Japan, Saudi to sign emergency oil supply pact

(REUTERS) - Japan and Saudi Arabia will sign an agreement this weekend that will allow Tokyo to make emergency requests for additional supplies of crude oil, Japan's Nikkei newspaper reported in its Friday edition.

The agreement would set up a telephone hotline between the two governments to allow Japan to quickly seek additional oil supplies in the event of extraordinary circumstances such as terrorist attacks, unrest in the Middle East or a spike in the price of oil.

Japan opted to seek the supply deal because Saudi Arabia's crude oil exports are set to decline, the Nikkei report said.

Although the kingdom retains significant spare crude oil production capacity, its crude oil exports are falling due to growing domestic oil demand and plans to expand Saudi oil refineries to export more refined products.

"If true, it shows how nervous importers are due to the fragility in the Middle Eastern situation, particularly Asian buyers," said Mr Amrita Sen of oil consultancy Energy Aspects.

Japanese economy, trade and industry minister Toshimitsu Motegi will travel to Saudi Arabia on Saturday to sign the pact, Nikkei said. He will later visit other Middle Eastern oil exporters, including the United Arab Emirates.

The deal, as described, would represent a significant increase in cooperation between one of the world's largest oil importers and the top producer in Organisation of the Petroleum Exporting Countries (OPEC).

Japan has relied on cooperation with Western oil importing countries through the International Energy Agency to ensure oil supply security since the 1970s.

As one of the most oil import-dependent countries in the industrialized world, analysts say it has always been acutely vulnerable to the prospect of a sudden halt to crude shipments.

Any move by a major oil importer to be first in line to tap Saudi Arabia's spare oil production capacity in the event of a crisis may further stoke global oil supply security concerns.

Japan is not the only large Asian country at risk in the event of an oil supply shock. China and India are both increasingly reliant on imported oil to fuel their economies and both have far less access to emergency stockpiles than Western importers.

Oil markets have been on edge for months about the security of Middle Eastern oil supplies amid mounting tensions between the West and Iran over Tehran's disputed nuclear program.

Iranian oil exports fell by 1 million barrels per day (bpd) by the end of 2012 due to Western sanctions aimed at forcing oil importers, like Japan, to reduce their purchases of Iranian crude.

In retaliation, Iran has at times threatened to cut off shipments of oil or block major shipping routes.

Additional restrictions imposed by the United States (US) took effect this week and there are few signs that a negotiated settlement to the dispute is at hand.

Iran's Supreme Leder Ayatollah Ali Khameni dismissed an offer of direct talks made by US Vice-President Joe Biden this week.


The Nikkei report did not specify how much oil Japan might be able to request from Saudi Arabia in the event of an emergency under the proposed emergency oil supply agreement.

Nor did it specify on what terms Japan would be able to secure more oil nor whether a request for emergency supplies would be binding on Riyadh.

OPEC heavyweight Saudi Arabia has repeatedly pledged to supply global markets with enough oil to meet demand. But the kingdom has traditionally guarded its sovereignty over its energy resources and has often rebuffed calls from oil consuming nations to produce more oil to depress high prices.

Saudi Arabia, which currently pumps approximately 9.05 million bpd, maintains the ability to produce up to 12.5 million bpd if needed, the only significant amount of spare oil production capacity worldwide.

Japan has grown increasingly reliant on fossil fuels since the Fukushima nuclear disaster, which has led to the shutdown of most of the resource-poor country's nuclear power plants.

Saudi Arabia signed a deal with Japan in June to store 3.8 million barrels of crude in the Asian nation's Okinawa Oil Base.

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