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3 June, 2008 7:26 PM
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| Newsletter
No. 870
RECORD OIL PRICES UNDERLINE JAPANESE ENERGY DEPENDENCE ON THE ARAB GULF Are you getting that retro 1970s feeling yet? On January 3rd international crude oil prices briefly reached over the US$100/barrel mark for the first time ever, although, at the time of writing, prices have now retreated to about US$97/barrel on fears that poor growth in the US economy may lower demand somewhat. Both the Asahi and the Japan Times produced editorials on the oil prices today. The Asahi explained to its readers what has contributed to the high oil prices, and then finished with a call for higher energy efficiency. The Japan Times had a shorter explanation, and then concluded with one of their typical, meaningless final sentences: “Japan, like the rest of the world, must prepare for a new international energy market.” For the case of Iran, I ask Shingetsu Newsletter readers to review the op-ed I wrote for Asahi Shinbun on December 23, 2006, and which is available at the website at the end of Shingetsu Newsletter No. 472. As a reminder, the title of that piece was “Giving Up on Azadegan was a Strategic Failure.” In the post-NIE, $US100/barrel oil era, how does that opinion piece read just a year or so later?
One of the points that I made in that op-ed was the following: “Now, Japan must rely to an even greater extent on Saudi Arabia and Persian Gulf sheikhdoms that are considerably less democratic than the Islamic Republic itself.” This newsletter that I am writing now should well attest to the fact that Japan’s dependence on the GCC states has indeed been growing, perhaps to dangerously high levels -- and yet still it is not clear that Japanese policymakers have really fashioned a foreign policy that takes this into account. At any rate, the most recent figures have Saudi Arabia, the UAE, and Qatar pegged as the top three suppliers of oil. The shares of the top three were as follows: 35.3%
-- Saudi Arabia Since Iran has now fallen to fourth place as Japan’s oil supplier, I believe that this is the first time ever that all three of the top three oil suppliers are GCC states. It’s also worth pointing out that with supplies of LNG from Indonesia faltering, as we have discussed here at some length, Qatar’s role as an LNG supplier has also become crucial. At the same time, Japan’s nuclear energy industry has been troubled as well, especially in regard to the earthquake damage at TEPCO’s Kashiwazaki-Kariwa Nuclear Power Plant last July. Indeed, one of today’s headlines is that TEPCO’s proposed Higashidori Nuclear Power Plant in Aomori Prefecture will have its construction delayed by a further year due to a more stringent screening process. All of this adds up to a greater degree of Japanese economic dependence on the GCC states.
One side effect of the higher oil prices that may be welcome in Japan, however, is that it is boosting exports to the region. A recent JETRO study found that Japanese exports of transportation equipment to the GCC grew by no less than 19.8% between the first half of 2006 and the first half of 2007. And -- brace yourself -- exports of “general machinery” grew by a whopping 114% over the same one-year period. That is, exports in that category more than doubled in just one year. Total Japanese exports in the six-month period from January-June 2007 reached US$9.7 billion. The balance between GCC members was as follows: 35.2%
-- United Arab Emirates Commented JETRO Managing Director Yoshio Minagi: “It is needless to say that the GCC is important for Japan, as Japan is heavily dependent on the GCC's energy sources such as crude oil and gaseous hydrocarbons. I believe that Japan's wider and competitive business with GCC countries will be for the benefit of both sides.”
Japan’s recent enthusiasm for entering the Islamic banking market and the new S&P TOPIX 150 Shariah Index at the Tokyo Stock Exchange are only two dimensions of what Jiji Press recently described as Japan’s “scramble for oil money.” Some Japanese business leaders are belatedly waking up to the fact that Gulf Arab investors now have coffers filled with investment money, and they have done very little to ensure that Japan might benefit from those investments. However, last year did witness the Abu Dhabi government becoming the largest shareholder in Cosmo Oil, and indeed the Japan-Abu Dhabi partnership seems to be taking off more generally.
It seems that all this economic activity has even forced METI Minister Akira Amari to get off his bum and travel out to the UAE this week. On the 5th a new Japan-UAE bilateral accord was signed to facilitate investments by UAE government-backed funds and energy firms in Japanese projects. Although I have not seen details about what this accord really consists of, it does suggest that official Japan is getting more serious about these issues. Yesterday,
Amari met with UAE Minister of Economy Shaikha Lubna al-Qasimi.
