The Indonesian government terminated ExxonMobil's contract to operate the huge Natuna D-Alpha gas block last month, amid high extraction costs and a lack of buyers for the gas.

The US supermajor challenged the move, saying the contract allows for two more years for it and Indonesian state energy player Pertamina to satisfy conditions or proceed with development even if the terms for development of the field are not met by 8 January next year.

"Indonesia is ready to negotiate with ExxonMobil on Natuna D-alpha block. If we are talking about the terms and conditions, then it won't be too long ... It will at least take about three months," the head of BPMigas, Kardaya Warnika, told Reuters.

"Hopefully it could be completed in January and we want the best terms and conditions for the country."

Pertamina has a 24% stake in Natuna D-Alpha block, wiht ExxonMobil holding the remainder.

"We would like to hear what the (Indonesian) government wants, but what we want is a mutually beneficial (agreement) for both parties," said Maman Budiman, Exxon Mobil Indonesia senior vice-president.

Natuna D-Alpha holds about 222 trillion cubic feet of gas, of which 46 Tcf is thought to be commercially recoverable, but the field contains about 70% carbon dioxide, making it expensive to develop and difficult to sell.

Indonesia and Exxon Mobil signed a basic agreement in 1995 covering an estimated $40 billion to be invested in the offshore gas project in the South China Sea.

However, tapping the reserves has proved difficult.

The gas in Natuna D-Alpha, which lies about 1100 kilometres north of capital Jakarta and 200 kilometres of the West Natuna fields, accounts for about a quarter of Indonesia's total gas reserves of 182 Tcf.

Published: 16 November 2006 09:44 GMT  | Last updated: 16 November 2006 09:44 GMT