Australia and Timor Leste have agreed to walk away from a controversial deal over a lucrative A$50 billion (S$53 billion) oil and gas field, a step in resolving a long-running bitter dispute over their maritime border.
In a joint statement released yesterday, the two countries said they had agreed to negotiate a permanent maritime boundary - a process being overseen by the Permanent Court of Arbitration.
Timor Leste has long pushed for a 2006 treaty to be scrapped, arguing that it unfairly divides revenue from the Greater Sunrise fields and that Australia had spied on its officials during negotiations in 2004.
The treaty, which equally divided revenue from the fields and set a maritime boundary for 50 years, will become ineffective three months after Dili's formal notification.
"The parties recognise the importance of providing stability and certainty for petroleum companies with interests in the Timor Sea and of continuing to provide a stable framework for petroleum operations and the development of resources in the Timor Sea," said the joint statement by Australia's and Timor Leste's foreign affairs ministers, Ms Julie Bishop and Mr Hernani Coelho, along with the arbitration court.
Timor Leste, formerly an Indonesian territory, is heavily dependent on future revenue from the Greater Sunrise fields to secure its economic future. The tiny country gained its independence in 2002, with the help of an Australian-led international force, but ties with Canberra have become deeply strained over the long-running border dispute.
The two nations have been conducting a one-year confidential conciliation process overseen by a five-member panel from the Permanent Court of Arbitration.
The conciliation is being hosted by the court, which is based in The Hague, but meetings have been held in Singapore.
An international law expert, Professor Donald Rothwell, said the announcement marked a significant shift for Australia, which had signalled for the first time that it was willing to accept the establishment of a permanent maritime border.
He added that the conciliation talks appeared to be "moving forward" but the shape of the final boundary remained unclear.
"All the signs from the conciliation are promising," he told The Straits Times.
"Australia is prepared to countenance a permanent maritime border as a result of this process.
"Australia has never made that concession previously."
The conciliation process, which is due to end in October, is compulsory but its findings are not binding. Most analysts believe the talks could lead to a boundary that is far more favourable to Timor Leste than the existing arrangement.
The current treaty sets the boundary according to the continental shelf but most international law experts believe the border should be marked by the midway point between the countries.
Such a change would place the Greater Sunrise fields - discovered in 1974 - entirely, or mostly, in Timor Leste's territory.
The fields are due to be operated by Australian resources firm Woodside Petroleum, which welcomed the move to negotiate a permanent boundary.
It said: "Woodside understands the Timor Sea Treaty remains in place and we look forward to an agreement that allows for the earliest commercialisation of the Greater Sunrise fields, which promise great benefits for all parties."
In an explosive development in the dispute, Timor Leste in 2012 accused Australia of using spies from its foreign intelligence agency to bug the Cabinet office in Dili in order to gain a negotiating advantage.
Australia has not admitted to spying but it seized the passport of a former spy who allegedly informed Timor Leste's representatives about the alleged spying.