1. Presentation by Charles Scheiner to 25 Years of IPJET Conference
29 May 2017
Timor-Leste’s oil wealth: Financing government, building for development and providing for people
Presentation by Charles Scheiner to 25 Years of IPJET Conference
Lisbon, Portugal
29 May 2017
In 1991, IPJET joined the people of Timor-Leste in struggling for their legal right to self-determination. At the same time, people in the U.S. formed ETAN, the East Timor Action Network. After the Timorese people restored imminent independence in the 1999 referendum, we both asked our friends there what they needed from international solidarity.
Many had similar answers – “we’ve been isolated and focused on our struggle against Indonesia, and haven’t had the chance to learn about the world. Our country is being flooded with institutions we know little about — and they all tell us what’s best for our people. We know enough not to believe everything they say – but please help us understand what they want, who they serve, what they have done in other places, and how we can ensure that their presence supports the Maubere people.”

2. La’o Hamutuk?
The Timor-Leste Institute for Development Monitoring and Analysis, founded in May 2000.
Timorese and international supporters “walking together” on the journey to create a new nation.
An independent, Timorese, non-governmental organization which does research, policy analysis, public education and advocacy.
Working toward participatory, equitable, sustainable and evidence-based policies and practices.
Seventeen years ago last week, La’o Hamutuk was formed in response to that request, as an independent, small, local civil society organization. We began to analyze and report on international organizations active in Timor-Leste. We encouraged them, and later Timor-Leste’s own government, to strengthen political sovereignty (including the maritime boundary with Australia), legal accountability (including ending impunity for crimes against humanity committed during the Indonesian occupation), environmental protection, and sustainable, equitable economic development.

3. 29 May 2017
Petroleum Dependency
(million current US dollars)
2013
2014
2015
Petroleum GDP
$4,234 (75%)
$2,591 (64%)
$1,496 (48%)
Non-oil GDP
$1,410 (25%)
$1,451 (36%)
$1,607 (52%)
Productive (agric. & manuf.)
$289
$295
$293
Projected state revenues in 2017:……….. $1,312 million $843 million (64%) from investing the Petroleum Fund $263 million (20%) from oil and gas revenues $206 million (16%) from non-petroleum sources
2017 State Budget:…………………………… $1,387 million $1,079 million (78%) directly from the Petroleum Fund $ million (15%) from non-petroleum (domestic) revenues $ million ( 7%) from loans which will have to be repaid with interest
State activities, paid for with oil money, are about half of the “non-oil” economy, because some of this money circulates locally.
Petroleum “income” goes to the government, not the people.
Today I’m going to talk a little about the last point – the implications of Timor-Leste having been one of the most petroleum-export-dependent countries in the world, and possible consequences and adaptations as that era comes to an abrupt end. As we heard earlier, the independence struggles of both Western Sahara and West Papua are also entangled with non-renewable resources, and I hope Timor-Leste’s experience can provide some lessons for them as well.
Moving away from petroleum dependency
Although oil companies have explored Timor-Leste for oil and gas for more than a century, large-scale extraction activities began in the Timor Sea in the late 1990s. Since then, Timor-Leste’s government has received about US $21 billion in oil revenues from Elang-Kakatua, Kitan and Bayu-Undan – and only about $0.4 billion more remains.
[Since 1998, Australia has taken in nearly $5 billion that should legally belong to Timor-Leste, about half from their 10% share of those three fields, and half from Laminaria-Corallina, which is just outside the Joint Development Area and has paid nothing to Timor-Leste.]
Only South Sudan, Libya (and Equatorial Guinea?) are more dependent on oil and gas exports than Timor-Leste was.

4. Oil and gas income has been falling since 2012.
Production is dropping faster than prices, and will not go back up.
Revenue falls even faster as production costs increase.
Timor-Leste has wisely invested most of its oil income in its Petroleum Fund, whose investments have earned more than $3.8 billion. Timor-Leste’s government has spent nearly $9 billion of the money from oil and investments, and about $16 billion remains in the Fund, whose balance peaked about two years ago and has begun to decline. Between 2002 and 2016, oil money paid for 83% of all government spending. The Ministry of Finance expects the Petroleum Fund to finance 75% of state activities during the next five years, although oil and gas income in 2016 was only one-eighth of its 2012 peak.
[This is after adjusting for taxes that were over-assessed in and refunded to the companies in Actual revenues received in 2016 were 1/16 as much as were received in 2012.]

