Japanese drawing on an oasis of Saudi-Kuwaiti oil

From the south, across the sands of the Saudi-Kuwaiti Divided Neutral Zone, appear two towers emitting billowing orange flames over what looks like an expanse of silver cliffs beside the Gulf. The vision, wavering in the desert heat like a mirage, rises steadily until a crude oil tank farm and a sprawling desert town take form across the horizon.

Twenty years ago the sight would indeed have been a mirage. But in 1980, Khafqi -- the production site of the Tokyo-based Arabian Oil Company -- is a very real oasis of oil for Japan in the Middle East.

Since the late 1950s, Arabian oil has transformed this once-desolate shoreline into a thriving crude production facility, supplying Japan with about 7 percent of its daily 5 million-barrel oil consumption and with oil reserves estimated at 6.2 billion barrels. Although Arabian oil is by no means Japan's largest crude supplier, it is by far the largest of Japan's more than 50 production companies and in 1979 was Japan's top corporate income-earner before taxes.

Khafqi, about 200 miles south of the Iranian-Iraqi "refinery warfare" is the northernmost landmark on Saudi Arabia's Gulf coast. It quietly continues to pump more than 400,000 barrels of crude daily from its offshore facilities in the Gulf.

Arabian Oil has not been directly affected by the Gulf conflict. But according to company officials, production was reduced for a week after the outbreak of fighting because of uncertainty about tanker traffic proceeding safely through the Strait of Hormuz. Full production was resumed after assurances that the strait would remain open and that shippers would continue on schedule.

Though Arabian Oil's production is only a small part of Saudi Arabia's total daily production in September of 9.5 million barrels, the company traditionally exports most of its crude to Japan and is thus a relatively stable cog in the workings of the often unstable Japanese domestic oil industry.

Arabian Oil's production is perhaps more appreciated now in the wake of recent losses by Japan of 390,000 barrels daily supply from Iraq, due to the fighting, and of 520,000 barrels a day from Iran in April due to the revolution.

Iraqi production for Japan had been initiated in part to help offset Iranian losses. Arabian Oil also helped take up the slack in 1978 and 1979.

Officials at Arabian Oil said that with production at Khafqi now running at capacity, there was little the company could do to stem a possible Japanese oil shortage if the Middle East conflict continued for more than a few months. But Japanese officials with the company were not overly concerned, pointing out that in September Japan had an estimated 110 days' worth of crude stockpiled and that Japanese trading firms were flexible enough to adjust quickly to changes in the oil market.

Japanese oil companies are now looking away from Iran and Iraq to other Gulf producers, Mexico, Indonesia, and China.

(In Saudi Arabia, Japanese traders have been warned by the Saudi government not to buy crude at higher prices on the spot market; rather, the Japanese were told to use their oil reserves. The warning came despite a reported agreement between Saudi Arabia and other Gulf producers to increase output to offset Iranian and Iraqi production losses.)

Overall, Arabian Oil has in 20 years drilled 186 offshore wells, primarily in two large oil fields: the Khafqi field, 45 miles offshore, and Hout field, 19 miles northeast of the Khafqi field. About 130 of these are producing oil today.

Producing wells are connected by a system of pipelines and flow stations to a central "gathering station." From the gathering station the crude is piped to onshore facilities, which remove gases from the crude and in some instances reduce the salt content before storing the gas-free oil in a 22-tank, 8.6 million-barrel onshore tank farm.

A portion of the gas removed from the crude is used to power five turbine electric generators and four seawater desalination plants. Most of the gas is flared.

In addition to being stored, some of the crude is piped to the 30,000 -barrel-a-day Khafqi refinery, which produces naphtha, diesel oil, and fuel oil for the operation's bunkering facilities.

Khafqi's four tanker loading berths are 6 to 8 miles from shore in the Gulf. The deepwater loading system can accommodate tankers up to 250,000 tons with a loading rate of 9,000 tons an hour.

