Abstract

The Timor Gap region in the Timor Sea between Australia and Indonesia has been the subject of a border dispute between the two countries since the mid 1970s. The region has long been perceived by the oil and gas industry to have petroleum potential, but pending the resolution of the dispute, little or no petroleum exploration has taken place since the late 1970s. However, in December 1989 a Treaty was signed providing an interim resolution to the dispute and establishing a Zone of Cooperation and the jurisdictional and fiscal regimes to apply within it.

The agreed Zone of Cooperation consists of three discrete Areas each with different fiscal regimes, administration and physical conditions. Area A is the largest of the three Areas and is to be administered by a Joint Authority and Ministerial Council set up under the Treaty and has a production sharing contract regime. The water depth in Area A ranges from 100 metres in the south to approximately 1,500 meters in the north. Area B is to be administered by Australia and is subject to a Resource Rent Tax regime. The water depth in this Area ranges between 50 and 100 metres. Area C is to be administered by Indonesia and has a deep water production sharing contract regime. Water depths in this Area are in the range 1,000 to 2,000 metres.

The economics of exploring for oil in the Zone of Cooperation are primarily dependent on expected reserves, water depth, anticipated probabilities of success and the fiscal regime applicable. The paper analyses the economic effect of these parameters and the economics of exploration in terms of minimum economic reserves levels and other indicators are determined for each of the Areas in the Zone.