Japan's largest oil producer, Arabian Oil Co., has reached a basic agreement with Kuwait on extending its drilling rights in the Khafji oil field, the Ministry of Economy, Trade and Industry said Monday.

The basic agreement means Arabian Oil has cleared the first major hurdle for a new contract covering the Kuwaiti sector of the Khafji field; the company's current drilling concession is due to expire Jan. 4, 2003.

"Negotiations on principles between Arabian Oil and the Kuwaiti Oil Ministry ended in a satisfactory manner on Sept. 9 local time," a senior ministry official said. "Considerable progress was made and we welcome the progress."

The Ministry of Economy, Trade and Industry declined to give details of the principles, including the form of the new contract and its terms, saying the Kuwaiti side asked that the information be withheld.

Kuwait must first undertake the necessary domestic procedures before formally agreeing to the principles. It is not yet known when these procedures will be completed, but if approved, the two parties will officially sign the principles and enter contract negotiations, the official said.

Arabian Oil has been operating in the Khafji oil field -- located off the coast of Kuwait and Saudi Arabia and straddling both countries -- under the existing contract, which was concluded in 1958.

Arabian Oil produces about 140,000 barrels per day in the field, or about 3 percent of Japan's total oil imports.

The new agreement is a lifeline to the company. Most of the firm's revenue has come from the Kuwaiti side of the Khafji field after negotiations to maintain the company's drilling rights in the Saudi Arabian portion collapsed in February 2000.

The current contract with Kuwait allows the company to own the oil it produces as well as the production facilities.

But Arabian Oil and Kuwait must work out new terms, as the Kuwaiti Constitution -- established after the existing contract was signed -- prohibits foreign ownership of the country's natural resources, which it says belong to the state. The negotiations included Keiichi Konaga, president of Arabian Oil, and Hirobumi Kawano, director general of the Natural Resources and Energy Agency. Kuwait was represented by Oil Minister Adel Khaled al-Subeih.

The Japanese side had three goals -- a stable oil supply for Japan, profits for Arabian Oil and a substantial role for the company in the drilling operation.

Konaga and al-Subeih exchanged a memorandum in Kuwait in July to work out a framework for a new contract along with trade minister Takeo Hiranuma within two months.

This raised hopes that forthcoming negotiations would go smoothly, until local opposition in Kuwait brought an unexpected turn.

There is strong sentiment in the Kuwaiti Parliament that the nation's natural resources should be protected, and this led to calls to reduce foreign involvement in Khafji.

"Within the Kuwaiti Parliament, there is the nationalism of protecting domestic natural resources and the power of the Parliament in Kuwait is strong, compared with other countries in the region," a ministry official said.

With the loss in Saudi Arabia in mind, Arabian Oil and the Ministry of Economy, Trade and Industry began talks on renewing the firm's Kuwaiti contract well ahead of the expiration date, the ministry official said.

Since the company began drilling in the Khafji field in 1961, Arabian Oil has supplied about 2.8 billion barrels of oil to Japan, or about 46 percent of oil developed by Japanese oil companies.