The government has told East Timor the fledgling nation can't tax a lucrative pipeline from a Timor Sea gas field, in a move that has further soured relations between Australia and its neighbour.

East Timor's legal advisers believe Australia's stance gives the country further grounds to launch another round of arbitration over the Timor Sea Treaty, the agreement that governs $40 billion in oil and gas revenues that the nation wants declared invalid.

Taxing times: Gas is sent from the Timor Sea through a pipeline to Darwin for processing. Credit:Rob Homer

The government has been embarrassed by revelations it bugged East Timor's government offices as it negotiated the treaty and the espionage is being used by East Timor to force an arbitration in the Hague to have the treaty declared void.

Multinational energy company ConocoPhillips operates the Bayu-Undan natural gas facility in the Timor Sea, sending gas through a pipeline to Darwin for processing.