Lenore Taylor – Woodside Petroleum is increasingly wedged between a rock and a hard place as its multibillion-dollar Greater Sunrise joint venture becomes the bargaining chip in an increasingly bitter feud between the fledgling government of East Timor and Australia.

East Timor's President Xanana Gusmao and Prime Minister Mari Alkatiri have garnered significant international support and sympathy with their accusation that wealthy Australia is collecting $1 million a day in oil and gas revenue that rightly belongs to their impoverished state, and is paving the way to collect many billions of dollars more.

But they've infuriated the Howard government. With the war of words escalating, a resolution that would result in Woodside and its partners getting the end-of-year agreement they are looking for appears increasingly remote.

In an interview with Capital Moves, Foreign Minister Alexander Downer said the Timorese leaders' tactic of launching "fusilladive" [all guns blazing] and "extremely aggressive" abuse against Australia was "sorely misjudged".

"Charm and flattery have more of an impact on me than fusilladive abuse. Whenever I am abused that's it, I don't like it," he said. "They are making a very bad misjudgement if they think the best way to deal with us is to abuse us."

Downer has sent the same message to Dili via a foreign affairs envoy and via the Timorese Ambassador to Australia, Jorge Teme. But to little effect. The Timorese genuinely believe an injustice is being done.

At the same time, Downer has rejected two "compromises" suggested by the Timorese to try to break the deadlock. Australia argues it has been generous to the Timorese agreeing they should receive 90 per cent of the revenues from the disputed joint petroleum development area a deal which results in a potential $6 billion income from the Bayu-Undan fields. But in order to clinch the deal Timor signed a treaty recognising, for now, the seabed boundary on either side of the JPDA.

And those boundaries mean 80 per cent of the as yet undeveloped Greater Sunrise field lies outside the JPDA, in Australian territory. Timor also signed a so-called unitisation agreement, agreeing on revenue sharing for the Greater Sunrise project.

But now it accuses Australia of dragging its feet on the negotiations for a permanent seabed border, and is arguing that a fair redrawing of the boundary would give it control over 80 per cent of Greater Sunrise, rather than the other way round.

The only ace the Timorese have in their hand is the refusal to ratify the unitisation agreement in their parliament without which Greater Sunrise cannot proceed. And that's the card they are playing. Woodside, and the Australian government, are so far calling their bluff.

Downer belittled the idea that Australia should give ground in the negotiations because of Timor's poverty. "They spend a lot of time running an emotive argument that we're richer than them and because we're richer we should give them more territory," he said. "This is not a principle that could ever be applied in international law, where two countries are adjacent, the richer should cede territory to the poorer. On that basis the United States should cede Texas to Mexico. And if it was to become a principle of international law it would have enormous ramifications for our maritime boundaries with other countries we are richer than many of our neighbours, Indonesia, East Timor, New Zealand so we are certainly not getting into that."

The Timorese have suggested that revenue from the Greater Sunrise fields could be put into a trust, or escrow account, until the seabed boundaries are finalised. "Absolutely not," Downer said. "Those resources are in Australian territory."

The Timorese also suggest that Australia submit the dispute to an international arbiter for determination. But Downer insists that "we conduct our negotiations on a bilateral basis, it's not for some third party to decide".

There remains time to find a resolution. And Downer said he could conceive of how the impasse could be broken, although he wouldn't say how.