* Period given as "compensation" for earlier changes -minister
* Inpex hopes to increase output from the project
* Indonesia pushing for domestic supply, but demand stagnant (Adds comment from local Inpex office, context)
JAKARTA, Oct 19 (Reuters) - Indonesia has agreed with Japan's Inpex to extend the company's contract to operate the Masela natural gas field in the country's east by up to 27 years once it expires in 2028, the energy ministry said in a statement on Thursday.
"This decision ... will give a 20-year extension to Inpex because their contract is almost over, with an additional seven years as compensation for changing the refinery development scheme from floating to land-based," Energy and Mineral Resources Minister Ignasius Jonan said in the statement.
An Inpex spokesman in Jakarta confirmed Jonan met Inpex CEO Toshiaki Kitamura in Japan on Tuesday, and said the company was aware of media reports on the decision to extend the Masela contract.
"We continue to be engaged in discussions with the Indonesian government regarding the extension of the Masela PSC," Inpex media relations specialist Moch N. Kurniawan told Reuters, declining to provide further details.
Indonesian President Joko Widodo in March 2016 rejected a $15 billion plan by Inpex and its partner Royal Dutch Shell to develop what would have been the world's largest floating LNG facility to process gas from Masela, saying an onshore plant would benefit the local economy more.
The move was a blow to both companies and pushed the anticipated start of production from the field to the late 2020s, as development plans had to be revised.
Inpex subsequently asked to increase output from the LNG plant to 9.5 million tonnes per year, but the government has pushed the company to set aside a larger portion of the gas via a pipeline to domestic buyers.
The Masela block, located in the Timor Sea near Indonesia's border with northern Australia, is 65 percent owned by Inpex and 35 percent by Shell.
Inpex is also working with BP, Mitsubishi, China National Offshore Oil Co, Sumitomo and Sojitz on an $8 billion expansion of the Tangguh project in West Papua province that will boost annual LNG production capacity there by 50 percent.
This week, Indonesia asked LNG Japan Corporation to work with the local regulator to cut production costs at Tangguh, the ministry said, amid efforts to keep manufacturing and power generation costs down.
Indonesia's gas demand has been in decline in recent years, and questions remain around how quickly Southeast Asia's largest economy can develop infrastructure to absorb gas from these projects.
(Reporting by Bernadette Christina Munthe and Wilda Asmarini; Writing by Fergus Jensen; Editing by Christian Schmollinger and Tom Hogue)