Japan and Iran have signed a basic agreement for a Japanese consortium to develop a major oil field in southwestern Iran, Japanese media reports say.

The reports Thursday said the deal grants the consortium full development rights to the Azadegan oil field, which has estimated reserves of about 26 billion barrels and is believed to be one of the largest in the Middle East.

It could offer a key source of energy for resource-poor Japan, which is also pursuing similar arrangements in Russia and other countries.

The negotiations have drawn concern from the United States that the estimated US$2 billion investment in Iran could pay for nuclear weapons development and terrorist activities.

Officials penned the agreement late Wednesday in Tehran and were soon to follow with a formal announcement, the Nihon Keizai Shimbun, Japan's major business daily, reported in its Thursday morning edition, citing unnamed sources.

Officials in Tokyo declined to comment.

The project is reportedly worth more than 200 billion yen (US$1.9 billion). The Japanese consortium will receive oil equivalent in value to the invested capital plus an undisclosed margin, the Nikkei said.

Production could begin as early as 2006 and is expected to draw up to 400,000 barrels of oil a day, Kyodo News Agency said.

Yasuo Fukuda, chief cabinet secretary, told reporters Wednesday in Tokyo that the two sides meeting in Tehran were near a deal.

"I've heard they are negotiating and working toward an agreement," he said, without elaborating.

The Japanese government-backed consortium has been negotiating for the rights to develop the field for more than three years.

The talks appeared to stall after Washington publicly criticized Tokyo last July for courting Tehran, expressing concern that the planned US$2 billion investment could pay for nuclear weapons development and terrorist activities.

The talks resumed after Iran signed an additional protocol to the Nuclear Non-Proliferation Treaty late last year, allowing unfettered inspections of its nuclear sites, reports said.

Iran and Japan had reportedly notified the United States of their agreement, which was greeted with disappointment.

"Our policy has been, with respect to Iran, to oppose petroleum investment there," Kyodo quoted US State Department spokesman Richard Boucher as saying. "We remain deeply concerned about deals such as this."

Tehran had reportedly begun courting European and Chinese oil companies to bid on the project, after Japanese and Iranian negotiators missed a deadline set for last June.

(China Daily February 19, 2004)