Arabian Oil Co., a state-backed Japanese oil developer, and the Kuwaiti government failed to reach agreement on Arabian Oil's bid to continue operating in the Khafji oil field, the Ministry of Economy, Trade and Industry said Friday.

They did agree, however, to continue negotiating in the hope of reaching an early accord on the issue, the ministry said.

Arabian Oil President Keiichi Konaga and Hirofumi Kawano, director general of the Natural Resources and Energy Agency, both of whom are in Kuwait to try to finalize a deal with Kuwaiti Oil Minister Adel Khaled al-Subeih, failed to broker an agreement by Thursday's deadline, Kuwait time.

"Both parties agreed that, even if final adjustment for the deal does not come before the deadline, negotiations will continue beyond that," Arabian Oil said in a statement issued in Tokyo.

Negotiations were expected to resume today, following a Kuwaiti national holiday Friday.

Arabian Oil aims to secure operational rights in the Kuwaiti side of the oil field before its current drilling concessions expire in January 2003.

Since last Saturday, the two sides have been striving to reach an accord in line with a basic operational rights agreement forged by Subeih and trade minister Takeo Hiranuma in July, a ministry official said.

But resistance from Kuwaiti politicians, who have called for Kuwait to promote its own oil development, could hinder this goal, the official said.

In this context, members of the Kuwaiti legislature have invoked the country's Constitution, which stipulates that natural resources belong to the state.

A proposed new contract would allow Arabian Oil to drill in the field on behalf of the Kuwaiti government -- rather than owning concessions -- with the company receiving commission fees from Kuwait under a technical service contract, negotiation sources said.

The duration of a contract of this kind could be around five years, assuming it is renewed, the sources said.

Arabian Oil currently produces 140,000 barrels of crude per day.

In February 2000, Arabian Oil lost its drilling concessions in the Saudi Arabian portion of the same oil field, after having drilled the field in the formerly neutral zone between Kuwait and Saudi Arabia since 1960.

Arabian Oil is Japan's largest oil producer.

It is owned by the Saudi government, Kuwait Petroleum Corp. and other investors, including Japanese power companies such as Tokyo Electric Power Co. and Kansai Electric Power Co.