5. Spending now exceeds income.
If you consider the Petroleum Fund as part of the state, Timor-Leste went into deficit in 2015, and the funding gap will increase significantly after this year. All of the numbers I have used so far come from government reports, but the government does not release projections more than five years into the future. Therefore, La’o Hamutuk made our own estimates, and we expect that the Petroleum Fund could be entirely empty within a decade if the state pays for all the things it intends to build.

6. State Budgets 2002-2017 Where the money goes
Ten years ago, oil revenues began to surge, a new government was elected, and Timor-Leste’s state budget became the second-fastest growing in the world. Expenditures increased ten-fold between 2005 and 2012.

7. Budgeted & executed spending
Although budget escalation has moderated since then, spending continues to go up and, since 2014, recurrent spending has been far more than the sustainable income from the Petroleum Fund. The government expects this to continue through at least 2021.

8. The money doesn’t match the promises.
Timor-Leste’s leaders say that their priorities are health, education, agriculture and water supply. Unfortunately, all four of these together will get only one-fifth of state spending this year. More money goes for roads and other physical infrastructure, veterans and other pensions, and the machinery of government.

9. ‘Priority’ sectors get less resources than they did three years ago, but veterans get more.
Half of the people in Timor-Leste are under 20 years old, and 60% make their livelihoods as farmers, but appropriations for education and agriculture have been dropping during the last four years. Education spending has been cut by 20%, even as the number of school-age children went up by 10%. Child malnutrition is among the highest in the world, yet spending on health is lower than it was in 2014 – and is less than half of the norm for developing countries.
Time does not allow a detailed discussion of other programs which consume state resources but may not provide social or economic returns greater their financial, social and environmental costs. The Tasi Mane project, the Oecusse special zone and three international airports will absorb billions of dollars without benefitting most people. In addition, Timor-Leste is borrowing more than a billion dollars to build infrastructure, which will have to be repaid after the Petroleum Fund is gone. La’o Hamutuk estimates that basic services, already far below what people deserve, may have to slashed by 85% in about ten years.

10. Oil dropped from 82% to 48% of GDP in three years and will continue to fall.
Oil money and the economy
If Timor-Leste can develop a strong, diverse economic base, this austerity will not be necessary. Unfortunately, the so-called ‘non-oil economy’ is still not strong enough to sustain the country.

11. The ‘non-oil’, non-state GDP is stagnant.
About half of the ‘non-oil’ economy is fueled by state spending of oil money, as exemplified by construction and public administration. After adjusting for population growth and inflation, the productive sectors of agriculture and manufacturing have shrunk during the fifteen years since independence.
La’o Hamutuk believes that GDP gives a misleading picture of how an economy serves its people, especially when more than 40% live below the poverty line. We think it is more appropriate to count people, not dollars.

12. What do 672,000 Timorese people aged 15-64 do for work?
Only about a quarter of the working-age population are in the formal economy – the rest are subsistence farmers or fisherpeople, not working for income, or students. Of those who work for dollars, roughly equal numbers work for the government, the private sector, and very small family businesses. Although this picture shows that there is tremendous under-utilized human potential, it also shows the challenges of expecting private companies, such as foreign investors or the oil industry, to build the country’s economy.
The post-war baby boom is reaching working age, and the potential labor force will increase by about 19,000 this year and even more in the future. Projects like Heineken, TL Cement and Tasi Mane will each employ fewer people than join the labor force in a single month. A more holistic approach to economic development is clearly needed, concentrating on agriculture and production for local consumption.
The potential workforce grows by 19,000 people every year.

13. Since 2015, more money goes out than comes in.
2016 trade: services non-oil goods total Imports $603m $559m $1,162m Exports $ 77m $ 20m (99% coffee) $ m Deficit $526m $539m -$1,063m
Another way to look at Timor-Leste’s economy is to examine the money flowing in and out of the country. We import more than $500 million worth of goods each year, and about the same amount of services. Non-oil goods exports, almost all coffee, are around $20 million. As the red line in the graph shows, our non-oil trade deficit is about a billion dollars each year, and hasn’t changed much since The green line shows the balance after oil revenues and returns from investing the Petroleum Fund are added in. This first fell below zero two years ago, and will converge with the red line as the Petroleum Fund is depleted. Although the deficit may decline after Timor-Leste has no more money to pay for imports, the effects on people will be disastrous if local production has not significantly improved.

