The deal paves the way for the draft law to be ratified, and for state oil company Pertamina to begin the transition from protected monopoly to equal player in a competitive domestic oil industry.

``The deal will be followed by ratification. When it will be ratified depends on parliament,'' ministry spokesman Budhi Sulistio told reporters. Parliament reconvenes on Monday after its summer break. Under the deal, the power to issue licences for exploration, exploitation and downstream activities would be transferred from state oil company Pertamina to the government.

The government and parliament had been deadlocked on the issue, with legislators saying the government should not be given the power to issue licences. Pertamina had also been opposed to the new law, sayingit needed more time to adjust to the demands of competition.

The mines and energy ministry said in a statement Pertamina would be given two years to prepare to face competition and become a limited liability company. For a transition period of between two and five years, the government would give preferential treatment to Pertamina when awarding licences, it said. The passage of the law is likely to mean the demise of the production sharing contract (PSC), mines and energy officials said. Under the PSC, the power for revenue collection remains in the hands of Pertamina.