The New Geopolitics of Energy
By almost any measure, Southeast Asia is thriving. The region has a population of over 600 million, brings in more foreign investment than China, and boasts a combined GDP of $2.5 trillion, larger than India’s $1.9 trillion economy. It is no wonder, then, that Indonesia, Malaysia, Singapore, and their neighbors have received plenty of international praise in recent years.
But there is an outlier in the region, and it tends to go unnoticed. In the 12 years since gaining independence, Asia’s youngest country, the Democratic Republic of Timor-Leste -- better known as East Timor -- has struggled in almost every facet of economic and political management. The country recently submitted a formal application to join its ten neighbors in the Association of Southeast Asian Nations (ASEAN), but it’s difficult to see how it belongs in the club. As its neighboring economies boom, East Timor is quietly on the path to becoming a failed state. And it is quickly running out of time to change course.
ADDICTED TO OIL
East Timor’s path to independence was long and difficult. In the mid-1700s, the Portuguese colonized the eastern half of the island of Timor, as the Dutch took control of the western end (which later became part of Indonesia’s territory). Over the next two centuries, Portugal all but forgot about its colonial outpost, using it only for small-scale trade purposes. In 1974, as Portugal decolonized its empire following a revolution in Lisbon, East Timor was freed. But the respite was brief. Beginning in late 1975, East Timor suffered a brutal 24-year military occupation by Indonesia (which sought to control both halves of Timor); over 100,000 East Timorese were killed during this period. In 1999, the UN finally intervened to secure the area’s independence. After two years of transitional government overseen by the UN, East Timor became a sovereign nation in 2002.
Post-independence, the country suffered periodic episodes of conflict, most notably in 2006, when violent riots against government forces caused the displacement of 150,000 people, and in 2008, when military rebels attempted to assassinate Prime Minister Xanana Gusmão and then President José Ramos-Horta.
Over the past six years, the tide of violence has mostly receded. But the relative calm has revealed East Timor’s many other pressing problems. Unemployment is rampant (roughly 20 percent), and 37 percent of the population lives below the international poverty line, surviving on less than $1.25 per day. East Timor sits at the bottom of the Global Hunger Index (alongside Burundi, Comoros, Eritrea, and Sudan), with more than half of the country’s children suffering from chronic malnutrition and stunted growth. The government has failed to make basic investments in health services, education, or appropriate kinds of infrastructure (although it has poured millions into inessential infrastructure projects). Any travel outside the capital city of Dili requires navigating treacherous mountain roads that are in shockingly poor condition.
What little economic growth East Timor has experienced is almost entirely due to natural resource extraction. East Timor is one of the most oil-and-gas-dependent nations in the world, relying heavily on the export of petroleum deposits under the Timor Sea. According to Charles Scheiner, a researcher at La’o Hamutuk, a Dili-based think tank, the oil and gas industry accounts for nearly 80 percent of East Timor’s GDP and 95 percent of state revenues.
But East Timor’s two major reserves, the Bayu-Undan field (operated by the U.S. energy company ConocoPhillips) and the Kitan field (operated by the Italian energy company Eni), are depleting rapidly, with production projected to end by 2020. (By contrast, Southeast Asian neighbor Brunei, with just a third of East Timor’s population, has at least 20 times the amount of oil and gas reserves. Brunei also has greater potential to discover new reserves in its maritime territory in the coming decades.)
Beyond Bayu-Undan and Kitan, there is a potential third project in the Timor Sea -- the Greater Sunrise gas field. But this project has not gained any traction due to Dili’s ongoing disagreements with Woodside, ConocoPhillips, and Royal Dutch Shell, the foreign energy companies operating the field. Dili would like to develop a pipeline to a processing plant on the Timorese coast in order to create local jobs, but the petroleum firms prefer an offshore facility that would benefit their bottom line. Hence, Greater Sunrise is far from being a sure-fire contingency plan for East Timor.