Photo:
Lubna and Amari
Interestingly, she also asserted the need to finalize the Japan-GCC free trade agreement. I wonder if this might be an indication that it is the Japanese side that has been dragging its feet on signing this long-discussed economic pact. Since she also seemed to be nudging Amari about the need to accept more non-oil imports from UAE companies, perhaps that is the point where the problem lies.
In addition to the headlines above, there have also been smaller bilateral developments with each of the GCC states, excepting Oman.
Ambassador Takeshi Kondo has been very active on the local scene promoting his view of Japanese interests in Bahrain. In the field of security, Ambassador Kondo has been highlighting Japanese aid contributions to Iraq and Palestine. He stated: “Over 90% of the oil that Japan imports is from here, and it is in our interest that we are involved proactively involved with this region's security.” In terms of political relations, he said that a Bahraini parliamentary delegation would be visiting Japan before too long, perhaps in March. This delegation will visit some of their colleagues from the Japanese Diet, in particular those affiliated with the Japan Bahrain Parliamentary Friendship Association. Kondo noted that Japan was a top trading partner of Bahrain, and that this would continue: “There is still huge potential for improvement in Bahrain and value-adding activities need to be further created. Investments including the establishment of a steel manufacturing plant will be a boost, and we expect to be negotiations for that early next year… Other sectors such as water and power also need to be addressed, and Japan is eager to strengthen industrial ties in Bahrain through a consortium of nations that can provide the technology for water and power generation. Also, the manufacturing of parts and components in Bahrain could be a sector that would be worth developing.” Kondo also noted that JAL Hotels was about to start construction of its new luxury hotel in Amwaj, which will be owned by a Bahraini business group.
The final end of a major era has come. The Arabian Oil Company (AOC) will fully quit oil production operations in the Persian Gulf's Khafji field, the first overseas oil field in which Japan acquired concessions in 1957. This last contract was terminated as of January 4, 2008. Had the Shingetsu Newsletter been around for decades, rather than just the last couple of years, no doubt we would have produced mountains and mountains of text about the Khafji oil field. However, the main part of the drama ended in 2000 when AOC and Saudi Arabia failed to come to terms over the extension of the concession. This is yet another case in which Japanese energy policy decision-making looks very poor in hindsight, because they could very easily still be major players in the Khafji field had they been willing to invest about US$2 billion at the time. Concessions in the Kuwaiti side of the Khafji ended in 2003, but AOC had maintained a tenuous involvement through a technical assistance contract. However, ARAMCO, which is a partner of the Kuwait Gulf Oil Company (KGOC) in the Khafji project, opposed the further involvement of non-Arab technicians, and so AOC was not allowed to renew their technical assistance contract at this time. Thus, direct Japanese participation in Khafji is now at a final end. The only remaining link of any kind is that KGOC and AOC still have an oil purchase contract by which the Japanese may buy 100,000 barrels of oil per day from the field. This purchase contract is set to expire in 2023. In other Kuwait-related news, a new Kuwaiti ambassador to Tokyo presented his credentials to the Emperor on December 13th. The new man is named Abdul-Rahman Humood al-Otaibi, but that is the extent of the information about him which is currently available. Finally, a recent report says that a batch of eleven Kuwaiti experts from government agencies have completed a three-week training course in Japan on air pollution control technology specifically designed for personnel in the oil sector. The main program was organized by the Kitakyushu International Techno-Cooperative Association (KITA), right here in same city as the Shingetsu Institute. The courses at KITA are said to have included lectures on the history of overcoming pollution in the city of Kitakyushu and local environmental laws. One of the Kuwaiti participants commented: “The course brought together specialists from different organizations from Kuwait to exchange experiences needed to handle various sorts of environmental problems. It also helped us share information and techniques with Japanese experts.” The participants also toured the Hiroshima Peace Museum and some temples in Kyoto.
