Woodside's $14 billion Sunrise development proposal is already deadlocked by East Timor's rejection of its floating LNG processing plant, but chief petroleum negotiator Francisco da Costa Monteiro has raised the stakes.
He told The Australian East Timor would seriously consider terminating the treaty at the first opportunity, February 2013, if the dispute remained unresolved.
Mr Monteiro said the Dili government would take into account "all consequences" of ensuring Sunrise gas was piped to East Timor, "even be it a breaking-up of the treaty".
"Any treaty must ensure the two sides are happy, but at the moment Timor Leste is not happy and I speak not just as a commissioner but for all Timor Leste citizens," said Mr Monteiro, who represents his government on the Sunrise Commission, the joint Australia-Timor regulatory body.
The Treaty on Certain Maritime Arrangements in the Timor Sea runs 50 years from February 2007, but either country can terminate in February 2013 if there is still no development approval.
The treaty resolved the problem that 80 per cent of the field was under Australian jurisdiction, although disputed by its tiny neighbour, by dividing gas and condensate royalties 50:50.
East Timor gets a 90:10 royalty split in the Joint Petroleum Development Area, which covers 20 per cent of Sunrise.
Overturning the treaty would return Greater Sunrise to first-base negotiations and reopen the longstanding boundary dispute, frozen by the treaty until 2057.
Woodside, which holds 33.4 per cent of the field, estimates the resource at 5.13 million cubic feet gas and 226 million barrels of condensate.
ConocoPhillips has 30 per cent, Shell 26.6 per cent and Osaka Gas 10 per cent.
The December Sunrise Commission meeting broke down when East Timor asked for suspension of consideration of Woodside's proposals while rights over the "downstream" project were clarified.
Dili appears to be pressing Canberra -- which has refused to intervene on commercial considerations -- to take a direct role in negotiations.
East Timor wants the gas piped to Beacu on the south coast, where an LNG plant would anchor the government's ambitious southern industrialisation plan.
Woodside argues the Timor option would cost $5bn extra, while floating LNG would maximise benefits it estimates at $US13bn ($12.9bn) to East Timor over the project's life, and $US19bn to Australia.
It argues a pipeline across the deep Timor Trench is "technically feasible" but poses "technical, operational and commercial difficulties".
Woodside's largest objection is additional financing cost -- a suggested 6 per cent risk premium -- associated with a project in a country that has never had such development.
Secretary of State for Natural Resources Alfredo Pires said he had best industry advice there were no outstanding technical difficulties with the pipeline.
East Timor had other serious issues with Woodside's project shaping. "But should everyone align with the Timor Leste LNG option, then we are ready to move yesterday," he said.
"We feel that one pipeline (from Bayu-Undan) has gone already to Australia and has provided a number of benefits to the people of Australia, particularly Darwin, and it is only fair that the next one does the same things for the people of Timor Leste."
While the dispute continued, he said, East Timor would spend up to 18 months on studies establishing that Timor LNG was viable and commercial.
Mr Pires questioned the operational viability of floating LNG, developed by Shell -- which was still to launch its first FLNG project, Prelude off WA -- and an "extraordinary" reduction in the gas resource estimate from 7tcf to 5.1tcf.
Mr Pires criticised Woodside chief executive Don Voelte, who retires this year, claiming other partners told him they also were unhappy with his "arrogance".
"So we look forward to discussing Greater Sunrise with the next chief executive of Woodside . . . I think his level of frustration has just got the better of him now."
A Woodside spokeswoman declined to comment. However, she pointed to a February 21 presentation by Mr Voelte indicating that FLNG was unanimously endorsed by the partners, met all treaty obligations and Woodside was "driving forward" to a final investment decision.
Speaking afterwards, however, Mr Voelte evinced impatience with approval problems and said Woodside had other, unspecified options.