Jeremy Bowden, Singapore – East Timor is raising the stakes in talks on sharing offshore oil and natural gas revenues with Australia, according to Australian government sources.

It wants to expand the scope of negotiations to include areas outside the Timor Gap treaty zone, which could add in oil fields generating revenues of almost $2 billion a year. These fields currently fall under Australian sovereignty, despite being much closer to East Timor.

The talks – which began in October 2000, almost a year after East Timor broke away from Indonesia – had been confined to the royalty split within the 1989 Timor Gap treaty area, which, before East Timorese independence, divided oil revenues from a 75,000-square-kilometer strip near East Timor between Australia and Indonesia.

Under the treaty, Australia enjoyed generous oil and gas royalty terms. So much so that some political observers accuse Australia of accepting the terms in exchange for recognizing Indonesian sovereignty over the ex-Portuguese colony.

Australia was one of only a handful of countries to acknowledge Indonesian sovereignty over East Timor, following its invasion in 1975.

The Australian government sources said East Timor's move complicates the talks, and no more formal discussions are planned at this stage.

Australia's minister for foreign affairs, Alexander Downer, said last year that Australia would be "generous in the negotiations."

But now that the East Timorese want to expand the treaty's area, rather than just boosting their royalty cut inside it, the stakes are far higher, and Australian generosity is likely to be tested.

The move could force the inclusion of major Australian fields such as the Woodside Petroleum Ltd. (A.WPL)-operated, 150,000- barrel-a-day Laminaria-Carollina field, and the BHP Ltd. (BHP)- operated 40,000-barrel-a-day Buffalo field in royalty negotiations. Both are situated just outside the treaty area, along with massive unexploited finds such as Royal Dutch/Shell Group's (RD) Sunrise-Troubadour gas discovery.

Such fields dwarf current production from within the Timor Gap treaty area. Although the treaty area includes some promising finds, the only field currently producing is the 20,000-barrel-a-day BHP-operated Elang-Kakatua stream, which generates revenues of about $200 million a year.

Initial negotiations took place among Australia, UN administrative authorities and East Timorese representatives October 9-11. Since then, Australian government sources say "work has continued informally," but "no date has yet been set for the next round of formal negotiations."

The sources insist that they have a case for a cut of the royalties based on the extent of Australia's continental crust, which protrudes almost three quarters of the way to East Timor. The East Timorese authorities say their claim is based on "a distance criterion," which would leave most of the area under the East Timorese control.

East Timor's bloody 1999 break with Indonesia forced Australia to renegotiate the treaty. But until East Timor becomes fully independent – it is currently being run by a temporary UN administration – the existing terms continue to operate under a memorandum of understanding signed last February. Under this temporary arrangement, East Timor gets Indonesia's share of royalties.

East Timor received its first oil royalty payment in September. The payment of A$6 million covered royalties from the Elang- Kakatua fields, located in ZOCA 91-12 of the Timor Gap Zone of Cooperation.

Royalties from within the existing Timor Gap area will rise once production begins at the giant Phillips Petroleum Co. (P)- operated Bayu Undan gas and condensate field, which, like Elang- Kakatua, is located in ZOCA 91-12 of the treaty area. Philips issued initial engineering contracts for the first phase of the field development – comprising condensate and liquid petroleum gas production – last October.

Another Australian official pointed out that A$150 million in aid has been earmarked for East Timor over the next four years. This figure could fall if East Timor's revenues from oil royalties rise, particularly if the rise is at the expense of Australian government income.