In mid-December it was reported that the Qatar Investment Authority (QIA) was scouring the Japanese stock market for good investment opportunities. The QIA is headed by Crown Prince Tamim, and was established in 2005 to invest part of the country's swelling oil and gas revenues. QIA already has some investments in Japanese real estate indirectly through Western investment banks and private equity funds, but has yet to make direct investments in the Japanese market. A very short report from the Qatar News Agency said that Qatari Armed Forces Chief of Staff Major-General Hamad bin Ali al-Attiya received a delegation of Japanese SDF officers in December. The names of the Japanese officers were not given, nor was any explanation provided as to why the SDF delegation was in Qatar. My best guess is that these SDF officers were in Qatar to tour the headquarters of the Coalition forces in the Persian Gulf, which a few reports say is based in Qatar. Also, we have once seen a report that says that a handful of ASDF officers are based in Qatar in connection with the ongoing ASDF Iraq transport mission. The Al-Gattara, which is the country’s first state-of-the-art Q-Flex vessel, sailed from Doha to an unnamed terminal in northern Japan during the course of December. The Al-Gattara is owned by Qatar Gas Transport Company and OSG International, and is chartered by Qatargas on a long-term agreement. A senior Qatargas official enthused: “It is wonderful to be here today with our customer Tohoku Electric on this historic occasion. The new fleet of Q-Flex vessels is designed to allow Qatargas to safely and reliably meet the needs of our customers by shipping larger quantities of LNG around the world more efficiently than ever before.” Finally, Ambassador Yukio Kitazume told the local media in Doha in mid-December that his embassy was planning to invite specialists from Carnegie Mellon University to teach Qatari pupils Japanese animation filmmaking. He was speaking on the occasion of the first anniversary of the introduction of a Japanese language course at the Al-Bayan Educational Complex for Girls. The ambassador and his wife promised to do their best to facilitate more Japanese cultural programs in Qatar in the future.
Details were scant, but a report in late December said that the Japanese engineering company JGC Corporation won an order to construct an ethylene plant in Saudi Arabia worth more than US$1.8 billion. This plant, to be built in Jubail, is supposed to be completed by mid-2011 and have an annual production capacity of 1.2 million tons of ethylene, a basic material for petrochemical products. This will be one of the largest such plants in the world. JGC is already involved in three other major projects in Saudi Arabia, including the massive Rabigh Petrochemical Company project. ARAMCO Vice President of Marketing and Supply Planning Adil al-Tubayyeb toured Japan in late December and had quite a bit to say about the Japan-Saudi relationship. Here are some excerpts from the Saudi Press Agency: Japan is the world's second largest economy, a technological powerhouse, home to some of the planet's leading companies in a wide variety of industries, and a primary driver of what many international observers are calling the 'Asian century’… The economic power of Japan, coupled with Saudi Arabia's position in the energy picture through its national petroleum enterprise, Saudi ARAMCO, makes it clear that the relationships between our countries and among our companies are a matter of tremendous significance… We have well-established and solid relationships with Japanese petroleum companies, petrochemical firms like Sumitomo Chemical, and world-class engineering enterprises like JGC and Chiyoda. Some of you, such as the large power-generation and town gas companies, have no direct business with us at the moment but could be involved in our total energy business in the future and are nevertheless important partners in this energy dialogue today. While in Tokyo, Al-Tubayyeb paid a courtesy call on METI Minister Amari. The two were said to have exchanged ideas about Saudi ARAMCO’s relationship with the Japanese oil industry. There was also a more specific report which said that ARAMCO was considering the idea of expanding its already quite significant 15% stake in Showa Shell Sekiyu. Although Royal Dutch Shell is still the largest shareholder in this Japanese company, ARAMCO currently supplies more than 60% of Showa Shell’s crude oil needs.
Abu Dhabi’s Mubadala Development Company signed yesterday an investment pact with Nippon Export and Investment Insurance. The idea is to “combine Japanese companies' managerial expertise and Mubadala's ample financial resources,” according to a senior Japanese official. The investments that are being examined are in the UAE itself, and in other parts of Asia and Africa. Investments inside Japan do not seem to be part of the plan, but are not ruled out either. A delegation of the Roads and Transport Authority (RTA) left Dubai a few days ago headed to Hong Kong and Japan. The leader of the delegation is Chairman of the Board and Executive Director of the RTA Mattar al-Tayer. The purpose of the visit is to acquaint the delegation members with new expertise and technologies in the rail and marine transport industries. During the Japan leg of the tour, the RTA delegation will visit the manufacturing facilities of Dubai Metro and the Ministry of Land, Infrastructure and Transport, among other places. Al-Tayer himself was quoted as remarking: “The visit will enable RTA to review the latest technologies applied in the infrastructure of constructing rail and tunnel networks, interior designs of trains, security and safety procedures in metro networks, and quality service rendered to commuters… Hong Kong and Japan have advanced know-how in rail and marine transport industry. We at the RTA are continuously seeking to benefit from international expertise in transport sector so as to enrich the projects undertaken by the RTA with the best practices.” On a final, curious note, Abu Dhabi’s Centre for Information Affairs announced on Christmas Day that a special book would be produced that chronicles Crown Prince Shaikh Muhammad bin Zayd al-Nahyan’s visit to Japan last month. Apparently, the book notes the various negotiations and consultations during this visit. Time still remains for just one more stocking stuffer!
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