INTERNATIONAL FOCUS

Japan's AOC loses Neutral Zone concession

Saudi Arabia has dealt Japan's largest offshore oil producer, Arabian Oil (AOC), a detrimental blow. The company has been forced to surrender a 40-year oil concession in the Neutral Zone shared by Saudi Arabia and Kuwait due to rejection of the contract renewal.

Saudi Arabia and Kuwait granted the contract for the concession to AOC in 1958 for operations through 2002. AOC was given a 40% stake in the concession and the remaining 60% split equally between Saudi Arabia and Kuwait. In addition, Saudi and Kuwait each retained a 10.94% interest in the company.

That year, the company discovered the Khafji-Hout oil field and has since been producing oil. In 1999, the company exported 156,000 b/d to Japan and 106,000 b/d to other countries.

Over the past five years, AOC has been in talks with Saudi over renewing the license. However, in order to renew the license, Saudi Arabia demanded a $2 billion donation to a mining railroad, which the Japanese government flatly rejected. As a result, AOC has lost the drilling rights and half of its marketing rights of the crude on the Saudi side of the concession leaving only the Kuwait side, which the company is immediately trying to secure.

The loss of the concession will result in a major restructuring of the company. In essence, the company will be halved. Production is expected to drop to 78,000 b/d of oil, half of its current production, and the company will have to cut its administrative cost in half. Saudi state-owned Saudi Aramco will now pick up the Saudi half of the concession, as well as one-half of AOC's fixed assets - $331 million.

More importantly, the loss leaves Japan with a questionable supply of oil. Japan relies almost entirely on imports for its oil needs. The country has been struggling to reach a goal of 30% self-sufficiency using Japanese-owned upstream assets for oil imports since the collapse of the crude market in the 1970s and during the Gulf War. Without the strength of its major producer, that self-sufficiency is now cut to 14% from an already dismal 15%.

The Japanese have downplayed the loss, pointing out that the country is becoming less reliant on oil for energy, and other forms such as nuclear power and natural gas are being used more and more.

However, Japan may have brought this problem on itself. Part of the blame for the loss has been aimed at the Japanese government for not donating the $2 billion for the railroad. Analysts have said that with increasing debt, the country was not going to pour money into the project this year due to upcoming elections in October.

But Saudi places the blame on AOC. The Kingdom said that it wanted to achieve two objectives in its talks with the company in renewing the concession:

• Increase investment in the kingdom
• Increase sales of crude on the Japanese market to 1.5-2.0 million b/d, instead of 900,000 b/d at present.

Saudi's oil minister said these two conditions could not be achieved in time and that was the main reason the concession was not renewed. AOC has pledged that it will continue to operate and stay financially solvent based on the Kuwaiti half.

Iranian government may open door for US producers

A new government in Iran may hold the key to the US lifting its sanctions against doing business with the country. Iran has elected 29 reformist members to its Parliament, ousting the strong hard-liner party.

The election of the new reformist group, headed by Mohammadreza Khatami, younger brother of President Mohammad Khatami, has been seen as a call for more individual freedom for the people of Iran. On the agenda for the next meeting of Majlis, the Iranian Parliament, next month will be a more liberal press, increased personal freedom, and talks with the US.

The US has welcomed this new reformist influx as a historical event. US State Department spokesman, James Rubin, was quoted as saying, "The Iranian people have demonstrated unmistakably that they want policies of openness and engagement with the rest of the world."

While this warm response from the US was welcomed, Khatami said, "We are waiting for practical steps from the US, not just kind words." He added, "Now that Iran has become one of the most free nations, it [US] continues its policy of sanctions and continues its baseless claims against Iran." The President has also called for people-to-people exchanges with the US, but did not call for talks.

The hard-liners, however, still have power in the government in such institutions as the Guardians Council, which must approve all laws, and it is yet unclear if they will try to block reformist actions. It is anticipated that more action needs to be taken by the government before sanctions will be lifted. Analysts have predicted that the US will slowly lift certain aspects of the sanctions, but that the oil industry will be the last to go.

In the meantime, US firms are waiting eagerly to get a stake in the Iranian play. Several international majors such as Shell and Elf have already entered into deals in the area without US punishment. Now, with the elections over, Iran plans to award more contracts to foreign firms, which had been stalled.

Cantarell gets more money, but still lags behind

Mexican state oil company Pemex has budgeted $2.4 billion of its 2000 budget for the massive Cantarell oil complex, the world's largest offshore field in production, located in the Bay of Campeche. This new spending is part of a total $10.5 billion plan to increase the field's production capacity through the use of nitrogen injection. As part of the new $2.4 billion, Pemex issued in March 18 tenders worth about $2 billion, which includes pipelines, platforms, specialized vessels, tug boats, and modernizing the facilities already in place.

Despite this influx of cash, the project is behind schedule according to Pemex officials. Officials said the project is only 43% complete and should have reached 60% by this time.

Thus far, 57 contracts have been awarded for the project. Of the projects, platform construction is 98% complete, while maintenance and rehabilitation is only at 55%. According to Pemex, inclement weather and the complexity of the nitrogen injection plan have caused the problem delays.

This plan to use nitrogen injected back into the reservoir to boost the production has been received with a great deal of criticism. There are claims stating that while practical on a smaller scale, it is not feasible on such a large scale.

Nonetheless, Pemex is banking on the success of the project to keep the Mexican oil industry alive. Over its 20 years of production, Cantarell has witnessed an increasing decline in volume and well pressure. The field is now producing 1.54 million b/d of oil and is expected to increase to 1.85 million b/d by the end of the year. Without the work underway, officials said the field would only be producing 800,000 b/d. It is expected that the project will have reached 71% completion by the end of the year.