Japan a bigger player on global oil stage

Posted in Japan | 03-Apr-06 | Author: Hisane Masaki| Source: Asia Times

Map of the disputed area in the East China Sea.
TOKYO - The formation of a new Japanese oil company, Inpex Holdings, was announced on Monday. The result of a government-orchestrated merger between Inpex Corp and Teikoku Oil, the new firm appears to have been conceived as a "national policy corporation" designed to secure supplies for Japan from abroad. The government believes that the combined firm's greater size will better serve this purpose.

But strong government backing could be a double-edged sword for Inpex, because national policy does not always serve the interests of an individual private company, and there is a possibility that the government's politically motivated wishes will outweigh profit-and-loss considerations. The key tests may come first in the East China Sea, where the company has a concession to start drilling in an area that is at the center of a simmering gas dispute with China, and later Iran, where it has a 75% interest in the huge Azadegan oil project.

Inpex and Teikoku Oil are Japan's No 1 and No 3 oil developers, respectively. On Monday, the two launched a joint holding company to integrate their operations ahead of their planned complete merger in June 2008. Inpex Holdings was listed on the First Section of the Tokyo Stock Exchange on the same day. The newly launched entity is expected to become a much bigger global player, leveraging on the 100% interest it has in two gas projects - one in the Masela Block in the Timor Sea near Indonesia and another off Western Australia.

But at the same time, Inpex Holdings' other two major projects face considerable potential risks. This includes the massive Azadegan oil project in Iran, which could easily be impacted by the growing international crisis concerning Tehran's suspected nuclear-weapons program, and also its concession to start drilling in an area in the East China Sea where Tokyo and Beijing have conflicting claims over undersea natural-gas deposits.

The inauguration of Inpex Holdings apparently reflects the desires of the Japanese government, which is the largest shareholder in the new entity with a 29.3% stake. Tokyo is in the final stages of working out a "New National Energy Strategy", which will call for various specific goals to ensure the nation's energy security in the long term. Among other things, it will call for increasing the ratio of "Hinomaru oil" imports from the country's independent oil resource development projects abroad from 15% to 40% of total imports by 2030.

Just a week before the joint holding company was set up, Inpex and Teikoku Oil announced that it would target group revenue of 769 billion yen (US$6.6 billion) for the fiscal year starting on April 1. They announced a group net profit for the new fiscal year - of 90 billion yen - that is 25% lower than the combined net profit of the pre-merger entities, based on conservative estimates for crude-oil prices. Increased production will add about 10 billion yen to Inpex Holdings' profit for the new fiscal year, however.

The Ministry of Economy, Trade and Industry (METI), which owned 36% of Inpex, played a key role in the marriage of the two oil developers, hoping to foster a more powerful entity to compete with foreign rivals. Inpex emerged from another government-affiliated firm, Japan Oil Development, in 2004. Teikoku Oil was also originally established by the government. Newly launched Inpex Holdings is expected to pursue promising oil and gas fields through mergers and acquisitions of foreign firms.

Inpex Holdings has been designated a "national policy corporation" because the government holds sway through the presence of former officials in top posts, as well as through its unrivaled equity stake. Chairman Kunihiko Matsuo is a former chief of the METI-affiliated Small and Medium Enterprise Agency, and its president, Naoki Kuroda, is a former head of the also METI-affiliated Natural Resources and Energy Agency. Matsuo and Kuroda served as chairman and president, respectively, of Inpex Corp.

Competition for energy resources has raised tensions between China and Japan. The two are at odds over Chinese gas projects in the disputed waters in the East China Sea near the "median line", which was drawn by Japan but is not recognized by China. The line is meant to separate the two countries' 200-nautical-mile exclusive economic zones (EEZs). The disputed Senkaku Islands, known as the Diaoyu in Chinese, are on the Japanese side of the median.

Last year the Japanese government decided to build the country's first ship specially designed to survey offshore oil deposits. The government also earmarked 8.2 billion yen in its fiscal 2006 defense budget to increase the nation's ability to cope with submarines and armed spy ships in seas close to Japan. Also, in a move aimed at providing a legal basis for protecting Japan's test-drilling activities in the East China Sea, the diet (parliament) has prepared a bill to protect vessels used by marine-resource explorers and fishermen in Japan's EEZ.

The bill stipulates that the Land, Infrastructure and Transport Ministry may create off-limits zones near structures set up for resource exploration and development in the EEZ. Trespassers would be punished with prison terms and fines. The legislation was prepared to support Teikoku Oil, which was formally granted concessions last summer to start experimental drilling in the East China Sea, in an apparent bid to counter natural-gas exploration conducted nearby by China.

The Azadegan project
In early 2004, Japan and Iran signed a $3 billion deal to develop Iran's massive Azadegan oilfield. The project is expected to pump 700,000 barrels of oil per day by 2010. But with international tensions rising over Iran's nuclear program, there are growing concerns in Japan about how the crisis will play out. Many analysts point out that should Japan be forced to give up the Azadegan project as part of international sanctions against Tehran, China, which recently won rights to the Yadavaran oilfield in Iran, could step in to replace Japan.

Japan's oil diplomacy suffered a serious setback when Arabian Oil Co, which has strong backing of the government, lost its right to operate the Khafji oilfield in the Persian Gulf - in the Saudi-controlled portion of the field in early 2000 and the Kuwaiti-controlled portion in early 2003. But Japan has since regained lost ground, securing oilfields elsewhere in the Middle East.

After the Azadegan oil deal, Japan scored another coup in its oil diplomacy. Five Japanese enterprises won international tenders to acquire the rights to develop six oilfields in Libya. The deals involving Nippon Oil, Mitsubishi, Japan Petroleum Exploration, Teikoku Oil and Inpex mark the first oil-exploration concessions granted to Japanese firms in Libya. Inpex joined hands with the major French oil firm Total in the bid. The oil projects are likely to be the biggest involving Japanese companies since a group acquired the concessions for the Sakhalin project in Russia. The Libyan fields are estimated to have the eighth-richest reserves in the world.

Through their marriage, Inpex and Teikoku Oil hope to become a bigger player on the global stage. The two oil developers have combined annual sales of more than $4.7 billion. But as things stand now, the new entity is still nowhere close to becoming an oil major that can match the US - or even Chinese - giants. The new entity produces 370,000 barrels of oil per day, an amount dwarfed even by Total's 1.7 million barrels per day. The new entity's production volume is even smaller than the 380,000 barrels per day pumped by China National Offshore Oil Corp (CNOOC).

Japan still has a long way to go before becoming a major player in global oil diplomacy.

Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy.

Hisane Masaki is WSN Editor Japan.