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Nearly four years after Japan and Saudi Arabia agreed to form a pact to rev up Japanese private investment in the world’s largest oil-exporting country, negotiations remain stalled and the treaty hangs in limbo.

In early November 1997, then Prime Minister Ryutaro Hashimoto made an unprecedented trip to Riyadh in a desperate bid to secure an extension of Arabian Oil Co.’s oil-drilling rights in the Saudi-controlled portion of the Khafji oil field — situated between Saudi Arabia and Kuwait.

Hashimoto’s visit was apparently prompted by implicit threats from Saudi Arabia that the Japanese firm would be denied an extension of the drilling rights unless Japanese companies increased investment in the country.

Hashimoto, a former minister of international trade and industry, proposed an investment pact to help appease the Saudi complaints.

The pact would, among other things, compensate private Japanese companies for losses incurred due to changes in Saudi economic policy, including the nationalization of Japanese-funded businesses.

Japan has concluded similar pacts with several developing countries, including China and Egypt.

The proposal was greeted by King Fahd and other leaders. But since that time, negotiators from the two countries have met only once for preliminary negotiations on the pact. It is still uncertain when they can enter into full-scale negotiations and discuss a draft text for the treaty.

“We remain so far apart over basic points, largely because of Saudi Arabia’s foreign investment-restricting Islamic law, that we cannot begin full-scale negotiations,” a senior Japanese government official said, requesting anonymity.

But there seems to be more than just this technical reason for the stalled negotiations.

Arabian Oil lost its oil-drilling rights in the Khafji field in early 2000, when negotiations between Tokyo and Riyadh on extending the rights collapsed after Japan rejected a Saudi demand to finance a huge railway project.

Although the oil firm retains its right to drill in the Kuwaiti side of the oil field, the loss on the Saudi side was a serious blow for Arabian Oil. Japan’s largest oil developer has been bleeding red ink in recent years.

“Japan has become much less enthusiastic about concluding an investment pact with Saudi Arabia after Arabian Oil’s loss of oil-drilling rights in the Khafji oil field,” another senior Japanese government official said, also on condition of anonymity.

But Japan may — or may have to — soon change its lukewarm attitude to the investment pact, as the Saudi side of Khafji is appearing on its radar screen again.

Takeo Hiranuma, minister of economy, trade and industry, visited Riyadh in early July, asking Saudi leaders to reopen negotiations on Arabian Oil’s operations in Khafji under terms different to those that the company operated under until 2000.

Saudi Arabia is stepping up efforts to court investment from Japan and other countries, especially in manufacturing, as part of efforts to reform its heavily oil-dependent economic structure.

Abdullah Faisal Turki, governor of the Saudi General Investment Authority, a newly created body commissioned with attracting foreign investment, visited Tokyo in March.

The governor also told Hiranuma in Riyadh that Japan — which relies on the Middle East for more than 85 percent of its oil — should support Saudi economic development through increased investment.

While the investment protection pact would mainly have a psychological impact on Japanese firms, it would be insufficient to spur Saudi-bound investment, especially when businesses are struggling to survive a protracted economic slump at home and increasingly tough competition in the global marketplace.

“It seems that Saudi Arabia, well aware of the limited effect of the investment pact, is trying to attract more Japanese investments through more practical means, without harboring too much expectations about the pact,” one government official said.

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