The East Timorese government insists that its $16 billion Petroleum Fund of Timor-Leste -- the sovereign wealth fund responsible for saving and investing the country’s existing oil and gas revenues -- will keep the country afloat even after oil and gas production comes to a halt. But, like the country’s oil wells, that account is drying up. The government is withdrawing billions of dollars to pay for physical infrastructure, services, and other programs, which is likely to exhaust the entire Petroleum Fund by 2025, according to La’o Humutuk. Beyond that point, politicians would have to slash the state budget by at least two-thirds (even if a deal is reached on the Greater Sunrise field) in order to keep the country on a solvent course.
The fact that East Timor has been able to depend, until now, on natural resource extraction has given it few incentives to develop a more diversified economy. The country’s only other export is coffee, which yielded only $16 million in 2013 (compared to $3 billion from oil and gas). Even if production of coffee and other cash crops is ramped up, it won’t be able to close the petro gap. And with imports remaining high ($1.3 billion in goods and services in 2013, according to La’o Hamutuk), a massive trade deficit is inevitable.
But East Timor won’t be able to fix these devastating economic problems until it addresses its political malaise. Corruption and cronyism are endemic; several members of the national cabinet have recently been ensnared in high-profile scandals. (Emilia Pires, the minister of finance, for example, has been indicted for allegedly granting a $2.04 million government contract to her husband’s Australian business.) Too often, the government’s response to such scandals has been to clamp down on press freedoms. Under a new law passed in May 2014, journalists in East Timor -- including foreigners -- who fail to earn credentials from the government face fines or imprisonment. Soon after the law was passed, Jose Belo, one of East Timor’s most renowned journalists, proclaimed that it “was the last day that East Timor could be considered democratic.”
Perhaps Prime Minister Xanana Gusmão -- one of the principal figures in the nation’s resistance movement, subsequent independence, and sovereign government -- and his colleagues are now resorting to a lower politics because they themselves feel helpless in confronting the overwhelming challenges. They may well sense the impending doom that awaits East Timor. Indeed, Gusmão is quickly making his way toward the exit; he has announced that he will step down from his position this September. Future leadership -- and long-term prospects for democracy -- remain unclear in this fragile, volatile state.
AN AMBIVALENT GLOBE
Facing a rather grim outlook, East Timor has started to look to foreign powers for economic and political assistance. In 2011, it applied to join ASEAN, after nine years of observer status. Although outwardly cordial, most countries in ASEAN have preffered to maintain their distance from East Timor, seeing it as a regional laggard. Most countries in ASEAN have preferred to maintain their distance from East Timor, seeing it as a regional laggard. But analysts predict that East Timor could be accepted into the bloc within the next year or two, given the country’s geographic ties and its persistence in the application process. Even so, according to an April 2013 presentation by Douglas Kammen, a professor of Southeast Asian studies at the National University of Singapore, “[membership in] the planned ASEAN economic community is not likely to have a serious impact on Timor-Leste.” Simply put, it won’t change the fact that East Timor has few exports and many imports, nor will it attract significantly more foreign investment in the absence of better governance.
East Timor’s fate will also be affected by its bonds with countries outside the region. Its relationship with Australia, which lies just 400 miles to the south, has soured in recent years over disputes regarding ownership of the Timor Sea petroleum reserves and allegations that Australia has spied on Dili’s cabinet.
At the same time, East Timor's ties with China have strengthened. China has made investments in East Timor since its independence, providing naval vessels and helping construct Dili’s defense headquarters, foreign affairs ministry, and presidential palace. All of this has been part of Beijing’s broader effort to increase its involvement with the Portuguese-speaking bloc around the globe. More important, these investments allow Beijing to extend its influence deep into Southeast Asia, at the strategic confluence of the Pacific and Indian Oceans.
East Timor has also received attention from the United States, which has launched a number of high-level diplomatic initiatives there. In 2012, U.S. Secretary of State Hillary Clinton made a historic visit to East Timor to meet with top government officials. USAID, the U.S. development agency, has become increasingly present in there, funding projects focused on democracy promotion, economic development, and health care. The U.S. government has also created Fulbright fellowships and international exchange programs to place Americans in special assistant roles within the East Timorese government. These programs also empower East Timorese citizens to study at universities in the United States.
