The Timor Sea Treaty establishes a temporary joint petroleum revenue sharing area in the Timor Sea between Timor-Leste and Australia. The Timor-Leste Government believes the Treaty is a satisfactory interim arrangement that provides certainty and continuity for investors, while generating significant revenue during the crucial early years of national reconstruction.

Timor-Leste Prime Minister Mari Alkatiri and Australian Prime Minister John Howard signed the Treaty on 20 May 2002, and it was ratified by the Timor-Leste Parliament in December 2002 by a vote of 65 to 13. Following ratification by the Australian Government in March 2003, the Treaty entered into force on 2 April 2003.

Under the Treaty, Timor-Leste receives 90 per cent of tax and royalty revenues from oil and gas production in the Treaty area, known as the Joint Petroleum Development Area (JPDA), while Australia receives 10 per cent. See map. The Treaty area encompasses about one third of the total known oil and gas resources which belong to Timor-Leste under international law.

The Treaty provides for the continuation, with certain agreed modifications, of contracts held by companies under the interim arrangements put in place during Timor-Leste's transition to independence. Those contracts relate to the Bayu-Undan and Greater Sunrise fields.

Bayu-Undan is the most significant petroleum deposit in the JPDA. The estimated benefit to Timor-Leste from the full development of Bayu-Undan is around US$5 billion over the life of the field, likely to be around 20 years. There are other smaller discoveries in the JPDA, including Elang Kakatua Kakatua North, and the Jahal and Kuda Tasi fields.

By its terms, the Timor Sea Treaty will terminate when Timor-Leste and Australia reach an agreement on permanent maritime boundaries. The Government of Timor-Leste is hopeful that Australia will, as promised, negotiate in "good faith" and that a satisfactory outcome for both parties can be reached without unnecessary delay.