Now to East Timor, where for the last three days, teams from there and Australia have been in bitter negotiations over where our sea boundaries lie and who will control the oil and gas royalties within them, worth an estimated $30 billion. This has been an ongoing issue between the two countries, which to date has been handled reasonably amicably. But now there seems to have been a radical change of mood with anti-Australian sentiment rising by the day. Mark Davis spent the last few days in the capital, Dili, amongst the protesters, politicians and negotiators battling over the spoils.

Reporter: Mark Davis

It's crunch time for East Timor, foreign aid is rapidly drying up and next month the UN will finally withdraw its security forces. President Xanana Gusmao knows better than most the crisis East Timor will soon be facing. For Gusmao this school in the hills above Dili is just one corner of the looming problem. There'll be barely enough to pay the teachers and virtually nothing to fix the still ruined classrooms.

Xanana Gusmao, East Timor president (Translation): Today we are still begging. They give us money with a smile and say "Take it", We have no money.

There's a new bitterness here. The dream that East Timor's natural resources would rescue the countries as the aid disappeared is rapidly fading.

Xanana Gusmao (Translation): You might have heard that we have oil, kerosene and gas in our sea that people want to steal. They are the resources that can help us to fix everything.

While various deals have been signed with Australia regarding the oilfields that lie between the two countries, Xanana has publicly barely uttered a critical word. Until very recently his Prime Minister has presented those deals to the public as not ideal, but at least reasonable. Xanana's venom on this day, a couple of weeks ago, was a bolt out of the blue.

Xanana Gusmao (Translation): Australia is a rich country. A rich country which recognised our past integration. After that, Ali Alatas and Gareth Evans flew over East Timor drinking champagne and signing the agreement to steal our oil.

Protester (Translation): You don't understand what I'm saying. This petrol zone is mine and that is yours. Understand?

For many of the activists here the Australians have always been plotting to steal East Timor's oil. The dramatic difference now is that their President and Prime Minister are joining in the chorus. PROTESTER: Australia is cheating.

The Timor Sea Treaty signed between Australia and the new East Timorees Government in 1992 was condemned at the time by many of the organisers here. The treaty was seen as selling out East Timor's full maritime boundaries for a short-sighted gain. Although not said today, those deals were negotiated by Prime Minister Mari Alkatiri.

Mark Davis: Was that in retrospect a mistake?

Mari Alkatiri, East Timor Prime Minister: Yeah, because this is temporary agreement. That's why we can sign it before the maritime boundaries. If this only was a real show of goodwill and good faith from our side.

Mark Davis: Do you believe that good faith has not been returned, was to your expectation that Australia would have progressed on these other fronts.

Mari Alkatiri: In the beginning it was various starting points in the negotiations. We knew we had one, two, three years to go. I still believe that Australia will realise that there's no way than to submit to the rule of law.

Sorting out a maritime boundary between the two nations was never going to be easy or fast. In 1972 Australia settled on a sea border with Indonesia.

Portugal, which then controlled East Timor was not a party and hence the so-called Timor gap in the border. After the Indonesian invasion, Australia and Indonesia agreed, not on formal borders, but on a joint exploitation zone splitting profits 50/50. After independence it was essentially this zone that Australia and East Timor negotiated over. It was agreed that 90% of oil profits would go to East Timor, still without defining any maritime border over an area much less than what East Timor claims is its rightful territory. Australia retained it's oil field west of the joint development zone and most of its Sunrise field to the east, 80% of it. Mario Carrascalou was a senior opposition figure who opposed East Timor signing the treaty.

Mario Carrascalou: Demonsrate against the government, second against the parliament and then in the third place against Australia.

Mark Davis: The Government in East Timor, demonstrate against this government?

Mario Carrascalou: Yes.

Mark Davis: Because why, because it was their deal.

Mario Carrascalao: Because they are the one that brought – signed the agreement and brought this through the parliament, and the parliament ratified it. And now, why should we blame Australia?

Mark Davis: So in your opinion the issue of the maritime boundary should have been settled before there was any discussion about sharing the oil resources.