14. Our seas have been explored for 50 years. There may be no other fields.
What does the future hold?
Bayu-Undan is almost empty, with less than a half-billion dollars more expected. Although petroleum sector officials raised public hopes last week by announcing that the government has approved ConocoPhillips to drill more wells in that field, this is not something to celebrate. The cost of these wells, which are necessary to extract the last puddles of oil and gas from the nearly-exhausted reserve, will come out of Timor-Leste’s revenues.
Development of the Greater Sunrise oil and gas field, which is somewhat larger than Bayu-Undan, has been delayed due to disagreements with Australia about maritime boundaries and disagreements with the oil companies about where to liquefy the natural gas. The government has recently awarded no-bid contracts to national oil company TimorGAP to explore onshore and offshore for new fields, but prospects are limited. It would be foolhardy to pin Timor-Leste’s future on the faint possibility that deposits were missed during more than half a century of exploration.
While talking about economic diversification, policymakers continue to dream of wealth obtained without facing the daunting challenges of developing Timor-Leste’s workforce and productive sectors. Parliament is discussing a mining law, and government is proposing to create a state-owned Mining Company and a Minerals Fund, although Timor-Leste’s limited reserves of non-precious minerals have nowhere near the value of already-exploited petroleum fields.
In addition, tax holidays and a new private investment law and policy hope to attract foreign investors, who will take more money out of Timor-Leste than the capital they bring in. A huge new container port will make it harder for local products to compete with imports, as will free trade agreements that come with ASEAN membership.

15. Scheiner to IPJET 25th anniverary
29 May 2017
What’s in their future?
In addition, tax holidays and a new private investment law and policy hope to attract foreign investors, who will take more money out of Timor-Leste than the capital they bring in. A huge new container port will make it harder for local products to compete with imports, as will free trade agreements that come with ASEAN membership.
La’o Hamutuk is hopeful about the future of Timor-Leste, provided that policy-makers change course soon and prioritize renewable sectors which involve many people and are realistically sustainable. These include:
Food production, primarily for local consumption
Agricultural processing, so that more of the money from our crops stays in the country
Light industry, to manufacture products used locally and to reduce imports
Eco-tourism which makes use of the country’s unique advantages and potential markets, rather than trying to divert business from Bali’s luxury resorts
Remittances from Timorese workers who are temporarily overseas, while encouraging them to come home and contribute more to the development of the nation.

16. Use
The struggle for sustainable, equitable economic sovereignty – building a diversified economy which can fulfill the economic and social rights of the poorest and most vulnerable – is more complex and difficult than overcoming the Indonesian occupation. Without a common enemy like Indonesia, it is harder to unify people, especially when a small part of the population is doing well from public money, either as contract brokers or implementers, or as advisors or pensioners paid by the state.
Timor-Leste’s greatest resource is its people, and history has proven that they can endure tremendous hardships while achieving victory against overwhelming odds. The country would not be independent today except for their persistence and the support of IPJET and other international friends. odds. The country would not be independent today except for their persistence and the support of IPJET and other international friends.

17. Thank you. You will find more and updated information at
La’o Hamutuk’s website
La’o Hamutuk’s blog
Timor-Leste Institute for Development Monitoring and Analysis
Rua D. Alberto Ricardo, Bebora, Dili, Timor-Leste
Mailing address: P.O. Box 340, Dili, Timor-Leste
Telephone: (mobile) (landline)
We each need to encourage our own governments, including the one in Dili, to prepare for the end of oil, and to leverage what’s left of Timor-Leste’s limited natural resource endowment to invest in a country, economy and society which build on their own strengths to provide for all of Timor-Leste’s people.
Time is running out.
Thank you.

18. The rest of these slides provide additional information about topics discussed in this presentation. They are part of a longer presentation which is at

19. Basic Statistics Nearly half of Timor-Leste’s people live in poverty.
Two-thirds of our people live in rural areas, largely by subsistence farming.
About 1,200 Timorese children under 5 years old die from preventable conditions every year … 15 times the number of people who die from physical violence.
Poor sanitation and malnutrition are endemic.

20. Where TL’s oil income comes from

21. Oil income is lower than expected.
Timor-Leste has already received 98% of the revenue from Bayu-Undan and Kitan, and they will end entirely in 2021.

22. We’ve moved from oil dependence to relying on our declining savings.
The balance has been dropping for nearly two years.

23. We’re spending down our savings.
Expected future revenues dropped by more than half from the 2013 budget to the 2014 one, and dropped further when the 2015 budget was proposed two weeks ago.
The Petroleum Fund balance at the start of 2016 was $16.2 billion, significantly lower than the $16.6b that the Ministry of Finance expected six months earlier. It was $15.8b at the end of 2016; the Ministry had expected $15.6b.

