"I believe the only way for Indonesia to avoid moving to the status of a net importer in the long run will be improved contract terms for oil companies that will encourage them to explore for additional reserves," said Leon Codron, president and resident manager of ARCO Indonesia.

Codron, who was speaking at the Pacific Rim Forum in Shanghai, added Indonesia's problems arising from the Asian financial crisis had caused its oil demand to decline.

But he said the government should offer incentives to develop small fields."Half a billion barrels of known oil reserves are sitting in fields too small for viable development," Codron said in a speech.

"Economic incentives are needed to make investment attractive in small fields of one to two million barrels each."

Indonesia should adopt a more transparent pricingsystem for domestic natural gas and allow energy companies to deduct the costs of exploration from their taxes, he said.

The government could also diversify more to natural gas, which would generate savings of $500 million to $700 million over the import of diesel fuel, Codron said. He did not say how much time would be needed for the savings.

ARCO has participated in developing the natural gas industry in Indonesia.