Woodside Petroleum, Australia's biggest independent oil and gas group, is to evaluate competing proposals from Royal Dutch/Shell and Phillips Petroleum of the US in an attempt to resolve differences over how the substantial deep sea gas fields between Australia and East Timor should be developed.

Plans to develop the first field, Bayu-Undan, were thrown into disarray earlier this month when Phillips, its operator, said it had failed to reach agreement with the East Timorese over the fiscal arrangements. Shell subsequently proposed that the world's first floating liquified natural gas plant be used at Greater Sunrise, the second and much larger field, a move it said would substantially reduce costs.

Royalties from the fields are set to provide by far East Timor's most important source of funding and it is also hoped they will become an important source of gas for California.

Phillips, together with Woodside, operator of Sunrise, has been in negotiations with El Paso, the US energy group, over a long-term US$3.7 billion supply contract from the two fields. Phillips – which still hopes it can reach agreement with East Timor – had been planning to bring gas from Bayu-Undan ashore via a pipeline. It would then be processed at a new plant in Darwin. It had also hoped to share the pipeline with Sunrise, plans thrown into doubt by Shell's proposal.

But Woodside said on Thursday that at a meeting in Singapore earlier this week the two companies, as well as Osaka Gas, the other partner in Sunrise, had agreed that the Australian company would evaluate the two proposals by the end of October. This would enable heads of agreement for gas sales from Sunrise, a US$4.9 billion project, also to be signed then as planned.

Shell claims that using a floating LNG facility would cut development costs by up to 40 per cent but others in the industry believe it would leave Sunrise isolated and advocate a joint infrastructure approach with three other fields being developed in the region. Woodside said it was also continuing talks with East Timor over the fiscal regime applicable to Sunrise. However, only 20 per cent of the field is in an area jointly administered by Australia and the new state, with the remainder in Australian waters, whereas Bayu-Undan falls entirely within the shared zone. Canberra has agreed to split the revenues in the shared area 90:10 in favour of East Timor.

Woodside said it expected talks over Sunrise with the new East Timorese government to stretch into next year but that it remained confident it was on track to begin production there in mid-2006 as planned. Woodside holds a 33.4 per cent stake in the field, Phillips 30 per cent, Shell 26.6 per cent and Osaka Gas, 10 per cent.

[Virginia Marsh in Sydney and Matthew Jones in London.]