ANALYSIS-Australia seeks to avoid E.Timor border dispute.

By Wendy Pugh

MELBOURNE, Oct 5 (Reuters) - Australia might have to give up some petroleum revenue to East Timor in talks starting next week to avoid a sea border dispute that could open a Pandora's box of tension with Indonesia and frighten off billions in investment.

East Timor starts talks with Australia on Monday on revenues from the disputed Zone of Co-operation in the Timor Sea, and has signalled it may seek 90 percent of the funds based on border claims that put key petroleum projects in its waters.

The Timor Gap Treaty between Australia and Indonesia evenly split revenues from the zone after the two countries could not agree on a border, but the treaty must be renegotiated following East Timor's vote for independence last year.

Analysts said on Thursday that Australia faced pressure to help the emerging East Timorese nation but would not agree to any move that created a border which diminished its sovereignty and that could create tensions with Indonesia .

"There is no doubt Indonesia will feel quite aggrieved if we have unequal boundaries in certain areas with Indonesia and we suddenly blow the boundary out and make a more equi-distant one in relation to East Timor," said Gillian Triggs, associate dean of the University of Melbourne's law faculty.

"I would have thought these negotiations would be done with a pretty positive view to coming up with an approach which is in the interests of East Timor, but which doesn't significantly diminish the legal position of Australia," she told Reuters.

FUNDS CRITICAL TO EAST TIMOR

The border alongside the Zone of Co-operation is a sensitive issue as several major gas and oil deposits lie just outside Indonesian territory in Australian waters including the 140,000 barrels per day Laminaria project.

Australia has said the first round of talks starting in Dili next week will be more about royalties as East Timor is not yet a sovereign country with the right to negotiate boundaries.

But East Timor's boundary claims underpin its demand for extra revenues, critical to its future as a viable independent nation not reliant on aid from countries including Australia.

It is estimated slightly less than A$6 million has been received by Australia from its share of royalties from the small level of oil production in the zone since July 1998.

But Australia and East Timor stand to gain tens of millions of dollars annually just from the Phillips Petroleum Co operated Bayu-Undan liquids project, due to produce 113,000 barrels per day from 2004.

Australia's claim to the zone of co-operation is based on the "natural prolongation" of its continental shelf which extends to a deep underwater trench close to East Timor.

But other views on the international Convention of the Law of the Sea say that East Timor's case for a mid-point boundary has strengthened since Indonesia signed the original treaty.

Some industry analysts tip Australia could give more than 70 percent of the royalties to East Timor, reflecting the equal validity of its claim and political pressure to help a country to which it has already given millions of dollars in aid.

INVESTORS SEEK CERTAINTY

What no one wants is a border dispute locked up in international courts for years, frightening away billions of dollars of investment.

Australia's government has not disclosed the position it will take to the talks but Industry, Science and Resources Minister Nick Minchin said it wanted a smooth transition.

"It is critical that the new treaty does maintain investor confidence in the Timor Gap. Without that there will be no financial or employment benefits for either the East Timorese people or us," he told Parliament this week. Australian Petroleum Production and Exploration Association executive director Barry Jones said whatever arose from the talks, the petroleum companies needed certainty.

"The first thing that has to come out of these talks is confidence to the industry that existing legal and contract rights will not be altered in any way by the outcome of the negotiations," he said.

The industry is also looking for rules on fiscal arrangements for gas, left out of the original treaty because at the time no one realised the zone of co-operation was more of a gas province than an Australian equivalent to the oil-rich North Sea.

The Bayu-Undan project plans to brings gas to Australia in 2004 and is also considering liquefied natural gas exports.

The North Australian Gas Venture of Woodside Petroleum Ltd and Royal Dutch/Shell has vast gas reserves of 16.9 trillion cubic feet, up to 20 percent in the zone of co-operation, and is also planning major developments.

The treaty renegotiation comes as key decisions by the gas developers and downstream users are due to be taken by year-end.

"It is not in the interests of the East Timorese, or of Australia or of the industry to have any aspect of these negotiations become a stumbling block for major gas developments," Jones said.

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