Robert Garran – Australia and East Timor remain far apart in crucial talks over revenue from the Timor Gap oil and gas fields that could become a mainstay of the new country's economy.

Sources familiar with talks on the Timor Gap treaty say Australia is holding out against East Timor's claim for the lion's share of revenue from oil and gas produced in the jointly managed Timor Gap Zone of Co-operation.

So far it has offered about 60 per cent of revenue, which could total $US100 million a year. East Timor, represented by the UN Transitional Authority in East Timor, is arguing strongly for a 90 per cent stake in revenue, or alternatively for the boundary between the two countries to be redrawn at the mid-point between their coastlines.

It bases its claim on the view that under international law it may be entitled to all the revenue. The argument could mean a difference of up to $1.5 billion over 24 years in the revenue paid to East Timor.

Under an agreement reached in October 1999, mirroring an agreement 10 years earlier with Indonesia, East Timor and Australia have an equal share in revenue rights. But the deal only applies until East Timor reaches independence, late this year or early next year, and is being renegotiated.

The 1989 agreement with Indonesia was a compromise to allow development of the Timor Gap oil and gasfields without finally settling conflicting views about the legal boundary between Australia and Timor.

Australia argues the true boundary should be the centre of the Timor Trough where the two continental shelves meet. East Timor negotiators believe they have a strong legal argument for a new boundary at the mid-point.

But both sides recognise that delays and uncertainty in seeking independent arbitration could be highly disruptive to investment in the field, meaning the final agreement will be heavily influenced by political judgments.

Foreign Affairs Minister Alexander Downer has said publicly Australia should be more generous to East Timor than under the existing deal, but East Timor supporters believe the existing offer does not go nearly far enough.

The Opposition has backed a 90 per cent revenue share for the new nation, giving East Timor extra leverage and an incentive to hold out for a possible change of government in this year's federal election.

The Australian Council for Overseas Aid has called on the Government to ensure the new agreement gives the major share of revenue to East Timor.

So far East Timor has received one revenue payment from the Timor Gap treaty of $US3 million. Some analysts predict revenue from the field could exceed $5 billion over 24 years.