Despite frenzied eleventh-hour negotiations, Tokyo-based Arabian Oil Co., Ltd., Japan's biggest oil producer, failed to convince Riyadh to extend its drilling rights in the Saudi-controlled section of the Khafji oil field in the Persian Gulf (see JEI Report No. 8B, February 25, 2000). These rights, going back 40 years, expired February 27. A Saudi company will take over this part of Arabian Oil's business. The rest of its production facilities, located in an area controlled by Kuwait, will continue to operate under Japanese management at least until January 2003, when this contract also is up for renewal. Arabian Oil's president said that the firm would post an extraordinary loss in FY 1999 and that it would search for merger opportunities to rebuild its position.
Negotiations to renew the drilling rights broke down over Saudi Arabia's demand that Japan build and operate a $2 billion industrial railroad. In the face of mounting fiscal pressures and election-year politics, Tokyo was unwilling to use taxpayers' money to finance the project.
The loss of part of the Khafji concession is a blow to the energy policy goals of the Ministry of International Trade and Industry, which include reducing Japan's dependence on Middle Eastern oil. The region supplies roughly 85 percent of Japan's crude oil, of which only about 15 percent comes from Japanese companies. Because Arabian Oil produced approximately 4 percent of Japan's total oil imports, the elimination of half of its output is not insignificant.
However, International Trade and Industry Minister Takashi Fukaya played down the impact, noting that crude is available for purchase on the world market. He also said that Tokyo would work to expand the number of regions from which oil is bought to lessen Japan's dependence on the Middle East. At the same time, Mr. Fukaya confirmed with Saudi Petroleum and Mineral Resources Minister Ali Ibrahim al-Nuaimi that the failure to agree on the renewal of Arabian Oil's drilling rights would not affect Saudi Arabia's oil shipments to Japan.
The biggest worry among relevant Tokyo policymakers seems to be that the breakdown of the extension talks could affect bilateral relations. To ensure that ties remain as strong as possible, Tokyo has suggested that the two countries expand ministerial-level exchanges.