No. 2 — January 14, 2000


Weekly Review

--- by Marc Castellano

In a last-ditch effort to secure extended crude oil production rights for Tokyo-based Arabian Oil Co., Ltd., International Trade and Industry Minister Takashi Fukaya has scheduled a January 15-16 trip to Saudi Arabia for what is supposed to be a final series of negotiations. Because talks conducted over the last few years have been unsuccessful and the two sides remain at loggerheads over a key issue, the outcome of the upcoming round is, at best, uncertain.

The stakes are high. Japan depends on the Middle East for more than 80 percent of its crude oil imports, and Arabian Oil, Japan's largest supplier, accounts for 5 percent of total purchases. The company's exclusive rights to exploit the Khafji oil field, located offshore from the former neutral zone shared equally by Saudi Arabia and Kuwait, expire in February.

Riyadh, frustrated by what it sees as low levels of Japanese investment in Saudi Arabia, has not yet agreed to renew the 40-year-old contract. Instead, it has been using the extension issue as leverage to gain more Japanese capital, both public and private, especially in such manufacturing industries as motor vehicles and electronics. Saudi Arabia has been trying to diversify its oil-dependent economy and create jobs for its ballooning population, which has more than doubled in the last 25 years.

The biggest sticking point in the current negotiations centers around Tokyo's participation in a $2 billion transportation project that would link via a 900-mile-long railroad a mining area in northern Saudi Arabia and an industrial region on the country's east coast. Tokyo steadfastly has refused Riyadh's demand to put up much of the funding for the project on the grounds that the rail line not only is too costly but also is likely to be unprofitable. Although Japanese negotiators have indicated a willingness to cooperate on a feasibility study and to extend technical assistance for the project, they have rejected Saudi demands to invest in the construction and the operation of the railroad. As recently as January 7, Mr. Fukaya reiterated this stance, saying that the government could not justify spending taxpayers' money to finance the project.

Tokyo already has made numerous concessions to Riyadh. Last June, Vice MITI Minister for International Affairs Hisamitsu Arai offered a package of measures designed to promote as much as ¥600 billion ($5 billion at ¥120=$1.00) in Japanese investment in Saudi Arabia over 10 years. It included a plan to establish a fund to help Saudi Arabia and other Middle Eastern nations proceed with structural reforms. Financing would come from loans from the Japan Bank for International Cooperation — the recently formed quasi-public organization that combines the Overseas Economic Cooperation Fund and the Export-Import Bank of Japan — or directly from the private sector. The Arai proposal also contained an offer of technical assistance and a means to facilitate the exchange of experts and trainees between Saudi Arabia and other Middle Eastern countries. Under the plan, moreover, Japan would increase imports of Saudi Arabian crude oil, another of Riyadh's requests, and help Saudi Arabia gain entry into the World Trade Organization.

In advance of Mr. Fukaya's trip to Saudi Arabia, Tokyo again dangled the WTO carrot in the hope of preparing the ground for a breakthrough. Saudi Arabia sought membership in the General Agreement on Tariffs and Trade, the WTO's predecessor, in 1993; talks on trade liberalization with Japan began in 1995. Tokyo has reiterated its promise to actively assist Saudi Arabia in its bid to gain entry in the global trade body and has been working on a bilateral deal that would advance the process. The WTO requires prospective members to negotiate market access accords with major trading partners and to complete multilateral discussions with the organization's secretariat. Tokyo is hoping to win lower tariffs from Saudi Arabia on such products as electronics. It also wants to clarify the rules governing foreign capital in the Saudi construction market.

However, progress on the WTO front may not be enough to convince Riyadh that it should renew Arabian Oil's drilling rights. Indeed, the government still shows no signs of backing away from its demand that Tokyo shoulder a major part of the cost of the rail project. Yet Mr. Fukaya, who is scheduled to meet with Ali al-Naimi, Saudi Arabia's oil minister, King Fahd and Crown Prince Abdullah, has said that Japan already has conceded as much as possible on that issue.

On the brighter side, in September 1995, the Kuwaiti cabinet endorsed a 30-year extension of its contract with Arabian Oil, which is due to expire in 2003. In addition, because Saudi Arabia, like Kuwait, has a 10.9 percent equity stake in the oil company, self-interest may play a role in facilitating the discussions.

Ultimately, it is Arabian Oil, a private firm, that is responsible for reaching a deal with Saudi Arabia. But its significant role as an oil supplier ensures the government's strong backing. Mr. Fukaya clearly has his work cut out for him.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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