Four years after Australia helped East Timor gain independence the good will is being threatened by a disputed line on the seabed that will decide how revenue from the multi-billion dollar oil and gas deposits is divided.

The stakes are high for both parties. For East Timor, which operates on an annual budget of less than $100 million – about what the Australian government spends on advertising – redrawing the seabed boundary would put $US12 billion in its coffers over the next generation, compared with $US4 billion currently.

Australia's concerns centre on the potential political and economic consequences of redrawing the boundary. Australia is determined that East Timor's border will not provide a source of friction with our largest neighbour, Indonesia.

The dispute dates back before Indonesia's 1975 invasion of East Timor. Australia negotiated a seabed boundary with Indonesia but was unable to reach an agreement with Portugal, which was the colonial ruler of East Timor.

In 1989 Indonesia and Australia reached a compromise with the Timor Gap Treaty, effectively sharing equally the income from oil and gas in the area between the two proposed boundaries, known as the "gap".

It is in this zone that the most significant finds of gas and oil have been found to date.

The gap treaty sparked an exploration boom in the Timor Sea that led to a string of oil and gas discoveries – 16 in the last five years alone.

After Indonesia withdrew from East Timor in 1999, the 1989 gap treaty was declared illegal by the United Nations and East Timor sought to renegotiate the boundary.

Australia has come to the table, but steadfastly refused to redraw the seabed border. It fears Indonesia would query that border and may then seek to renegotiate the entire maritime boundary between Australia and Indonesia.

This would potentially endanger Australia's prospects in a much wider area, estimated to contain around 424 billion cubic metres of gas – about twice the reserves of the North West Shelf.

Instead, Australia proposed a provisional agreement under which East Timor would get 90 per cent of the taxation and royalty revenue from oil and gas in a joint development zone, but the boundary would be left unchanged.

This led to the signing of the Timor Sea Treaty between Australia and East Timor on May 20, 2002, the day East Timor officially became a sovereign nation.

The treaty gave the security needed for ConocoPhillips and its partners to pour billions of dollars into the Bayu-Undan gas field, which lies entirely in the joint development area with reserves of 400 million barrels of condensate and LPG.

By 2007, tens of millions of much-needed dollars in taxation revenue and royalties should be pouring into East Timor's coffers.

But East Timor now argues that it should be entitled to full sovereignty over the joint development area and that the eastern and western edges between East Timor and Indonesia should be realigned.

A small shift to the west would give East Timor all the royalties from Woodside Offshore Petroleum Pty Ltd's Laminaria oil field – estimated at about $300 million a year for the next several years.

Luminaria and nearby Corallina started production in November 1999 from one of the world's largest floating production facilities.

Since start up, production has averaged 142,500 barrels per day. But it is the eastern boundary that has the greatest potential to affect the revenue divide.

The current line on the seabed puts 20 per cent of the massive Greater Sunrise gas fields inside the joint development area, with 80 per cent under Australia's seabed. Shifting the line just a few kilometres eastward would reverse the revenue split.

Development of Greater Sunrise, owned by Woodside Energy Ltd (33 per cent), Phillips STL Pty Ltd (30 per cent), Shell Development (Australia) Pty Ltd (27 per cent) and Osaka Gas Australia Pty Ltd (10 per cent), is currently in limbo.

It cannot go ahead until the East Timor parliament ratifies a so-called Unitisation Agreement signed last year which governs how the field is to be taxed and the revenue divided. In the present climate, it may be some time before this occurs.

The Greater Sunrise partners have not yet agreed on a developmental concept for the field, which is estimated to contain 238 billion cubic metres of gas and 320 million barrels of condensate.

Options include processing the gas in East Timor, at the Wickham Point LNG plant at Darwin, or at sea on a ship.

Australia has been in no hurry to resolve the dispute. Two years after East Timor's independence, the first substantial negotiating session was held in April, and another won't be held till at least October.

The issue is more pressing for East Timor. It says that every day the dispute remains unresolved costs it $1 million in oil royalties from Laminaria – or $1.5 billion since 1999. It wants the royalty money held in escrow until a final agreement has been negotiated.