The Timor Gap Treaty signed between Australia and Indonesia during the rule of former president Suharto is illegal, and is not recognised by either the United Nations or the East Timorese people.

Peter Galbraith, the director for political affairs for the United Nations Transitional Administration in East Timor (UNTAET), said at last month's seminar in Canberra on East Timor that UNTAET was not prepared to accept a "successor state model" for the continuation of the treaty aimed at exploiting the energy resources in the former Indonesian colony. He said that the UN had never recognised the legality of the treaty. He said that both UNTAET and the CNRT – the East Timorese political umbrella group – are now actively negotiating for a final settlement of the seabed boundary dispute which underlies the treaty for joint development of petroleum resources in the area.

The seminar, titled "East Timor and its Maritime Dimensions: Legal and Policy Implications for Australia", was organised by the Australian Institute of International Affairs, the Centre for Maritime Policy at Australia's University of Wollongong, and the International Law Association. Victor Prescott, Australia's pre-eminent expert on maritime boundaries, presented his work on East Timor's possible maritime entitlements. His maps showed the new nation state's potential claim in the south to coincide with the western, southern and eastern limits of Area A of the current "Zone of Co-operation". Such boundaries would give East Timor sovereignty over, and access to 100% of royalties arising from the US$1.4 billion Bayu-Undan offshore gas project, currently in the advanced stages of engineering.

Professor Prescott noted however that the boundary disagreement between Indonesia and Australia that produced the Timor Gap Treaty would still exist between Australia and East Timor.

"Australia would probably rely on natural prolongation and East Timor would probably rely on equidistance," he said, referring to the legal principles underlying maritime boundary negotiations. Prof Prescott believes that the eastern "tripoint" called "A16" on the current Zone of Co-Operation boundary would have to be moved a little further to the east in an agreed settlement.

This would result in East Timor inheriting a greater share of Shell-Woodside's Sunrise/Troubadour reserves, which straddle point "A16". In April, Sydney-based oil and gas consultant Geoffrey McKee foreshadowed an East Timorese policy shift away from the "successor state" approach and towards an historic settlement of the dispute.

In a 3,000-word article published in a recent issue of "Inside Indonesia" magazine, Mr McKee suggested that the oil industry will support a median line settlement of the dispute provided a future East Timorese government offers a fiscal regime slightly more favourable than the current Timor Gap Treaty regime.

In March, East Timorese representatives gave an undertaking to Canberra that any future fiscal regime will not be more "onerous" than the current Treaty regime, thus reassuring the Timor Gap contractors and promoting a smooth transition to a new treaty.

At the Canberra seminar, Commander Robin Warner from the Royal Australian Navy explained that, from a strategic point of view, definite boundaries were preferred to joint development zones. She described the extraordinary lengths that Australia went to in August 1999 to define the maritime boundaries for the INTERFET operational area in East Timor.

Her map showed INTERFET's western maritime boundary as being perpendicular to the general direction of coastline starting from the mouth of the Massin River which separates West and East Timor. A similar coastal projection of East Timor's maritime claims – if adopted in a final settlement of the Timor Gap dispute – would result in East Timorese sovereignty over the existing Laminaria/Corallina reserves just outside the western boundary of the Zone of Co-operation. "Good fences make good neighbours," said Professor Ivan Shearer, of Sydney University's faculty of law.

Several speakers at the seminar emphasised their belief that the Australian government may be forced by public opinion to accept a settlement of the Timor Gap dispute favouring East Timor. It would be counterproductive, some said, for Australia to prevent the new state from having a sound revenue base and thereby increasing the reliance on Australian aid as is the case with neighbouring Papua New Guinea.

"Anyone who believes that Australia will conduct maritime boundary negotiations with East Timor on the basis of squeezing the last dollar out of them is living in cloud cuckoo land," said Professor Anthony Bergin, director of the Defence Studies Centre of the Australian Defence Force Academy.

Professor Gillian Triggs, international law specialist from the University of Melbourne, said that the successor state model for the Treaty, from a legal perspective, would lead to "muddy waters". She advised that East Timor would more than likely become a "clean slate" nation state and that the International Court of Justice position tends to favour a median line settlements of the maritime boundary disputes.

Her assessment was that "all sights suggest low risk" for the Timor Gap contractors and that "East Timorese leaders seem to be getting good advice". Bill Campbell, director of the International Law office of Australia's Attorney-General's Department, favours a negotiated settlement of the Timor Gap dispute. He is opposed to a possible judicial settlement in which "states lose control".

The Timor Gap negotiations with Indonesia offered only two outcomes, he said, either "stalemate" or a "joint development zone". "Going to court was not an option then, since Indonesia opposed third party settlement," he said.

Jim Godlove, spokesman for Bayu-Undan operator Phillips Petroleum, said: "Phillips has confidence that the East Timorese leaders understand the importance of favourable fiscal terms and will act in the best interests of their nation and the ZOCA contractors.

"Decisions regarding a final delimitation of the seabed are matters solely for the two nations, East Timor and Australia, to make and as such it would be inappropriate for Phillips to speculate on a final settlement of this matter.

"The major unresolved matter that does need to be addressed expeditiously is the lack of a defined fiscal regime in the terms of the Treaty regarding gas exported from the Zone of Co-operation. An agreement on that matter would have significant economic benefits to both East Timor and Australia."

Recent statements by Mari Alkatiri, Timor Gap spokesman for East Timor's CNRT and Mr Gailbraith, UNTAET's political chief, suggest that both agree a median line settlement would provide a satisfactory outcome for all parties.