David Fickling – The spectacle of someone large and powerful picking on a weak and desperate neighbour passes as bullying in the average playground. International politics, however, has a better name for it: diplomacy.

Government bureaucrats leap easily to the standard platitudes about how no one wants a poor, unstable neighbour dependent on aid, but when it comes to the crunch this is so much hogwash. If the financial benefits of impoverishing a neighbour outweigh the costs of propping them up, then it's time to call out the heavy diplomacy.

The subject of Canberra's latest round with the knuckle-punch and Chinese burn is the most famous bastardised kid in the Asia-Pacific playground. East Timor, less than a year old and struggling to escape from the effects of its 25-year occupation by Indonesia, has got in a fight with its powerful southern neighbour over those most coveted of commodities, oil and gas.

The focus of the argument has been billions of pounds worth of fossil fuel which lie in the torrid waters of the Timor sea, which is closer to Timor than Australia but strung along a disputed area of ocean whose history has been intimately bound up in East Timor's own struggle for independence.

The so-called Timor Gap first became an issue back in 1972, when East Timor was still a Portuguese colony. Ocean boundaries had never been demarcated northwest of Darwin, but governments were quickly becoming aware of the mineral wealth beneath the sea. At the time, there were no hard and fast rules about how sea boundaries should be drawn. Canberra decided that its border should extend to the edge of Australia's continental shelf, a formula that would give it 85% of the sea territory; East Timor's Portuguese rulers, understandably, preferred to site the border on the middle line between the two countries.

Matters were left at a stalemate until 1975, when Indonesia invaded the new country after just 10 days of independence from Portugal. Australia's response to this gross violation on its doorstep was famously nonchalant: then prime minister Gough Whitlam even offered Jakarta tactical advice on how to make the invasion look like the result of the Timorese popular will.

Australia's ambassador in Jakarta, Richard Woolcott, could barely hold back his glee as the invasion approached. "Closing the present gap in the agreed sea border could be much more readily negotiated with Indonesia ... than with Portugal or an independent Portuguese Timor," he wrote in a confidential telegram to his superiors.

That closure of the gap was finally brought about in the 1989 Timor Gap treaty between Jakarta and Canberra. Australia got what it had been wanting since 1972: a border following the rough lines of the continental shelf, whose existence should have been an absurd anomaly. The UN convention on the law of the sea says that such boundaries should pass along the median line, and Australia's boundary with Indonesia follows the same rule. Even the two countries' fishing zones stop on the median line. Only the seabed, and its precious oil and gas, is excepted.

This concession cost Indonesia a great deal in potential oil and gas revenues, but what it got in return was a valuable Australian recognition of its de jure sovereignty over East Timor.

Naturally, East Timorese view the Timor Gap treaty as irredeemably tainted. Now, more than three years after East Timor's independence vote and less than a year after it formally joined the community of nations, Australia is once again trying to force multimillion-pound concessions at Dili's expense.

The status of the Timor sea border still lies undecided, although neither the Australian government nor the opposition show any interest in following the overwhelming opinion of international law and agreeing a median border. The replacement to the Timor Gap treaty has been named the Timor sea treaty. Oil and gas revenues from the already active Bayu-Undan field are being held in limbo until both nations ratify the treaty, something which Dili jumped to do but about which Canberra is showing some reluctance.

The reason for this reluctance, according to several people close to the negotiations, is that every month East Timor goes without the 1 billin pounds that is waiting for it in escrow, the young country becomes poorer and more desperate to agree to Canberra's demands.

Those demands centre around the neighbouring Greater Sunrise gas field, whose 25 billion pounds reserves are currently split vastly in Australia's favour. If the median line were to be taken as the boundary between the two countries, Dili's earnings from Greater Sunrise would rise from 5 billion pounds to 22.5 billion pounds, enough to transform the country and its broken economy.

Naturally enough, Australia is playing it hard. Talks in Canberra about the Greater Sunrise field broke down last week, to the bafflement of Timorese negotiators. "We were shown the door for reasons which we frankly don't understand, " said Jonathan Morrow, coordinator of Dili's Timor sea office. "Australia has the opportunity to demonstrate that it is not trying to extract unfair concessions from this new country. It has the power of life and death over East Timor," he said.

Foreign ministry officials in Canberra professed surprise at the Timorese response, and said that talks were still fully on track. In any case, an agreement must be reached by March 11, when potential buyers will be free to walk away from the deal.

Dili has already been knocked down to a weakened position. Just two months before East Timor's independence day last May, Canberra announced that it would not recognise decisions of the international court of justice on maritime boundary issues. The announcement meant that the UN convention rules, which favour East Timor, would not influence discussions between the two countries.

Officials in Canberra's department of foreign affairs and trade say that such matters are better handled through negotiation than court litigation, but this claim has the familiar aura of diplomatic platitude to it. When the school bully decides to negotiate with the class weed over ownership of a pencil case, you know what is coming.