Karen Polglaze, Canberra – East Timor could not begin its life as an independent country by scaring off investors – so it would reach agreement with Australia on a Timor Gap Treaty, interim foreign minister Jose Ramos Horta said today.

Negotiations for a new treaty covering oil and gas reserves in the Timor Sea had been through a few bumpy weeks, but were now proceeding more smoothly, Mr Ramos Horta said. He was confident an agreement on a treaty to replace the one that had existed between Australia and Indonesia, which ruled East Timor until the territory voted to separate, would be finalised by July.

"The talks are going very well," Mr Ramos Horta said in a lecture at the Australian National University. "We have to sign an agreement by July. We have to. There is no other way. We have to show leadership, pragmatism and a sense of responsibility. The Timor Gap (Treaty) has to be signed."

Both sides would be blamed if they could not reach agreement and sign a new treaty, he said. "I don't want the East Timorese side to be blamed, so our side will do our utmost because it's beneficial to Australia, but even more beneficial to East Timor, " Mr Ramos Horta said. "We can't begin our new nation, our new country, by scaring off investors, particularly those who have invested already hundreds of millions of dollars in research, in exploration, in drilling and in infrastructure."

Australian Department of Foreign Affairs officials negotiating the new deal said yesterday that the crucial issue of how to divide revenue from the oil and gas reserves had yet to be decided.The former treaty signed in 1989 split royalties 50:50, but the new treaty will much more heavily favour East Timor.

Interim economic minister Mari Alkatiri has said East Timor has already rejected Australia's offer to split 85:15. Oil royalties have so far netted a few million dollars annually to the treaty partners, but gas reserves are predicted to be much larger and could earn East Timor more than $100 million a year for its budget.