watching other companies develop our resources. It is like before under the Portuguese occupation. It was the same; we just watched. It was also the same under the Indonesian occupation; we just watched. Now there is no occupation. But we are taking the rewards for work done by others.

For sure, we are lacking experience. But the time is right, now.

One real concern is that a National Oil Company would probably pay better than government regulatory bodies, and could draw away all of the talent from regulating the oil and gas sector. Besides a lack of trained people to work for the Company, one of the issues will be how it pays for capital investments necessary for its growth. (The suggestion that capital could come directly from the Petroleum Fund has some worried.)

Along with the issue of Land, debates over the Petroleum Law and the National Oil Company will likely be heated this year, and continue to gain importance over the coming years.

(Des)envolvimentu by Timor Cartoon shared under a CC license.

Poet “Minarai” (meaning “Oil” in Tetum) shared a sobering sentiment on the group poetry blog Timor Do Norte ao Sul [pt]

QUANDO O PETROLEO DORMIA
NO NOSSO TEMPO DE INFANCIA
PAZ E AMOR SEMPRE EXISTIA
POBREZA NAO TINHA IMPORTANCIA

AGORA LIQUIDO INFERNAL
QUE ACORDASTE EM TERRA MINHA
TROUXESTE GRANDE VENDAVAL
MATANDO O AMOR QUE A GENTE TINHA

This post was the first of a series of two on Timor's natural resource wealth. The second post will look at the ongoing negotiations over maritime boundaries, future natural gas exploration in the Timor Sea, and the issue of a pipeline.