At the October meeting, representatives of the Australian government argued that the current terms of the treaty should be maintained.
They were particularly concerned to preserve the current maritime boundary between the two countries and the division of royalties from oil and gas developments.
The split for royalties is currently set at 50-50 in area A of the zone of cooperation, where nearly all the reserves are located, although it is believed the government was prepared to agree to a 60-40 split in East Timor's favour.
Representatives of the East Timorese and of the United Nations Transitional Administration in East Timor (UNTAET) proposed a new arrangement, stating that they did not accept the current treaty as legally binding, as it only came into existence because Australia formally recognised Indonesia's illegal occupation of East Timor.
Furthermore, they argued that the boundary should be set along the half-way line between the coastlines of Australia and East Timor, in accordance with international norms and the UN Convention on the Law of the Sea.
If this were to take place, then East Timor would have lone sovereign rights over huge gas and oil fields. While under such a situation East Timor would be entitled to all of the royalties, the East Timorese proposed a 90-10 split with Australia.
Both sides of the dispute have refrained from commenting openly on the state of play following the October deadlock. Until recently there have been no public comments or statements by UNTAET, East Timorese political leaders or the Howard government.
The federal government has refused to reveal its position publicly, claiming this would counter the "national interest". The reason behind its reluctance seems to be the fear of a public backlash against a policy that would result in East Timor being denied desperately needed revenue while Canberra's coffers filled.
According to a January 15 article in the Sydney Morning Herald, there have been a number of "informal" meetings held to help overcome sticking points prior to the next official round of talks, set to be held possibly in March.
In the article, East Timorese negotiator Mari Alkatiri was quoted as saying "new ideas have been adopted by both sides" and "we are closer now to a consensus about dealing with the issues". Alkatiri believes that a settlement may take place as soon as July or August.
The Herald report also claims that the "Australian government is retreating from its tough opening stance on the oil revenue split", inferring that it may now be prepared to accept a greater share of royalties going to East Timor.
There have been wide and varying estimates on the amount of royalties that developments in the Timor Gap will actually generate. At the time of the first round of negotiations, UNTAET head of political affairs Peter Galbraith told ABC radio "It could mean between US$100 million and US$200 million for East Timor by the end of the decade, depending on how these negotiations turn out".
"For a country whose annual budget is just US$45 million that makes all the difference", Galbraith added. "The resources of the Timor Sea could make the difference between having to choose between children's health and children's education to being able to do both".
A January 17 article in the Australian Financial Review cited a government source as saying that the federal cabinet will consider a new proposal in February to take to the next round of negotiations. The source claimed the new proposal would result in Australia forgoing up to $70 million a year in royalties.
A report in the January 5 Australian claimed that a 60-40 split in East Timor's favour would net the country as much as US$100 million a year.
Foreign minister Alexander Downer has previously threatened that if Australia was to lose royalties the federal government would reduce its aid commitment of $150 million over the next four years.
East Timorese leader Xanana Gusmao highlighted the crudeness of this blackmail attempt by the Australian government. "It is preferable that we get it [oil revenue] rather than it goes to Canberra and then comes to us as aid", he told the Herald.
Australian solidarity groups have backed the East Timorese stand in the negotiations. One of the most prominent, Action in Solidarity with Indonesia and East Timor, plans to increase its campaign efforts to ensure that East Timor is not forced to accept a drop in any aid commitment from Australia as a result of it gaining greater access to natural resources and royalties that it is rightfully entitled to.
ASIET is also calling for the Australian government to return any royalties it may receive from a new settlement, as partial compensation to the people of East Timor for the support given by successive Australian governments to Indonesia's 24 year long occupation of East Timor.