Darwin – Federal and state mining ministers have shot down a proposal to include East Timor in their talks on the exploitation of oil and gas resources.

Victoria's Energy Minister Theo Theophanous today urged his counterparts to allow East Timor, and Papua New Guinea, to sit on the Ministerial Council on Minerals and Petroleum Resources as an observer. He also urged the council to press the federal government to treat East Timor fairly in any talks over revenue from the A$5 billion (US$3.4 billion) Sunrise gas project in the Timor Sea.

But federal Resources Minister Ian Macfarlane said the motion was voted down by federal and state ministers at the meeting in Alice Springs today.

Mr Macfarlane labelled the motion a smokescreen for what he called Labor's foreign policy "blunder" over Australia's negotiations with East Timor. "It was obviously a desperate attempt to divert attention from the policy blunder of the federal Labor leader," Mr Macfarlane said.

Sunrise partner Woodside Petroleum (ASX:WPL) this week warned the massive project would topple if Australia and East Timor did not resolve their differences over the division of billions of dollars of royalties from the project by the year's end.

The federal government has threatened to suspend the talks on a maritime boundary after Opposition Leader Mark Latham said a Labor government, if elected, would make a fresh start on the negotiations.

"The issue is not whether or not East Timor comes on the ministerial council," he said. "Mr Latham has very seriously compromised the Australian position in terms of our negotiations."

Australia and East Timor are currently in talks on a permanent seabed boundary to divide control of the estimated A$30 billion in royalties from Timor Sea oil and gas deposits, including the Greater Sunrise field.

East Timor has so far refused to ratify another revenue-sharing deal struck earlier known as the International Unitisation Agreement which says 80 per cent of the lucrative Sunrise field falls within Australian waters.

Mr Macfarlane said the federal government was willing to let East Timor sit as an observer at the ministerial meetings – if it ratified the unitisation agreement.

"The commonwealth is prepared to have the East Timorese admitted as observers provided they keep their word and ratify the international unitisation agreement," he said. "There's no point in them coming to this table as an observer until they have fulfilled the undertaking they gave us."

Mr Theophanous said it was the government, not Labor, that was placing the Sunrise project in jeopardy. "The only people that are jeopardising this project is the Howard government because it's highly unlikely that the East Timorese will agree to the proposals that they have put before them because it is not in their national interest," he told ABC radio.