24. Income in the 2017 state budget
29 May 2017
Income in the 2017 state budget
Total revenue: $1,387 million, of which 85% is from past, present and future oil and gas income.

25. 29 May 2017
If current plans continue, TL will be unable to finance its budget in ten years.

26. The 2017 Budget still neglects farmers, students, and health care.
Although health and education are gradually getting more resources, Timor-Leste is still spending 40% less than other well-managed developing countries, although our large child population puts our needs higher than average.
Agriculture, the livelihood of 75% of our people, gets only 2% of state spending, reduced from the 2013 budget.

27. Real Threats to Real Security
Human security is health care, food, education, employment, housing, etc.
20 times as many Timorese children under five die from avoidable conditions as people are killed by violence.
These children will not be helped by police, soldiers or judges, but many donors prioritize the “security sector,” seeing everything through a conflict lens.
We must diversify our economy and strengthen our people and workers to prepare for the day our oil runs out and we can no longer pay for imports.

28. Many children are becoming youth.
Scheiner to IPJET 25th anniverary
29 May 2017
Many children are becoming youth.
Timor-Leste is struggling to find jobs for 19,000 people who will enter the work force in 2017.
By 2024, it will be about 28,000/year, and the oil will be gone. Today’s youth will have their own children.

29. Tasi Mane petroleum infrastructure project
In 2010, TL began the South Coast Petroleum Corridor.
During , TL already spent $286 million on it.
Total project costs could be more than $15 billion if Timor-Leste pays for the refinery, pipeline or LNG plant.
The 2017 budget allocates $65m in 2017 and $1.62 billion in , but leaves out the biggest items.
The largest contract in TL history was signed in 2015: $719 million to build the Suai Supply Base. It was ruled invalid.

30. The Greater Sunrise stalemate
The project is stalled because Timor-Leste and the companies do not agree on how it should be developed.
Woodside and its partners Shell, ConocoPhillips and Osaka Gas believe a floating LNG plant in the sea is the most profitable.
Timor-Leste wants a pipeline from Sunrise to Beaçu, to get more tax revenues and anchor the Tasi Mane project.
Under contracts and treaties, the companies can choose the path, but both governments need to approve it.
TL could have withdrawn from most of CMATS at any time before a development plan is approved.
Because of Australian spying, TL successfully pressured Australia to invalidate all of CMATS in January 2017.

31. Problems with the Tasi Mane project
It makes TL more dependent on the oil and gas sector.
Dubious concepts and planning; it is unlikely to provide a reasonable return on investment.
It neglects sustainable development (agriculture, tourism, small industries etc.), exemplifying the obsession with oil.
Nearly all the billions spent will go to foreign companies, providing hardly any local jobs or subcontracts.
It will create social conflict, take up land, displace people, worsen health and degrade and endanger the environment.
Cost projections leave out most expenditures, including nearly all of the highway, LNG plant and refinery.
What if Sunrise gas doesn’t come to Timor-Leste?
The Government has made many unrealistic promises to local communities about profit-sharing, jobs and other benefits.

32. Special Market Zone in Oecusse
In 2016, ZEESM got $218 million with no accountability.
What are Oecusse’s competitive advantages?
Can ZEESM justify a $4 billion investment?
Who benefits: residents of Oecusse or political ex-opposition?
Who benefits: residents of Oecusse or political opposition?

33. Overbuilding ports and airports
IFC is encouraging Timor-Leste to build a port and airport far beyond realistic traffic expectations.
How will the country pay for a $6 billion annual trade deficit after the oil is gone?
Traffic forecast for Tibar Port

34. Timor-Leste is going deeper into debt.
Laws in 2009 opened the door to foreign loans.
In 2012, Timor-Leste signed contracts to borrow $107 million from Japan and from the ADB.
In 2013, TL signed for $90m more from ADB and World Bank. In 2015, TL signed for $12m more from ADB. In December 2015, TL borrowed $50m from China’s Ex-Im bank. In March 2016, TL signed for another $76m from the ADB. In April 2017, TL signed for $35m more from the World Bank.
During , TL hopes to borrow about $1.3 billion:
2016
$50m
2017
$102m
2018
$223m
2019
$399m
2020
$300m
2021
$200m
Total
$1.27bn

35. Loans will have to be paid back.
29 May 2017
Loans will have to be paid back.
Changes in the PF law in 2011 allow it to be used as security for loans.
But even if it isn’t legal collateral, any unpaid creditor will go after all state assets to try to recover their money.