Alan Boyd, Sydney – Time is running out for a settlement of disputed oil and gas royalties in the Timor Gap, as Australia turns up the diplomatic heat on the fledgling Timorese republic just ahead of its independence celebrations.

While Dili and Canberra both remain confident that the May 20 deadline for signing a new agreement will be met, the complex issue of maritime boundaries is making negotiations difficult.

East Timor's incoming leadership has accused Australia of adopting bullying tactics by using its diplomatic clout to deny their demands for the common maritime border to be redrawn. Dili wants the border shifted closer to Timorese shores and has won support from much of the international community.

But Canberra wants to maintain the status quo and shows no signs of relenting. On the contrary, Australia announced in April that it was unilaterally withdrawing from the jurisdiction of the International Court of Justice at The Hague in respect of some maritime boundaries, evidently to avoid a potential legal challenge. At issue is an annex to the original treaty that was signed with Timor's colonial ruler Indonesia in December, 1989, with the objective of setting aside territorial disputes and enabling oil deposits to be exploited.

Conflict had arisen because East Timor, then under Portuguese administration, was not included in the first seabed agreement signed between Indonesia and Australia in 1972. When Canberra recognized Jakarta's de jure (full legal) incorporation of East Timor in 1978, specifically so that boundary negotiations could begin, the area was declared a "gap" in the established border. Neither country could declare a territorial economic zone under standard maritime conventions because the strip of sea dividing Timor and Australia is too narrow.

For the purposes of the oil treaty, Australia insisted that the boundary be fixed at the edge of the continental shelf, which would place it to the north of Timor. Indonesia initially insisted on using the median line between the two countries, as is normal international practice, but later backed down in return for Australian recognition of its annexation of East Timor. An eventual compromise saw the royalties being shared equally in three Zones of Cooperation (ZOC).

This arrangement continued to hold way when the treaty was endorsed by the UN transitional authority last year as a technical procedure marking the end of Indonesian sovereignty, despite demands by nationalists for Timor to get a greater share. Canberra sought to deflect criticism by boosting Timor's portion of the joint zone royalties from 50 percent to 90 percent, apparently in exchange for more downstream investment in refined natural gas. However, the offer was conditional on the boundaries being unchanged, an issue on which it appears unlikely to budge.

One reason is that the most important finds of oil and gas have been in ZOCA, the zone that would be most affected. In particular, there is strong drilling interest in the Greater Sunrise belt of ZOCA, about 80 percent of which now falls in Australia's share. Moving the boundary to the south would place two zones – ZOCA and ZOCC – completely within Timorese waters. The third, ZOCB, would be under Australian control.

Much of the seabed has not yet been explored, raising the possibility that Canberra might have to sign away future oil deposits. Among the nascent operations that has a partial overlap in the contested zone is North Australian Gas Venture, a consortium led by Woodside Petroleum and Royal Dutch Shell with vast gas reserves.

Another disincentive for Canberra is that shifting the border might set an uneasy precedent for other maritime borders with Indonesia that have been the source of friction in the past.

In particular, Jakarta might be tempted to seek renegotiation of waters at the east end of the Timor Sea and in the Arafura Sea that are far more important to Australian interests. These waters are thought to contain about 15 trillion cubic feet of gas, which is far more than the known ZOCS reserves and double the capacity of Australia's leading gas field in the North West Shelf. Another 8 trillion cubic feet of oil has been found at Evans Shoal, slightly further to the east, which might also be dragged into negotiations.

The UN view, as outlined during the July 2001 talks, is that the median line should apply, especially as the 1989 treaty was never recognized in international law and contravenes the UN Convention on the Law of the Sea. As stated in the convention, "the exclusive economic zone boundary between two states that are less than 400 nautical miles apart should be the midline between their coasts". Peter Galbraith, the chief UN negotiator, has said he is prepared to refer the issue to The Hague, a comment that was dismissed as "bluff" by Canberra.

Nevertheless, it took the precaution of disassociating itself from the court's jurisdiction, probably to avoid a repetition of the international condemnation that accompanied its last visit there, in 1995. As the former colonial power, Portugal had challenged the validity of the 1989 treaty on the grounds that Indonesia's occupation of Timor was illegitimate. The court sided with Australia, but the moral victory went to Portugal. If there is no agreement at the current talks, which appears increasingly likely, the existing treaty terms will continue, thus benefitting Canberra.

Time is on Australia's side, as Timor is wary of deterring potential investors or aid donors by locking itself into a drawn-out legal struggle.

And it doesn't want to upset Canberra, which is Timor's biggest source of foreign aid and provides the backbone of the UN security detail that is overseeing the transitional period.

Already, Australian Prime Minister John Howard has dropped veiled hints that his government's commitment to Timor might weaken if it brought international pressure to bear for a realignment of the boundaries. Foreign Affairs Minister Alexander Downer said in October that "the extent to which East Timor itself is able to get the royalties, or a share of the royalties, the size of its share, plays into the overall size of the Australian aid program in East Timor".

Offers to build up Timor's capacity to manage the petroleum program through training and technical advice have quietly stalled. Funded from industry fees, they are conditional on Dili backing down.

Identified by the United Nations Development Program (UNDP) as Asia's poorest nation, with an annual per capita gross domestic product of only US$478, East Timor is putting a lot of faith in the oil and gas revenues, even though some of the initial optimism has wilted. Based on the current treaty, the 470,000 Timorese would gain revenues of US$7 billion over 20 years, backdated to 1994. Extending the border would give Timor access to most of the $20 billion of proven oil and gas reserves.

Australia's position is complicated by the need to deal with commercial partners in the exploration, led by Phillips Petroleum, which have been left in an uncertain legal position by the political changes in Timor. Phillips, which took over the drilling fields of Australian firm BHP in 1999, announced in August that it was deferring plans for a proposed gas pipeline from Bayu-Undan to Darwin due to mooted changes in the tax and regulatory framework. The UN transitional authority had earlier said it planned to use its discretionary powers to claim an additional $274 million in tax from the exploration companies.

Backed by Australian, Japanese, US and British interests, the Phillips consortium had pledged to invest $1.4 billion in the first phase of the project, which was to become operational in 2004. Another $1 billion was to be injected into the pipeline infrastructure. Both investments are now contingent on the outcome of the talks, as Bayu-Udan, expected to contribute joint royalties of $5 billion over 24 years for Timor and Australia, is located right in the disputed zone.

Canberra needs the pipeline to underpin a downstream gas operation in Darwin and is anxous to keep faith with investors as it develops remaining offshore fields in Australian waters. Howard had planned to use the signing ceremony for a new treaty in Dili on May 20 as a showplace for investment in Australia's petroleum industry. He also wanted to highlight the leading role taken by Canberra in preparing East Timor for independence, including the dispatching of 15,000 troops since 1999.

Instead, say critics, the furore over the treaty has reinforced the widespread notion that a tiny nation is being held to ransom while prosperous Australia safeguards its oil investments.