Canberra – Australia is unable to dictate a solution to a dispute between East Timor and a US-based oil company that has stalled construction of a key gas pipeline, the government said Wednesday.

Australian Foreign Minister Alexander Downer said the dispute between the fledgling state and Phillips Petroleum jeopardises construction of a 800 million US dollar gas pipeline between East Timor and Australia.

Phillips shelved the project earlier this month in a dispute over East Timor's tax regime, citing a corporate tax rate of at least 40 percent as a major disincentive to continuing its efforts to exploit oil and gas reserves in the Timor Sea. Downer and Resources Minister Nick Minchin were scheduled to meet Phillips executives later Wednesday, but the Foreign Minister conceded Canberra could only play a support role in resolving the dispute.

"We will be saying to Phillips that the important thing for them is to engage more intensively in discussion with the East Timorese," Downer told reporters. "There's no point in Phillips saying to Australia 'You fix it'. We don't run East Timor's tax regime, the East Timorese do."

Downer said the dispute was unlikely to be resolved until after the results of East Timor's first democratic elections scheduled for August 30 were announced. However he urged East Timor, which is currently administered by the United Nations after its bloody 1999 separation from Indonesia, to acknowledge a previous commitment that any post-independence tax regime would be no more onerous than a previous treaty between Australia and Indonesia covering development of Timor Sea oil and gas resources.

"East Timor's reputation will not be well-served if in the end this project doesn't go ahead because of East Timor just refusing to budge on this tax question," Downer said. The delay in the pipeline project threatens an estimated 6.5 billion US dollars worth of downstream investment in both East Timor and Australia.

When announcing the halt to the project, the president of Phillips Petroleum's Australasia business division, Stephen Brand, accused the UN of undermining the project. "Agreement by East Timor to fiscal and taxation arrangements reflecting their earlier commitments would allow further investment to proceed, providing significant economic benefits to the Bayu-Undan [oil and gas field] co-venturers and the new nation of East Timor," Brand said. "However, since the conclusion of the Timor Sea Arrangements, the United Nations, acting on behalf of East Timor, has yet to affirm these crucial commitments."