Japan agrees to store Saudi crude

Kingdom's planned reserves of 3.8 million barrels to join ADNOC's stockpile in east Asia

Saudi Aramco has reached an agreement with the Japanese government to stockpile crude oil on the island of Okinawa, giving the company a strategic position close to the fast-growing Chinese market. The Saudi state oil firm will put 3.8 million barrels into storage tanks on the island by the end of this year, according to Japan's Agency for Natural Resources and Energy.

The move follows a similar agreement signed in November between Japan and the Abu Dhabi National Oil Company (ADNOC), which agreed to store 3.6 million barrels of crude on Okinawa, located about 560km south of the Japanese mainland. "For Saudi Aramco, the project is expected to help deepen ties with oil market participants in east Asia, including Japan," the Japanese agency said. "For Japan, it will contribute to energy security by giving Japan higher priority in receiving oil supplies from the local oil storage in the event of an emergency."

The country, which has virtually no crude oil reserves of its own, gets 28 per cent of its daily consumption from Saudi Arabia, OPEC's largest exporter. It is the world's third-largest oil market, but consumption has declined 14.2 per cent since 2007 as the country's heavy industry contracted and vehicle fuel efficiency increased. The real point of storing oil in Japan is to have easy access to China, the world's second-largest - and fastest-growing - oil market, said Tom Grieder, an east Asian energy expert at IHS Global Insight, a consultancy.

"Saudi Aramco is very concerned to position itself to serve the Asian markets," he said. "China is going to have a rapid expansion of refining in the next five years, as much as doubling capacity, and Aramco wants to be in a position to sell into China." With Japan's oil consumption decreasing, it is likely that storage capacity is available at good commercial terms, while the location in Japan represents less risk than storing oil in China, he added.

John Vautrain, a senior vice president at Purvin and Gertz, an energy consultancy, said the OPEC exporters were also concerned about securing market share as too much oil was available worldwide and market fundamentals remained weak. "Just a few years ago OPEC members were straining to meet spiralling global demand," he said. "Now that market condition seems like the distant past and we're more concerned about bulging inventory."

Japan and Saudi Aramco have been in talks on the storage proposal for more than three years, the agency said. The talks received additional impetus from the start of Russian crude exports to east Asia at the beginning of the year, Mr Greider said. Russian oil exports provided the first competition in a market that had been locked up by Gulf exporters and Asian producers such as Brunei and Indonesia.

Russia's East Siberia-Pacific Ocean pipeline and oil terminal, located close to the city of Vladivostok, has capacity to export 300,000 barrels per day (bpd) but is expected to ship up to 1 million bpd within four years after additional development. Combined with oil shipments from Sakhalin Islands in its far east and upcoming rail shipments directly into north-east China, Russia has in five years transformed itself into a major crude supplier to east Asia whose oil takes weeks less to get to the market than the traditional producers.

Having oil stored in Japan allows Gulf exporters to continue to supply their customers even if vulnerable tanker routes through the Strait of Hormuz and the Indian Ocean are disrupted, Mr Grieder said. The Gulf exporters and Russia will face a third competitor in Brazil's Petroleo Brasileiro, known as Petrobras, which bought 87.5 per cent of Nansei, an Okinawa-based refiner, in 2008 and plans to base its east Asian marketing hub on the island.

The company can store about 3.1 million barrels in tanks at the refinery. In part to accommodate the new flow of oil from Brazil to Asia, BP last year reversed the flow of a trans-Panama oil pipeline that historically moved crude from the Pacific Ocean to the Caribbean to cater to the US market. [e-mail]