August/September 1991, Page 71

Trade and Finance

By John T Haldane

Japan and Saudi Arabia Enter Joint Refining Ventures

Saudi Aramco and a number of Japanese companies have formed a joint venture to build and operate oil refineries in the two countries. This marks the first entry into Japan's oil refining sector by a Middle Eastern oil producer. Japan is the developed world's second largest oil consumer. The project has an estimated value of $4.3 billion.

Saudi Aramco, the Saudi national oil company, will represent the Kingdom's interest and is expected to control 50 percent of the project. Japanese companies involved in the joint venture include Nippon Oil Company and Nippon Mining Company. In addition, the Caltex Group, a joint venture of Chevron Corporation and Texaco Inc., may participate through the Nippon Petroleum Refining Company, which Chevron and Texaco jointly own with Nippon Oil.

The joint venture plans to build a 300,000-baffels-per-day (b/d) refinery in Jubail and a 43,000-b/d facility in Yamaguchi prefecture. Construction of the two refineries, which is expected to take up to two years, is scheduled to begin early next year. Since Saudi Aramco hopes eventually to refine as much as 300,000 b/d in Japan, consideration is being given to a second refinery at Shinkudamatsu.

The joint venture firms also agreed that Nippon Oil Company will be responsible for the marketing of petroleum products from the new Japanese refineries. The Saudi-Japanese project is expected to reduce sharply Japanese demand for petroleum products from Asian oil refineries.

Iran Opens Oil Sector to West

In a major change of policy, Iranian President Ali Akbar Hashemi Rafsanjani has announced that Western countries will be invited to participate in major oil and gas development projects in Iran. Oil Minister Gholamreza Aghazadeh stated recently that "We are at present talking with a lot of companies regarding the development of gas and oil reservoirs. I think that during this year we will have a lot of developmental contracts with foreign companies. " According to Mr. J. Yarjani, a managing director of the National Iranian Oil Company (NIOC), talks are taking place with 15 international companies, mostly from Japan and the European Community, concerning offshore oil and gas exploration.

Total-Cie. Francaise des Petroles announced recently that a letter of intent has been signed covering offshore oil field development and the marketing of "an important quantity of Iranian oil. " Total was a major player in the Iranian oil sector before the 1979 revolution and is anxious to regain its position.

Mr. Yarjani also said that Iran plans to invest as much as $5.7 billion in refineries at Arak, Bandar Abbas and Isfahan, and at the Kangan natural gas plant. In addition, five new refineries are on the drawing boards, which will raise the number of plants to 11 by the mid- 1990s. NIOC plans to spend approximately $7 billion on investment in the petrochemical sector of the current five-year plan.

The moves signal Tehran's recognition that it will not be able to reach its 1993 goal of boosting oil capacity to 5 million b/d, from a current 3.5 million b/d, without substantial foreign technical and financial assistance. Oil is Iran's major industry, and getting production up as quickly as possible is a must if Tehran is to revive its war-shattered economy.

Despite the lack of diplomatic relations with the United States, Tehran is quietly wooing American oil companies. "The reception we're getting is just terrific," said Robert G. Reed 111, CEO of Hawaii-based refiners Pacific Resources, following his attendance at the May 27 international oil conference held in Isfahan. An estimated 250 Western, Asian and Arab oil officials, including a representative from Saudi Arabia, met with Iranian oil officials in the largest such conference held in Iran since the Islamic revolution in 1979.

Eager to rekindle business with the United States, NIOC is negotiating crude-oil deals with American firms for the first time in more than a decade. After receiving approval from Washington, which still reviews deals with Iran on a case-by-case basis, Mobil Corporation and Coastal Corporation are now buying Iranian crude. Oil experts predict that other US companies could soon be providing spare parts for American oil equipment dating from pre-revolutionary days.

Bahrain Victim of Kuwait Crisis

Bahrain's hope for a strong economic recovery in 1991, based on new industrial projects, has been dashed by adverse repercussions from the recent Kuwait crisis. While government officials have worked overtime to project the impression of "business as usual, " a serious downturn in Bahrain's financial services sector has made it difficult to sustain that image.

Rasheed Al-Meer, the assistant undersecretary for finance and budget planning, said recently that the budget deficit is expected to increase considerably over the next few years because of lower oil revenues. Falling prices are expected to cut government oil revenues to $1.2 billion in 1991, compared to $1.3 billion in 1990. A budget deficit of about $313 million will be financed by domestic borrowing through the issue of treasury bills and bonds.

A government study reveals that Manama lost about $2 billion as a result of the crisis. About half was borne by the island's banking sector, which was forced to make heavy loan loss provisions. The crisis also significantly reduced lending opportunities for the banks in the second half of 1990. The industrial sector lost about $200 million in revenue from the temporary shutdown of some of its state-owned plants. In addition, the loss of aid during 1990 from other Gulf states contributed to Bahrain's losses. In the past, Saudi Arabia and Kuwait had granted Bahrain an estimated $100 million annually to help cover budget deficits.

Manama was fortunate to secure financing for its main industrial project, the $1.4 billion expansion of the Aluminum Bahrain (Alba) plant, just two weeks before Iraq's invasion of Kuwait. Alba plans to raise production to 460,000 tons per year by mid-1992. It is the brightest spot in the economy.

Other projects have not fared as well. Plans for Alba won priority over the proposed modernization of the Bahrain Petroleum Company and the construction of a $365 million plant to produce methyl tertiary butyl ether. The Gulf Petrochemicals Industry Corporation also has postponed plans to construct a $140 million urea plant.

The unstable situation also dimmed prospects that the new stock exchange, opened in 1989, will provide a busy local shares market. A decline in the value of shares and volume of trading has delayed plans to reduce the government's stake in state owned enterprises. For example, a planned flotation of shares in the Bahrain Aluminum Extrusion Company was suspended. The company hopes that the government will offer more of its 80 percent ownership for public subscription in the near future.

Bahrain now must push hard to regain its former position as a regional financial center. Traditionally, Bahrain's financial institutions have attracted funds from all over the Gulf region. And the presence of a large banking community has made it easier for the government of Bahrain to finance its deficits through the sale of treasury bills and development bonds. Therefore, Manama has reason for cautious optimism that better days are ahead now that political tensions have been removed.

John T. Haldane is an international economist and Middle East specialist.