Reporter: Tanya Nolan

Tony Eastely: East Timor says that if it can't resolve its differences with Australia over maritime rights it wants New Zealand to step in as a mediator. The idea was floated by the country's foreign minister, Jose Ramos Horta, in a speech he gave in Sydney last night.

East Timor and Australia are about to embark on their second round of talks on a permanent sea border. If the first round is anything to go by, then New Zealand might be needed.

As Tanya Nolan reports, both sides are looking further apart than ever, over who has rights to the billions of dollars in oil and gas reserves.

Tanya Nolan: He may not have convinced the Australian Government of East Timor's right to any more of the huge reserves of oil and gas in the Timor sea, but there was no doubt Foreign Minister Jose Ramos Horta had the Sydney audience on his side last night.

(Sound of applause).

And it was to this adoring crowd that the Nobel prize winner put his proposition.

Jose Ramos Horta: If Timor Leste and Australia cannot resolve this dispute, why not get New Zealand? You know, it's a small country, very neutral.

Besides, New Zealand would be more favorable to Australia, because after all, you people are cousins. We are no cousins of New Zealand, so Australia should trust New Zealand as an independent neutral mediator.

Tanya Nolan: The second round of negotiations on a permanent maritime sea boundary between the two countries are planned for September, but both sides are digging their heels in.

East Timor maintains the current boundary agreed to by Australia and Indonesia in 1972 is costing it a million dollars a day in lost oil and gas revenues from the Laminaria Reserve.

But senior policymaker with the Department of Foreign Affairs and Trade Bill Patterson made it clear that Australia's position is strong at law.

Bill Patterson: Australia does not accept East Timor's ambit claims to areas outside the Joint Petroleum Development Authority area and on Australia's side of the 1972 Australia-Indonesia seabed boundary. These are areas of exclusive Australian sea-bed jurisdiction and have been for over 30 years.

Tanya Nolan: But East Timor argues that international law upholds its view that a median line should determine the boundary, which would give it total sovereignty over an area much larger and more valuable than that negotiated under the oil and gas treaty agreed to with Australia in 2002.

Under that agreement, the fledgling nation is set to reap more than $3 billion from the Bayu-undan oilfield alone.

But much more could be made by both countries out of the greater sunrise field, and Bill Patterson was applying pressure on East Timor to ratify the all-important unitisation agreement to kick-start production.

Bill Patterson: I don't want to overstate this point too much, but it is of course difficult to negotiate with confidence with a government which has refused to follow on... follow through on a previously negotiated agreement.

Tanya Nolan: But Mari Alkatiri is holding out for now and his strident criticism of the Federal Government's handling of the current negotiations hasn't gone down well in Canberra.

Despite the impasse, both sides remain confident of reaching a satisfactory agreement, without the involvement of New Zealand, or any other outside mediator.

Tony Eastely: Tanya Nolan reporting.