Nigel Wilson – For months there have been rumours of problems in the "co-operative" arrangement to develop more than 12 trillion cubic feet of gas in the Timor Sea. Yesterday those rumours were confirmed – with gusto.

Shell basically said it believed Phillips Petroleum, the Oklahoma-based oil and gas group that is developing a gas stripping project based on the Bayu-Undan reservoirs, should not be playing with LNG in our region. Phillips had signed a letter of intent to supply US giant El Paso with LNG from 2005.

Shell, miffed that its $10 billion bid for North West Shelf operator Woodside Energy was blocked by Treasurer Peter Costello, believes gas reserves in Australia should be part of its strategy to dominate LNG action into Asia.

Phillips, which has been very upfront in its desire to get the Timor Sea gas reserves onshore for Australian use and the North American LNG market, has found Shell less enthusiastic.

Phillips' style also has upset Shell, which believes that a far more sympathetic outcome could have been achieved in negotiations with East Timor on sharing the rewards of developing Timor Sea oil and gas if Phillips had not continually threatened to walk away from investment plans if it did not get its own way.

But Phillips can feel justifiably annoyed because the Shell plan undercuts its commitments to East Timor and the Northern Territory Government.

Shell made it clear last night only one LNG project could go ahead and that its plan was up to 40 per cent cheaper than Phillips'. The key cost reduction would be in pipelines. A floating LNG plant would obviate the need for a large pipeline to Darwin – and rule out plans to supply big gas customers in Sydney and Adelaide from the Timor Sea.

Woodside was last night diplomatically saying that the economics of both projects would have to be evaluated. But there is no doubt senior people in Woodside believe Shell has shown it has an entirely different view of the national interest than that which prevails in either Darwin or Perth.