Mario Carrascalou: No doubt about that and I also am aware that it was not so difficult but in order to have a good relationship with any other country here in the region, you have to take and give. Everybody had to realise that, that you cannot just force the position to be accepted by other sides. I believe we can reach a better agreement, a fair agreement to both sides.

Whether it was a good deal or a bad deal it was certainly Mari Alkatiri's deal, and for the Australian negotiators at this week's maritime boundary talks, it's a deal that the Prime Minister is now trying to get out of.

The dollars have started to flow to East Timor from the joint development area.

But, a second agreement covering Australia's principle area of interest, Greater Sunrise, signed by Alkatiri last year has not been presented to his parliament for ratification. A frustrating blockage for Australia, which has already begun negotiating with companies to develop the field.

Mark Davis: Is this why the relationship has deteriorated quite recently because Australia is issuing licences for Greater Sunrise.

Mari Alkatiri: I think the situation is only between the Prime Minister, Mari Alkatiri and the Government of Australia, not between the two people.

Mark Davis: I'm sure it's not. Both people have interest in what the boundaries are, both people's have interest in the proceeds of these fields. At that meeting, November 2002, you – Mr Downer did put very firmly that as far as he was concerned there was an agreement on Greater Sunrise.

You appeared to agree with that, although you were firm on maritime borders, you didn't want to question the 80/20 split on Greater Sunrise, pending to Maritime boundary discussions.

But it's unlikely there'll be any agreements coming out of this week's maritime boundary discussions. At Alkatiri's side is Peter Galbraith his constant advisor through four years of oil and border negotiations.

Their strategy has been a high-risk one, do the best deal possibly on the joint development area and leave the bigger fight over borders and rich oilfields until later in an international court if necessary.

Mark Davis: Is that part of the strategy to get enough assets to play a tougher hand later?Peter Galbraith: Absolutely. The idea was to pocket as much of the revenues as possible and there are to leave East Timor in a position where it had a stronger hand for future negotiations about areas outside the JPDA, Buffalo, Corallina and Laminaria on the west, and Sunrise on the east.

Galbraith's and Alkatiri's strategy of dealing with broader boundaries later took a turn for the worse when Australia withdrew itself from the jurisdiction of the International court of justice.

Peter Galbraith: The fact is you never withdraw from the jurisdiction of the court unless you think your case is weak.

Mark Davis: Would you ever anticipate that Australia would withdraw from the subsection International Court of Justice jurisdiction.

Peter Galbraith: The Australians from time to time in the negotiations under the Timor Sea Treaty, said that they might do so, frankly I didn't believe it because I had an imagine of Australia as one of those countries like the Scandinavian countries that was very law-abiding, believing in the United Nations a kind of good Government country in the world and I thought what they did was completely out of character.

Relationships here have soured dramatically in recent months and will probably only get worse today as Alkatiri announces that East Timor will legally challenge any company that deals with Australia in the Greater Sunrise field.

Mark Davis: Any response? Very strong opening sir, do you imagine there's much room for discussion after that speech.

Mari Alkatiri: The room is too big.

Mark Davis: Too big? Yeah. There was a stunned silence, do you imagine there will be much discussion now?

Mari Alkatiri: It's better to be transparent, to be clear, to be straight forward. This is the only way to convince the other side that we are here to negotiate, but in good faith.

Mark Davis: Is this a new stage in the discussions to be so frank, so forward.

Mari Alkatiri: This is my style.

Mark Davis: Now that Australia has withdrawn from the International Court of Justice, what strategy do you have, what leverage do you have to persuade Australia to make any changes whatsoever to the agreement.

Mari Alkatiri: Of course as leading figure in all this negotiation from East Timor's side I have my strategy. But, unfortunately I cannot disclose it.

Politics in East Timor is almost a one-party affair. Alkatiri's group enjoy an overwhelming majority and opposition voices can be lonely ones.

Politician, (Translation): Now everyone is calling Australia a thief. Australians are stealing oil, they're thieves, but we're not.

The debate on the maritime boundaries and the previous treaties that have been signed has become even more complicated by a bribery scandal that broke in March. In a statement of claim filed in the US, Oceanic Explorations which believes it holds an old title to the Timor Sea claims that Alkatiri received $2.5 million from ConocoPhillips to secure leases in the joint development area agreed to by East Timor and Australia.

