Kuwait said yesterday it had agreed with Japan's Arabian Oil Co Ltd (AOC) to end its 40-year oil concession in the Neutral Zone on January 4, 2003. The shape of AOC's future role in the zone, equally shared with Saudi Arabia, will be agreed upon in later talks but the two sides reached a non-binding agreement in principle on it.

The memorandum calls for a "long-term" supply deal with Kuwait selling Japan no less than 100,000 barrels per day from Khafji crude in the zone at prevailing market prices. It says AOC will extend soft loans to finance some zone operations at lending rates below international market levels.

Kuwait Oil Ministry said in a statement to Reuters: "The memorandum stipulates several principles, the most important of which (is) ending AOC's concession in the Neutral Zone which it acquired in 1958 and ends on January 2003."

Following Kuwait's 1961 independence from Britain, the country's constitution banned production sharing and foreign ownership of natural resources like oil. Opec member Kuwait sits on almost 10 per cent of the world's oil.

The Japanese firm, which last year lost its deal with Saudi Arabia, was originally hoping to maintain a larger presence in Neutral Zone operations, executives said, but the new deal centres around technical assistance and oil sales.

The Kuwaiti statement said:

"The memorandum also stipulates that principles agreed upon are not legally binding...and does not oblige them to forge any deal in the future but invites the two sides to enter into detailed negotiations...on the possibility of reaching a deal for technical consultancy, other agreements to supply Japan with Kuwaiti crude and receiving soft loans to be arranged by AOC."

Earlier yesterday, an official with Japan's Ministry of Economy, Trade and Industry (METI), Tetsuhiro Hosono, said AOC and Kuwait would now begin talks to negotiate details of the three contracts for signing before January.

AOC shares ended the day up 1.39 per cent or 13 yen at 950 yen ($8.1). Saudi Arabia and Kuwait each have a 10.94 per cent stake in AOC, Japan's major offshore producer.

The Kuwaiti statement said the aim of any future deals between the two sides include the need to benefit from Japan's technological advancements and training of Kuwaitis to be able to take over operations in the Zone.

Executives had told Reuters that state-owned Kuwait Oil Co (KOC), the country's sole domestic oil producer, is forming a task force to eventually take over from AOC.

Earlier this month, a Kuwaiti delegation visited Saudi Arabia to brief it on the talks with AOC. The two allies agreed on the formula to conduct joint oil operations in the area and to move its management centre to Kuwait.

Kuwait Oil Ministry undersecretary Isa Al Aoun said then that further consultations were planned to define an appropriate method "to manage the area during the interim period which will follow the end of the agreement with AOC."

In February 2000, AOC gave up its rights to produce oil in Saudi Arabia, losing a drilling concession representing Japan's premier upstream overseas oil interest, due to differences on terms and Riyadh's insistence on Japanese investments.

The kingdom set up its own firm which took up operations in the area after AOC lost its Saudi Arabian rights.