Rowan Callick – The Timor gap is getting wider. And both Australia and East Timor are set to delay or lose substantial income as a result.

Australia's row with East Timor over the oil- and gas-rich sea bed between the countries has inevitably turned into a domestic debate, too, as the election approaches, clouding the issues.

Don Voelte, Woodside Petroleum's new chief executive, is now visiting Dili for the first time. His message is a simple one: until the Timorese parliament ratifies the International Utilisation Agreement for the Greater Sunrise gas field, the $6 billion to $7 billion project cannot move to the next stage, of detailed design, expected to cost $86 million over 15 months.

Greater Sunrise, one-third owned and also operated by Woodside, straddles the provisional boundary between Australian waters and those covered by the Timor Sea Treaty that gives East Timor 90 per cent of oil and gas production revenues within the Join Petroleum Development area.

Since most of Greater Sunrise is in Australian waters, the IUA, ratified by the Australian parliament last March with Labor support, gives Australia 79.9 per cent of revenues from the field, and 20.1 per cent to East Timor. It is projected to provide up to $12 billion potential revenues for governments.

The Bayu-Undan field, operated by ConocoPhillips, which lies fully within the JPD area giving East Timor 90 per cent of receipts, started producing "wet gas" six months ago. This first phase has cost $2 billion, with liquefied natural gas (LNG) set for production in 18 months.

The East Timor government, which signed the IUA in early 2003, is now refusing to have it ratified until permanent boundaries with Australia are agreed.

It says that Australia should not be able to take into account its extensive continental shelf in fixing a boundary. But Canberra replies that the seabed boundaries agreed with all the country's other neighbours Indonesia, Papua New Guinea, the French colony of New Caledonia, and finally last weekend, after almost five years of negotiations, New Zealand start from the continental shelf.

The first round of talks about a permanent boundary took place in Dili in April, and the second round is due in Canberra in September. Australia says the boundaries to east and west, following a line from the borders between East Timor and Indonesia, are essentially already fixed, so it is the north/south boundary that should be the prime focus. But East Timor believes its boundary should be extended east and west as well as south, to encompass Greater Sunrise fully.

Opposition Leader Mark Latham said last week : "If we come into government, we'll have to start again, because from what I can gather there has been a lot of bad blood across the negotiating table. We don't want a failed state on our doorstep."

East Timor Foreign Minister Jose Ramos-Horta responded: "We are pleased with constructive and positive statements coming out of the Labor Party and other opposition parties in Australia."

Joel Fitzgibbon, the opposition mining and energy spokesman, tells The Australian Financial Review that "the government's bullying approach has created an impasse which has to be fixed".

"There needs to be a more generous approach to revenue sharing, through boundary changes or a separate deal," he says.

Foreign Minister Alexander Downer says that if Labor "wants to politicise these delicate negotiations", the government will have no choice but to suspend them until after the election.

He says that borders should not be decided according to relative wealth, which might be addressed by aid or other strategies. Australia has provided almost $100 million a year in aid, about 16 per cent of East Timor's gross domestic product, since 2000.

A spokesman for Woodside says that the parliament will meet again in Dili in September. He says that it is up to the two governments to resolve the border dispute. "But we can't commence the next phase of Greater Sunrise until the IUA is ratified," because a legal and fiscal framework has to be in place to spend further shareholders' funds, and to sign up potential LNG customers.

No decision has been made about whether the LNG would be exported from Darwin, East Timor, or a floating base.

The issue

• Australia has agreed with all its neighbours except East Timor sea boundaries that thake into account Australia's extensive continental shelf.
• East Timor says this is unfair and wants to complete boundary talks before ratifying an agreement on how oil and gas revenues are split from fields that straddle the countries' sea areas.
• This threatens to halt development of the $6bn-$7bn Greater Sunrise field.