Saudi Arabia the target as Japan refines its Middle East strategy

31 August 2007
Fifty years ago, in December 1957, Japanese business decisively entered the markets of the Middle East for the first time. Since then, Japan has been the Gulf's largest customer for crude oil and the Middle East has bought more Japanese than any other region. In 2006, the value of GCC-Japan trade was almost $100 billion, making Tokyo the GCC's leading trading partner.
The background to the 1957 breakthrough was political. The previous autumn, Britain and France conspired with Israel to attack Egypt. Arab oil exporters imposed embargoes. The US insisted that London and Paris withdrew. Washington has since been the dominant foreign power in the Middle East.

The crisis was the trigger for a bold departure in Saudi Arabian oil policy. Big US firms then had the kingdom's Eastern Province oil concession and in 1949 Riyadh awarded the concession for its share of the onshore divided zone with Kuwait to what became Getty Oil. The Kuwait share of the zone had previously been awarded to the American Oil Company (Aminoil), a consortium of smaller American oil firms.

Kuwait and Saudi Arabia cast around for someone different to develop the divided zone's offshore waters. They approached Japan, then at the early stages of the economic miracle that was to make it the world's most successful exporter. The Saudi concession was awarded to the Japan Petroleum Trading Company at the end of 1957. It was transferred to the newly-formed Arabian Oil Company (AOC) two months later. In July 1958, AOC was awarded Kuwait's divided zone offshore areas concessions. Initially, Kuwait and Saudi Arabia held 10 per cent each in AOC, but their aggregate stake was raised to 60 per cent in 1974.

AOC discovered the Al-Khafji field in 1960 and Al-Hout three years later. A refinery was built. By the end of the 1960s, AOC was meeting 15 per cent of Japan's oil needs. In the years to the end of 2002, it delivered more than 40 per cent of the oil supplied to Japan by national firms.

The AOC story ended in January 2003 when Saudi Aramco took over the Saudi concession and Kuwait Petroleum Company (KPC) did the same with the Kuwait concession. Kuwait signed technical service and oil sales agreements with AOC, which became 100 per cent Japanese-owned and was merged into the Fuji Oil Company.

It was, nevertheless, a huge setback for Japan's energy security efforts. Japan is totally dependent on imported oil. It consumes an average of 4.5 million barrels a day (b/d). More than 90 per cent of that comes from the Gulf. Abu Dhabi and Saudi Arabia alone account for 50 per cent. Japan's energy vulnerability has been highlighted by the crisis centring on Iran's nuclear plans. In 2006, Iran provided about 10 per cent of Japan's oil import needs. Tokyo expects, and wants, this figure to decrease. Rebuffed in the divided zone, Japan persisted. The new opportunity emerged when Saudi Aramco decided to modernise the 400,000 b/d Rabigh refinery and build a complementary petrochemicals scheme. In 2003, it created a 50:50 joint venture with Sumitomo Chemicals to develop the $9,900 million project.

It was the first chapter of a developing story. At the end of April this year, Japan's Prime Minister Shinzo Abe visited Egypt, Kuwait, Qatar, Saudi Arabia and the UAE. He met Saudi Arabia's King Abdullah and it was decided to set up a Japanese task group within the Saudi Arabian national industrial cluster programme launched at the start of the year.

Its first meeting on 31 July decided to focus on five sectors including cars, aluminium and household appliances. The next meeting is due in the autumn and the pressure is on for ideas. Saudi Arabia is Tokyo's most important Middle East partner. The industrial cluster initiative could be the key to deeper co-operation, but there are challenges. 'In the past, Saudi Arabia was not attractive to the Japanese manufacturing sector,' says a senior Japanese official.

There are, however

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications