Mark Baker, Dili – The Federal Government is locked in a bitter dispute with East Timor over control of multi-billion-dollar oil and gas reserves in the Timor Sea that is threatening to delay desperately needed revenues to the newly independent country.

Senior Timorese officials say Canberra is refusing to ratify a treaty enabling joint development of reserves within the Timor Gap resources zone unless East Timor gives up its claim to other substantial deposits lying outside the treaty area.

The officials said the dispute sparked an angry outburst by Foreign Minister Alexander Downer during a meeting in Dili last month with East Timorese Prime Minister Mari Alkatiri and senior Timorese negotiators.

Ratification of the treaty is essential before development of the Bayu-Undan field, which will deliver an estimated $US3 billion in revenue to East Timor in its 20-year life.

The treaty was signed by Prime Minister John Howard when he attended East Timorese independence celebrations in May. Australian officials said it would be ratified by Federal Parliament by the end of this year.

With parliament now adjourned for the year, there are fears in East Timor that the project could unravel. An agreement under which Japanese companies would buy the entire production of Bayu-Undan from project operators ConocoPhillips, expires in March.

Last week's riots in Dili, fuelled by public anger over worsening poverty in East Timor, have underscored the importance of Timor Sea oil and gas revenues to rebuild the country's crippled economy and infrastructure.

The dispute with Australia centres on plans to develop a second, larger field, Greater Sunrise.

Australia had proposed that East Timor receive 90 per cent of revenue from the 20 per cent of the Sunrise field that lies within the Timor Gap, the same sharing formula as for Bayu-Undan. The Federal Government insists that all the reserves lying outside the zone belong to Australia.

Negotiators for the two governments are to meet again next week, but Timorese officials believe Australia is determined to withhold ratification of the Timor Gap treaty until East Timor agrees to drop claims to any resources lying outside the zone.

Australia has rejected the Timorese position that its economic rights under international law extend 200 nautical miles from the Timorese coast.

"Australia is refusing to budge on its continental-shelf claims and it doesn't want to touch on maritime boundary issues because it is afraid of the implications for its boundaries with Indonesia, " a Timorese minister said.

"But we can't run an economy on development assistance. This revenue is vital for our future and we can't afford any delays to Bayu-Undan."

The Bayu-Undan project, which involves building a pipeline to Darwin, is expected to bring revenue of $US40 million to East Timor in its first year.

Officials estimate production could begin within 18 months of the treaty being ratified.