Dennis Shanahan – In a David and Goliath scenario, a row over oil revenues is threatening relations between Australia and its struggling neighbour East Timor

Many years ago I met the then esteemed governor of Yap, one of the four Federated States of Micronesia, drinking Australian red wine in an open bar in Ponape. He was astute, intelligent, friendly and highly regarded in the former US Pacific colony of the Carolinas. This was no meeting with a world leader where the feeling of power was palpable in the corridors. Quite the reverse – the governor's power was in his weakness.

Every couple of years he had to go to Washington to justify continuing aid to the tiny federation. Instead of quietly throwing himself on the mercy of Congress, if that's not an oxymoron, the governor hired a public relations firm to announce his arrival. Donning a traditional lap-lap, wearing beads and flowers in his hair, the governor would arrive in Washington with a plaited palm-frond bag full of betel nuts.

He played the role of native chief to the hilt and appeared before Congress as a sympathetic public figure seeking help for his tiny nation. He may have been playing the fearsome warrior, but his weapon was publicity and he wielded it deftly. The FSM got its funds.

There is a similiar "David and Goliath" battle, as John Howard puts it, right now and Australia could end up with a public black eye. Worse still, it could sour one of Canberra's most popular initiatives in decades – the creation of the independent state of East Timor. It is no exaggeration to say that Australia's bilateral relationship with East Timor is in danger – that's what Australia told East Timor recently. East Timor is fighting for its future and Australia is playing hard ball with its fledgling ward, for which there is an inordinate fondness and sympathy within the Australian public.

Yet even as Australian troops continue to withdraw this week to allow the East Timorese to take more responsibility for their fate, the relationship is souring. There are signs of popular discontent with Australia in Dili, the East Timor leadership has been publicly scarifying the Australian Government, the Australian Government has heavied President Xanana Gusmao and Prime Minister Mari Alkatiri into silence, and some of our regional allies are concerned with adverse publicity over the deteriotating situation.

The fight is over money – revenue from oil fields in the Timor Gap, some of which are shared by East Timor and Australia and some that are entirely Australia's. Australia insists the borders along the Timor Gap, negotiated with Indonesia, determine the oil rights. East Timor disputes the boundaries and claims they should be moved to give it more oil revenue.

East Timor claims it is losing about $1 million a day in revenue from oil taken in a disputed area of the Greater Sunrise field. Although Australia takes only 10per cent of one field and has agreed to East Timor taking 90 per cent, arrangements in nearby fields give Australia a far greater share of revenue from the region, virtually reversing the ratio overall.

Howard put Australia's position to The Australian as: "In the joint development area, we gave them a 10:90 split on that. Our view is that the original boundary is fair and reasonable. At the time of the Timor Gap negotiations, the idea of East Timor not being part of Indonesia was not something in the Indonesian government's contemplation, so why wouldn't they have driven a hard bargain?"

The East Timor response from Gusmao and Alkatiri is that Australia is at worst robbing East Timor while lecturing to it about corruption and at best being ungenerous after doing so much. East Timor wants to maximise the take from the oil revenue while negotiations over disputed claims are still under way. Give up now and East Timor can't expect anything more in the future.

The arguments in favour of being more generous are that it continues good relations, limits aid claims in the future, provides certainty that allows East Timor to borrow from the World Bank to rebuild its shattered life and prevents the development of a failed state on our doorstep, vulnerable to incursions from Indonesian-controlled territory, terrorist transit and Solomon Islands-style collapes and intervention.

The arguments against are that the deal is already fair to both sides, experience with Papau New Guinea and Nauru suggests aid bills are not limited in the future by generosity now, and endemic corruption is a threat without full accountability of revenue.

The overriding argument, which suggests any further act of grace will have to be outside the present border negotiations, is that Australia will not surrender its borders not only as a principle of sovereignty but also because such a renegotiation would infuriate Indonesia.

Already Gusmao is indicating, as reported this week in The Sydney Morning Herald, that "we can approach this problem with open minds. I believe there are other avenues to go down."

While the focus within the Australian Government is still on the boundary question, to which Australia is implacably opposed, Howard says any solution has to be fair and reasonable.

As for the publicity war and a public black eye, he says: "We can't allow ourselves to be too heavily influenced by that because it's still got to be something that is fair and reasonable to the Australian public as well."

Of course, the Australian public was prepared to heavily back Howard's support for East Timor against Indonesia despite being told by many it was not in Australia's best interests. Surely there's a way around the boundary impasse that gives East Timor a little more and preserves the good will between the two countries.