Background of KPC divestment (taken from KPC?s press release)

KPC?s operations in Indonesia are carried out under a contract between KPC and the Central Government known as the Coal Agreement.

As part of that contract KPC has agreed to offer shares for sale to local investors, being the Indonesian government, Indonesian nationals or Indonesian companies controlled by Indonesians.

The initial obligation was to offer shares after the first four years of operations as per the following schedule:

Fifth year (1996) 15%

Sixth year (1997) +8%

Seventh year (1998) +7%

Eight year (1999) +7%

Ninth year (2000) +7%

Tenth year (2001) +7%

Any shares not sold in a particular year must be offered again the following year until a total of 51% of the shares have been sold.

As a result of the government restructuring its coal interests and publicly announcing intentions to amend the provisions of Coal Agreements it was not practical to proceed with offers in 1996 and 1997 and so by written agreement with the government the process was deferred.

The divestment process commenced in 1998 with offers made by KPC to sell 23% of its shares that year. Further offers were made by KPC in 1999 to sell 30% and in 2000 to sell 37%. There were no acceptances of any of these offers, and so no shares have yet been sold.

During 2000 and the early part of 2001 the Government altered its position with respect to the deferrals and requested that KPC return to the original divestment schedule in the Coal Agreement, which meant that 51% would be offered in 2001. This KPC agreed to do in May 2001. However the divestment offers have not yet been made for 2001 as the price has not yet been finalized.

The price at which the shares are to be offered for sale is based on ?the fair value of KPC as a going concern? and ?giving due consideration to the project investment risk.? There is a process set out in the Coal Agreement for that price to be determined.

In summary it is a three stage process involving:

(1) discussions on the price between the Central Government and KPC and if agreement can not be reached,

(2) appointment of two independent valuers, one to represent each party to the contract and if agreement still can not be reached,

(3) appointment of a third independent valuer to work with the two already appointed to reach a majority discussion on the price.

In 2001 the process remains at stage one with discussions still being held between the Government and KPC over the price. KPC has had a valuation prepared by its advisors Salomon Smith Barney indicating a price of $889m (100% basis). The Government is of the view that the price should be between $583m and $625m (100% basis).

Given the difference in the positions, KPC believes it is appropriate to move to the second stage of the process. (*)