Australia must not lose East Timor to China

Scott Morrison has quickly put flesh on his Pacific step-up strategy. With the US, Japan, New Zealand and now France supportive, the Prime Minister has assembled an impressive coalition of democracies that may soon include Britain. Morrison knows that effective co-operation between Australia and the other Pacific powers will make it more difficult for China to entrench itself in our backyard and exploit the economic vulnerabilities of small Pacific island states.

Geopolitical rivalry is sometimes likened to an endless chess game that ebbs and flows as competitors retreat and advance. Barely a year ago, Beijing was on the verge of a historic advance deep into the southwest Pacific. Leveraging off a series of prestige infrastructure projects, Chinese firms were well placed to build ports, military facilities and undersea communication systems for Papua New Guinea, Fiji, Vanuatu and Solomon Islands before being checked by Australian counter-offers.

A decisive checkmate is unlikely. China won’t give up on its regional ambitions, and East Timor has emerged as the next piece in play. Frustrated by the unwillingness of its joint venture partners to build a pipeline to East Timor for onshore processing of gas at Beaco from the rich Greater Sunrise project in the Timor Sea, Dili is contemplating funding from China Exim Bank by designating the Beaco project as a Belt and Road initiative.

Should East Timor secure a loan of up to US$11 billion ($15.9bn), it’s not hard to envisage the country becoming indebted to China, given its limited capacity to repay and doubts about the commercial viability of an onshore LNG facility. A loan of this magnitude would be more than three times East Timor’s annual GDP, made worse by the near exhaustion of its Petroleum Fund, which provides about 90 per cent of the annual budget.

If Dili can’t repay the loan, a debt-for-equity swap could allow Beijing to use Beaco’s port and airfield for military purposes. Darwin is 700km away.

At the very least, China would have bought itself outsized influence over a country that is strategically important to us and to which most of us feel a sense of attachment. Having invested so much in helping East Timor obtain its independence, it would be an indictment of our foreign policy to see that independence compromised by inattention or neglect.

Regrettably, much of the goodwill generated by our support for East Timor’s independence has dissipated. Relations soured over disagreements about revenue sharing from oil and gas deposits in the Timor Sea. They deteriorated further when East Timor’s leaders became convinced the Howard government had authorised electronic eavesdropping operations against them during difficult and at times acrimonious negotiations over the disputed maritime border.

Settlement of the long-running border dispute last year through a UN-sponsored conciliation process left unresolved the issue of where gas from the Greater Sunrise development would be processed: in Darwin, on floating offshore platforms — favoured by Woodside — or in East Timor, which Woodside has long maintained is uneconomic.

Australia’s official position is that processing is a decision for the joint venture partners. But such considered neutrality is untenable in the face of China’s robust challenge to our regional pre-eminence. Dili has already funnelled significant resources into the Tasi Mane petroleum complex consisting of three industrial clusters on the south coast — a petroleum supply base at Suai; a refinery at Betano; and a planned port and LNG plant at Beaco, which would be built by a Chinese company if the Exim Bank loan is approved.

Given Dili’s longstanding commitment to build a petroleum industry as “the key pillar of future development”, it is time to put aside our reservations about the commercial viability of the Tasi Mane development. Thinking creatively about how we can assist the Timorese to achieve their goal of a sustainable petroleum sector is in both our interests. This means a more strategic approach to our relationship.

The next step in Morrison’s Pacific strategy should be to immediately engage his counterpart on East Timor’s infrastructure requirements and make clear that we are willing to consider supporting the Beaco development, including a gas pipeline from Greater Sunrise. The extent and detail would obviously require negotiation, but if we don’t want to risk Dili becoming a Chinese client, we need an attractive alternative that plays to our strengths.

These include the capacity to mobilise a consortium of partner governments through the new Australian Infrastructure Financing Facility that has just funded an LNG project in PNG.

The loans provided must be commercially competitive, transparent and used to train and employ East Timorese wherever possible.

There are opportunities for partnerships with the Northern Territory and Western Australia on education and training for petroleum sector workers, as well as providing skilled Australian work­ers on a fly-in, fly-out basis.

The China challenge is an opportunity for Australia to rejuvenate relations with Dili that have been allowed to atrophy. Morrison has already demonstrated a welcome capacity for speedy and resolute action to remediate our relations with other neglected island neighbours in the Pacific. He should do the same here, and soon, given its strategic importance and our longstanding commitment to the country’s independence, stability and economic development.

Alan Dupont is chief executive of The Cognoscenti Group and a nonresident fellow at the Lowy Institute.