ConocoPhillips and Alkatiri both regard these allegations as baseless.

Mark Davis: These negotiations are now entering the most important stage for you being the maritime boundaries that are somewhat overshadowed by another controversy, which is another oil company has accused you of accepting bribes or you have been influenced to sign these papers.

Mari Alkatiri: I already make clear my position, I denied everything and I'm not in a position to challenge them to come with facts.

Unfortunately, I was not presented or defended in court. Very unfortunate. I would prefer them to accuse me and put me in a place to defend it to. It's important that I – they insist that it was made intentionally. Their lawyer made it intentionally and was based on an America laws. I can't do too much to attack them. I've been watching them through my lawyers, trying to get some opportunity to react. Now I challenge them publicly to come with facts and try to accuse me in the court or everywhere.

The Oceanic claim is not convincing in itself but it does provide some detail. It gives the names of two bank branches in Darwin and bank account numbers through which they claim the money was paid.

Mark Davis: It's a terrible slander if it's not true. There is a reasonable amount of information, bank accounts, payment details, dates.

Mari Alkatiri: You have a bank account, you pay for your key to the school with cheques, or to a supermarket and you use cheques to pay something.

Of course the bank account is open. The numbers remain open. But, those amounts are for money that were really talking about, is completely false.

Please come with these facts. I know quite well how much money I had, maximum, in this bank account. I never had more than a few thousand, very few thousand.

Mario Carrascalou's son works for Petrotimor a subsidiary of Oceanic, but says there's no family interest in either company. He knows nothing of the charges but believes the allegations have affected the Government's recent behaviour.

Mark Davis: When did this talk about Australia being a thief and stealing, when did this start.

Mario Carrascalou: It is just, perhaps, one month ago, we start to see in the papers a statement made by Dr Mari Alkatiri saying that, they say that the Australian Government, always mention the Australian Government because Alkatiri try to make a difference between the Australian Government and people, they used it to make a statement. This is about a month ago.

It's quite recent. Almost two years, they considered us the opposition, as the one who tried to sabotage everything in East Timor, by voting against this also. The country needs money.

Mark Davis: Why is it starting now, why is this quite aggressive talk about Australia starting now. Has anything changed?

Mario Carrascalou: I do not know what really happened, but if you – even because the allegations, some bribes, it was after that. This demonstration perhaps is a way, also to get the attention of the people from something.

Something must be behind that. Everybody knows that the credibility of this Government, it's losing its credibility. Last meeting with the country in East Timor there was some problem, we realise that, so perhaps they wanted to show that they are carrying, taking care of the future of our people. Perhaps this is to create a new face, new image, who knows.

Mark Davis: Or a new enemy.

The Oceanic claim also makes an explosive accusation about the Australian embassy in East Timor, they claim that payments to many Timorese politicians were made inside the Australian embassy in Dili to relinquish their oil rights. The Australian Department of Foreign Affairs categorically denies the claim. The allegation concerning the Australian embassy did not include Alkatiri at all but it did include other parliamentary members.

Mark Davis: One of the accusations in those court documents is that the Australian embassy was involved in handing over...

Mari Alkatiri: Do you believe?

Mark Davis: It's not for me. It sounds credible there's individual names.

It's true it is a scandal of massive proportions it involves the Australian Government, embassy, politicians in East Timor...

Mari Alkatiri: All of it is rubbish.

Mark Davis: It would negate all negotiations and agreements that had gone on. Have you asked the Australian Government for their response to those allegations, have you asked them for any information regarding those claims?

Mari Alkatiri: No, not at all because I didn't believe. Because if they were really able to say that I received bribes, an amount of $2.5 million...

Mark Davis: Leaving that on the side.

Mari Alkatiri: The same line, I know it's not true it's false. It's frivolous. Why could I believe other kind of allegations?

Oil, like it seems to everywhere, is building clouds of suspicion and distrust. With billions of dollars at stake, these now strains between Australia and East Timor aren't likely to be getting any better any time soon.