Brad Howarth – The East Timorese and Australian Governments have agreed to proceed with negotiations over the Timor Sea oil and gas fields without discussing permanent seabed boundaries.

East Timor's Foreign Minister, Dr Jose Ramos-Horta, told BRW: "The two sides realise that if we continue to insist on each side [sticking to] our respective claims of sovereignty, we will never agree, unless the two sides go to international arbitration."

Australia's Minister for Foreign Affairs, Alexander Downer, remains positive about the discussions and says he wants to see the dispute with East Timor over the oil and gas fields resolved in time to hand the East Timorese and Australian people a "Christmas present".

But a resolution of the tensions by December is far from certain. Negotiations in early August resulted in a positive outlook on the long-running seabed boundaries disagreement, but there is still a long way to go. In dispute are numerous oil and gas deposits in the Timor Sea, including the Australian Governments have agreed to proceed with negotiations over the Timor Sea oil and gas fields without discussing permanent seabed boundaries.

East Timor's Foreign Minister, Dr Jose Ramos-Horta, told BRW: "The two sides realise that if we continue to insist on each side [sticking to] our respective claims of sovereignty, we will never agree, unless the two sides go to international arbitration."

Australia's Minister for Foreign Affairs, Alexander Downer, remains positive about the discussions and says he wants to see the dispute with East Timor over the oil and gas fields resolved in time to hand the East Timorese and Australian people a "Christmas present".

Almost 90% of this field lies outside the so-called Timor Gap (also known as the Joint Petroleum Development Area). The existing Timor Sea Treaty prescribes that 90% of the government revenue within the joint petroleum development area will flow to East Timor, but makes no recommendations on where the processing should take place.

The field's developer, Woodside Energy, is considering three proposals, including one that would lead to processing in East Timor. But Woodside has added further pressure to the negotiations by stating it would "mothball" the development of the Greater Sunrise field if the dispute is not resolved by the end of the year. Woodside is estimated to have invested $US200 million in the region.

Until now the negotiations have been acrimonious with accusations from East Timor that Australia is exploiting the fledgling nation's dire need for resources revenue.

A Woodside spokesman says the company is seeking ratification of an international unitisation agreement, which would create the legal and taxation framework for the development of Greater Sunrise. Without this, Woodside cannot proceed with the $US60-million, 15-month design phase.

The unitisation agreement has been signed by Australia but not by East Timor, and is a key point in the current discussions. The next round of discussions is in September

The dispute centres on attempts by East Timor to have boundaries moved south, to the midpoint between it and northern Australia. The present boundaries, established in the 1970s with East Timor's former ruler, Indonesia, extend close to East Timor's coastline, along Australia's northern continental shelf.

The president of East Timor, Xanana Gusmao, characterises the discussions as positive, but is reserving judgment on what has been said. He says East Timor wants a proper outcome based on the principles of fairness and sovereignty – not a "Christmas present".

"In the struggle I learned to be sceptical," Gusmao says. "We fought for 24 years, against a very big country, and we never gave up. We said, 'No, it is a matter of principle'. Under the frame of principles, we can work. We don't want to be taken as beggars ... But sometimes we feel ... that some people want to insult our intelligence."

Gusmao says that international experts have described the existing arrangements, including the positioning of the eastern and western lateral lines around the Timor Gap as legally indefensible and says. "We cannot inherit the mistakes of the other treaties."

The most likely outcome will be a revenue-sharing arrangement, with East Timor keen to see some onshore processing within its territory.

Ramos-Horta is adamant that the existing arrangement in the Timor Gap is not an adequate model for development. Despite East Timor earning 90% of the revenue from the extraction of the raw materials, he estimates that it receives only 10% of total revenue, as all processing is handled within Australia.