Khafqi's export role in the coming months will be to continue carrying out necessary maintenence procedures to keep its 130 producing offshore wells flowing at close to, if not full, capacity. But the company will not be involved directly in any negotiations for new large crude supply contracts between the Saudi Arabia and Japan. If the Saudis raise production by the reported 900,000 barrels a day to offset war losses, the increase would come through the operations of the Arabian American Oil Company (Aramco), the world's largest crude production company, which accounts for more than 9.2 million barrels a day of Saudi production.

The Khafqi facility, since its beginnings in 1960, has long been overshadowed by the much larger, 47-year-old Aramco, but the Japanese are quick to point out that the Japanese company's production is about equal to that of OPEC-member Qatar.

One of the benefits of the overshadowing has been that the Arabian Oil Company over the years has been left alone more or less to run itself, a situation that has not raised many Japanese complaints. Neither host government has set production limits or quotas on the company, and there have been no negotiations so far concerning 100 percent nationalization of Khafqi facilities, despite the imminent takeover by the Saudis of Aramco and the nationalization of oil facilities in Kuwait.

In July 1979, Kuwait increased its role in Khafqi operations by beginning to market its share of Khafqi production. The company continues to buy back the Saudi share of production, marketing it through Arabian Oil.

In addition to Japan, which purchased more than 75 percent of Arabian Oil-marketed crude, shipments in 1979 were made to Brazil, Singapore, South Korea, and Taiwan.

Under separately negotiated concession agreements extending from 1957 and 1958 to the turn of the century, Saudi Arabia and Kuwait granted the Arabian Oil Company exclusive rights for exploration and production in the 4,800-square-mile offshore neutral zone. Both governments received 10 percent stock ownership in Arabian Oil, the remaining 80 percent of the stock being held primarily by Japanese businesses.

Under the terms of the original concessions Arabian Oil's production was to be split equally between the two countries, with Arabian Oil marketing the crude. A clause in the agreement provided that any subsequent agreements or modifications between the company and one of the host countries would likewise apply to the other host country. Thus, in 1974 when Kuwait increased its participation to 60 percent in its dealings with Arabian Oil, Saudi Arabia's share of its portion of the total operation was also upped to 60 percent, although Saudi documents authorizing the increase have never been negotiated and signed.

While the clause is designed to ensure that both governments benefit equally from the oil resources in the once-disputed divided zone, it has in the past created problems for Arabian Oil. For example, in 1977 when a difference of opinion among members of OPEC concerning prices ended with Kuwait supporting a 10 percent increase and Saudi Arabia supporting a 5 percent increase, Arabian Oil was forced to abide by Kuwait's higher price for its entire operations. As a result, production in 1977 fell 114,000 barrels a day, to a daily rate of 190, 739 barrels. It was the lowest daily production since 1965.

The reduced production created serious problems for the oil company beyond just loss of revenue. The production system at Khafqi is interconnected, to the extent that four desalination plants and electric generation facilities supplying most of the water and electricity to the company compound and much of the town are powered by gases associated with crude production. To keep the electricity and water facilities operating, Khafqi had to be producing and processing at least 150,000 barrels of crude a day.

Company officials struggled through much of the year not sure whether or when the lights would go out, until in 1978 the Japanese government guaranteed enough purchases of the higher-priced Khafqi crude to see the company through.

The Japanese purchases were the initial installments in Japan's government and private "tanker storage system" crude stockpile.

The stockpile program saw the Arabian Oil Company through its hardest time, however; production at Khafqi didn't fully recover until late 1978, when Japanese traders in Iran were forced to seek other oil sources to replace Iran's falling production. That year Khafqi's production returned to more than 300,000 barrels a day, and it continued climbing in 1979 to reach capacity.

Fiscal year 1979 saw 268 percent increase over the previous year in recorded earnings before taxation. The total: $1.863 billion. The figure, representing the largest earnings ever recorded by a Japanese company, was caused by hefty oil price increases in 1979. The figure is not a true representation of the company's earnings, however, because it still must pay almost $1.2 billion to the Saudi and Kuwaiti governments in royalty payments and taxes.