Hamish McDonald, Dili – The Australian Government is retreating from its tough opening stance on the oil revenue split in a new seabed boundary treaty with independent East Timor, a senior Timorese negotiator reports.

Separately, East Timor's independence leader, Mr Xanana Gusmao, has urged Canberra to consider how much more crucial the contested Timor Sea oil and gas resources are to his emerging nation than to Australia. Mr Mari Alkatiri, a Timorese political leader attached to the interim United Nations administration as economic affairs minister, said he hoped the new treaty could be agreed by July or August, in time to be signed immediately a national government is formed in Dili after elections later this year.

"New ideas have been adopted by both sides," Mr Alkatiri told the Herald at the weekend. "We are closer now to a consensus about dealing with the issues."

Formal negotiations began last October on a replacement for the so-called Timor Gap treaty concluded between Canberra and Jakarta in 1989, which set up a shared zone and saw oil and gas revenues split equally between the two governments.

Since then sizable natural gas fields have been discovered in and around the shared zone, and oil companies have issued the first contracts in a planned multi-billion-dollar network of oil platforms, pipelines and gas-based industries in the Northern Territory.

But the UN administration considers this treaty has no legal standing, as Indonesian sovereignty in East Timor was never accepted by the world body. It proposed a treaty based on principles that would set most of the known petroleum resources entirely under Dili's jurisdiction.

The Howard Government's position, which has not been disclosed but is understood to include retaining the shared zone with a revenue split of 60:40 in Timor's favour, stunned UN and Timorese officials last October.

"The first round was a very hard round for both sides," said Mr Alkatiri, who refused to disclose either party's proposals.

"The Australian side never expected the Timorese side would have prepared their position and would make the claims we did. And from the East Timorese side we never expected that the Australians would come with such a conservative position. It was really a shock to both sides."

Since October, there have been two informal negotiating sessions and a third is possible next month before a second formal round of talks in March.

Mr Gusmao said at the weekend that the former treaty had no standing with the independence movement he heads. "To have a fair treaty, Australia has to consider that we have our perception of the problem, our rights in this issue," he said. "We will respect the rights and interests of Australia, but Australia has to respect our rights and our interests there."

Mr Gusmao, who is expected to become independent East Timor's first president, said the revenues from Timor Sea petroleum would be critical to his country's economic and social development.

"It is more important to us than to Australia – the new terms of the treaty," he said, adding that East Timor was prepared to accept less Australian aid in the event that it gained a greater share of the oil revenue. "It is preferable that we get it [oil revenue] rather than it goes to Canberra and then comes to us as aid."