The memorandum of understanding was signed during a recent visit to China by Indonesian president Susilo Bambang Yudhoyono. The exact details on the agreement, including the investment amount, have not yet been disclosed.

The Tuban refinery, which will process crude oil pumped from fields operated by Exxon Mobil Corp and Santos, is crucial in helping reducing Indonesia's dependence on fuel imports.

The government said that investors were reluctant to build refineries because of the low margins this business offered in an environment of subsidised fuel prices.

The government wanted the Tuban refinery to start operating in late 2007. It had issued permits to 17 companies to build oil refineries but none had begun construction, probably because of uncompetitive fuel prices and unprofitable market conditions.