IEEJ: January 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (24)

December 24, 2010

Japan-Saudi Arabia Energy Cooperation
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
Institute of Energy Economics, Japan

In Japan, oil still accounts for the largest share (at 46% in FY 2009 on a preliminary databasis) in its primary energy supply, although the share has gradually decreased. Therefore, it is ofgreat significance for Japan to secure stabile oil supply. In this sense, Japan may have to give toppriority in energy security policy and its diplomacy to the enhancement of the bilateral relation withSaudi Arabia that is the largest crude oil supplier to Japan. (In FY 2009, Japan’s crude oil imports
from Saudi Arabia totaled 62.39 million kiloliters accounting for 29% of its total crude oil imports.)
For Saudi Arabia, the bilateral relation with Japan is important as its crude oil exports to Japanaccounted for 16% of its total crude exports in 2008. Despite fast growth in China and otheremerging countries and Japan’s declining oil demand, the relation with Japan occupy a key positionin Saudi Arabia in that the oil kingdom has maintained stable relations with Japan over a long time tothe present and has been interested in Japan’s historical development and present situation regarding
industry and technology development and Japan’s cultural and societal uniqueness.
Japan and Saudi Arabia have made various efforts to maintain and enhance theircooperative relations. As part of such efforts, the two countries announced their new cooperation
deal regarding an oil reserve base in Okinawa on December 14. The announcement said (1) thatJapan’s Agency for Natural Resources and Energy agreed to allow an oil reserve tank in Okinawa tobe leased to state-run oil company Saudi Aramco, (2) that the Japan Oil, Gas and Metals NationalCorporation, known as JOGMEC, as the actual counterpart of the deal for Japanese side, signed thedeal with Saudi Aramco, (3) that the leasing period will be three years from December 2010, (4) thatJOGMEC will lease a 600,000-kiloliter oil reserve tank in which Saudi Aramco will store its own
crude oil, and (5) oil reserves in the tank will be provided preferentially to Japan in the case ofemergency. In February 2011, the first oil tanker from Saudi Arabia for the deal will arrive at thetank to launch the reserves.
The deal stemmed from a Japanese proposal made in April 2007. After negotiations basedon the proposal, the two sides announced a broad agreement in June 2010. The December
announcement of the final agreement came after they negotiated details. Negotiations toward
cooperation between the two countries have thus borne fruit. The deal features key points for bothsides. For Saudi Arabia, its access to the oil reserve facility in the geographically important point of
Okinawa may be significant. Since Okinawa is located at the center of the East Asian market thatincludes China, South Korea and Taiwan as well as Japan, the access to the oil reserve base there is1

IEEJ: January 2011

also significant for Saudi Arabia, which is required to make flexible, timely responses to market
conditions that sometimes change rapidly., Saudi Arabia has utilized a Caribbean oil reserve facility
for the U.S. market for the same purpose1. This time, it has secured an oil reserve/sale facility for theEast Asian market.
For Japan, the deal can be a specific oil supply stabilization measure, allowing it to secure
preferential oil supply in an emergency while leasing the oil reserve facility to Saudi Arabia on acommercial basis. The deal is also strategically important for Japan in that Japan has realized aspecific cooperation program with Saudi Arabia, as the most important oil producing country, at atime when Japan’s oil market or demand is expected to structurally shrink over a long time and theJapanese market’s relative importance is predicted to decline in line with substantial oil demand
growth in neighboring East Asian markets including China. The deal is strategically important for
Saudi Arabia as well in a sense because it represents a solution to how it should position Japan’simportance. In this sense, the deal amounts to a case where the two countries have successfully built
a win-win relationship under a dramatically changing market environment.
In the future, the two countries will have to deepen and develop their win-win relationshipunder a new situation beyond the latest deal. Basically, Japan as an oil consuming country has hadinterdependent relations with Saudi Arabia as an oil supplier. Based on such relations, the twocountries may have to take into account a “new situation” as explained below. While the Japanese
economy has struggled to end a long slump with its presence in the world economy declining, Japanis required to implement a growth strategy to invigorate its economy. Japan should unite its
industrial and technological capabilities to achieve economic growth. Particularly, Japan must
positively expand its economic and business activities into rapidly growing emerging countries andoil producing nations such as Saudi Arabia.
A key challenge for Saudi Arabia is to improve and diversify its energy supply structure
while satisfying rapidly growing domestic energy demand. As noted in my previous report, “AJapanese Perspective on the International Energy Landscape (3)” (July 15, 2010), growing energy
demand is feared to affect future oil exports, both in terms of volume and revenue, that are vitally
important for the Saudi economy. Saudi Arabia has become increasingly interested in improving its
energy supply/demand structure, while watching carefully ongoing nuclear power generation andrenewable energy programs in neighboring Middle Eastern countries. Already, Saudi Arabia has
been developing domestic research and support programs for promoting energy conservation,
nuclear power generation and renewable energies. It has activated public and informal moves toenhance cooperation with foreign countries, expert organizations and businesses that have advanced
technologies, knowledge and know-how in these energy areas.
As a matter of fact, Japan is one of the world’s top runners in improving the energy
supply/demand structure. Saudi Arabia has fully recognized this point. Therefore, energy
supply/demand structure improvement is an ideal area where Japan and Saudi Arabia should build
1

At present, however, Saudi Aramco has no leasing deal for oil reserve facility in the Caribbean Sea.

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IEEJ: January 2011

their win-win relationship under the “new situation”.
However, international competition has intensified for business regarding energy
supply/demand structure improvement and the development of clean energies such as nuclear andrenewable energies. In addition to Europe and the United States as forerunners, such countries asRussia, China and South Korea have taken advantage of their government-sponsored businessmodels and their respective strengths to join the competition. Everyone knows that no optimism canbe warranted for Japan’s leadership in these business areas. Japan’s government, private businesses
and expert organizations should find a breakthrough by utilizing their respective strengths andcooperating closely with each other to take a comprehensive approach under an appropriate
role-sharing.
Contact: report@tky.ieej.or.jp

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http://eneken.ieej.or.jp/en/whatsnew/JPOIEL.html

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