Some observers suspect that Washington has sought better relations with Dili in order to protect the U.S. energy company ConocoPhillips, which has a leading role in East Timor’s economy. In that sense, many East Timorese fear that U.S. engagement could be temporary. After all, ConocoPhillips may be an economic priority right now, but in five years’ time when the Bayu-Undan field runs dry, Washington might be less compelled to assist East Timor.
Indeed, East Timor has reason to worry. The worse the state fares, the fewer countries will be interested in making significant economic or diplomatic investments there -- whether it is the United States, China, Australia, or the ASEAN neighbors. Foreign aid (which has already amounted to over $5 billion in the post-independence years) may continue to flow in, but even on that front, several donor states -- and even Dili’s own politicians -- have complained that the funds have disappeared into a black hole, with East Timor having become yet another so-called republic of NGOs and consultants. Instead, East Timor must look inward to solve its biggest problems.
PAST AS PRELUDE
Dili must stop searching for a magic bullet -- whether it be petroleum reserves or authoritarian tendencies -- for its economic and political woes. Instead, it must return to the basics. The country should focus on developing its agricultural centers and coastal fisheries (industries in which nearly 40 percent of the East Timorese workforce is employed), creating a sustainable, subsistence-based economy that can meet the public’s basic needs without having to take on a heavy dose of imports. East Timor should then slowly seek to expand its international exports market, even if it will take years to close the gap left in the wake of the petroleum crisis. To do this, the country will have to develop and popularize a recognizable brand for its exports (most notably, coffee), services, and tourism sectors that will appeal to international consumers.
Meanwhile, over the course of the next five to ten years, before offshore oil and gas production ends, East Timor should make smarter investments with its Petroleum Fund withdrawals. The government must shift its spending priorities from expensive, fruitless projects (for instance, the new Ministry of Finance skyscraper) to developing the country’s human capital over the long term. Food security, primary and higher education, and quality hospitals are all necessary investments -- and they must be funded now, before it is too late. And a new generation of leaders will need to get the country’s domestic political house in order. Democracy is messy in its early stages, but there is no excuse for rampant graft and strong-arming of the press.
Even as East Timor tries to become more self-reliant, the international community will still have responsibilities. As Southeast Asia plays a larger role on the world stage, it can’t afford to have a failed state -- or an isolated eleventh semi-partner -- in its midst. ASEAN should initiate free trade agreements with Dili that place an emphasis on increasing East Timor’s exports; the group should also focus on sending more airline flights to Dili, an important first step in improving the country’s tourism sector. In exchange, East Timor should promise to improve governance and invest in its basic needs.
If the United States and Australia hope to contain China’s military rise in Southeast Asia, they should also make longer-term investments in East Timor, beyond the oil and gas sector. Australia should reset its relations with Dili by resolving the Timor Sea disputes as soon as possible. For its part, the United States should appoint an ambassador to Dili (only a chargé d’affaires has been stationed there until now). It should also preserve its military initiatives (for example, the U.S. Navy's stopover missions in Dili and the Marine Corps' presence in Darwin), as a signal to China; provide more funding for exchange programs; and increase public engagement efforts in Dili and outside the capital. On an economic level, Washington should encourage the U.S. coffee company Starbucks to further develop local industry in East Timor, and it should facilitate other mutually-beneficial partnerships between U.S. and East Timorese enterprises. Ideally, the United States would initiate these programs soon. After all, China is making headway into the region, treating East Timor as a potential strategic ally.
As the East Timorese consider what will likely be a difficult future, they ought to look to their recent past in order to retain a sense of hope. East Timor, after all, has endured and overcome terrible and tragic circumstances with great resilience. In the context of this not-so-distant history, the country might find that it has the strength for one more proverbial fight: the fight to create a peaceful, prosperous state. As East Timor’s current president has said, “To build the country we dream of, we have ahead of us battles so hard and stringent as the battles we have had in the past.”