Japan's energy drive stalls over Iran

Posted in Japan | 10-Oct-06 | Author: Hisane Masaki| Source: Asia Times

TOKYO - In a significant setback for its energy-security policy, resource-poor Japan has agreed to give up its controlling interest in the US$2 billion development of Iran's massive Azadegan oilfield amid tensions over Tehran's nuclear program.

After days of hectic haggling, Japan's Inpex Corp and National Iranian Oil Co reached a basic agreement on Friday on a major cut in the largest Japanese oil and gas developer's stake in the oilfield, in southwestern Iran, to 10% from 75%. Inpex will also return its status as operator of the project to the state-owned Iranian oil company.

Just six months ago, Inpex Holdings Inc, Japan's biggest oil and gas explorer, was established through a government-orchestrated merger between Inpex Corp and Teikoku Oil Co. Inpex Holdings was apparently conceived as a "national policy corporation" designed to secure supplies for Japan from abroad.

Inpex Holdings' largest shareholder, the Japanese government, believes that the combined firm's greater size will better serve this purpose. In fact, Inpex Holdings has been aggressive in expanding overseas operations. Until Friday's basic agreement with Iran to reduce its stake in the Azadegan oilfield, the holding company seemed to be pumping along quite smoothly. In August, on the strength of high oil prices, it revised upward its earnings forecast for the current fiscal year ending in March 2007.

With the reduction in Inpex Corp's stake in the project, the Japanese government is now unlikely to provide financial support to the company for the project. Still, Inpex Corp is expected to maintain the right to import crude oil from the field in the future with the 10% stake. Inpex Corp has already invested 10 billion yen ($85 million) in the project, but the company says it is not sure what its total investment will be.

Twists and turns
In early 2004, Inpex Corp signed the $2 billion deal to develop Azadegan, Iran's largest onshore oilfield and the world's second-largest among fields discovered since the 1980s, with an estimated 26 billion barrels of oil. The project's original plan called for pumping 260,000 barrels per day by early 2012. Iran is also Japan's third-largest oil supplier, accounting for 14% of Japan's total oil imports.

Akira Amari, Japan's minister of economy, trade and industry, lamented recently: "The government is responsible for stable energy supply, but at the same time it should seek nuclear non-proliferation. We face a very difficult dilemma."

Inpex Corp had yet to start development work, citing a delay in Iranian operations to remove land mines left over from the 1980-88 Iran-Iraq War. Tehran accused Tokyo of foot-dragging, however, claming that the mine-clearing had almost been finished. Tehran had set - and extended a few times - a deadline for Inpex Corp to start development work, with the first one set for August 22.

Iran had warned that the contract would be canceled if Japan failed to begin work by the deadline. Kamal Daneshyar, the head of the Iranian parliament's Energy Commission, said on September 30 that Iran would soon cancel the project, adding that "Japan must pay the penalty for five years of delay" in launching operations.

Announcing the basic agreement with the Iranian side on a steep cut in Inpex Corp's stake in the Azadegan project, Katsujiro Kida, the firm's executive senior vice president, insisted at a press conference on Friday that the decision was unrelated to the international situation. "The reason is simply a delay in removing land mines," Kida said. "It was a business judgment made as a private company." However, most observers do not take his remarks at face value.

Iran has refused to suspend its uranium-enrichment program after six key countries agreed to discuss possible sanctions against Tehran. The five permanent United Nations Security Council members and Germany held talks in Britain on Friday to discuss Iran's repeated refusal to halt nuclear activities. Despite fears it is developing nuclear arms, Iran says its aims are peaceful.

Russia and China favor diplomacy, not sanctions. A UN debate on punitive action could start as early as this week. Speaking after discussions in London, British Foreign Secretary Margaret Beckett said the six powers would "consult on measures under Article 41 of Chapter 7 of the UN Charter". Article 41 authorizes the Security Council to apply non-military means, such as economic or diplomatic sanctions, "to give effect to its decisions".
Though details of possible economic sanctions have yet to be decided, if the dispatch of engineers or further investment in Iran are prohibited, development of the Azadegan oilfield would be impossible. Many analysts also note that even if sanctions were averted, it would be difficult for Japan to go ahead with development as long as the United States, Japan's closest ally, maintains its hardline stance toward Iran.

Strong US pressure
Japan has been under US pressure to give up the Azadegan project. Even before Inpex Corp's compromise agreement with Iran, Japanese government officials had said Tokyo would not provide financial support for the development of the Azadegan oilfield if Tehran were slapped with economic sanctions by the Security Council. This decision on financing was taken by many as meaning Japan's virtual withdrawal from the project, because it would be difficult for Inpex Corp to finance the project without government aid.

Inpex Corp is believed by many observers to have tried to prolong negotiations with Iran in hopes of taking a wait-and-see attitude until uncertainty over the sanctions issue is cleared up.

US critics of Japan's Iran policy have argued that Iran's nuclear program could destabilize the entire Middle East region - from which Japan imports about 90% of its oil - and, as a result, severely damage Japan's energy security. They also have accused Tokyo of inconsistency on the issue of nuclear proliferation by getting tough with Pyongyang while doing business with Tehran as usual.

Despite US pressure, Japan has refused to give up its interest in the Azadegan project. Still, Japan has clearly sided with the United States recently, showing its readiness to accept its request for sanctions against Iran unless the Persian Gulf nation abandons its nuclear program. Probably the biggest reason for this Japanese policy shift is renewed tensions over North Korea's nuclear and missile programs. In defiance of mounting international pressure, the reclusive Stalinist state test-fired a volley of ballistic missiles in early July, all of which fell into the Sea of Japan. Further escalating its brinkmanship, Pyongyang said on Monday it had successfully conducted an underground nuclear test that day, adding that there had been no radioactive fallout from the experiment.

Japan still hopeful
Inpex Corp apparently wanted to avoid a complete pullout from Iran and thereby keep its future options open. The firm's agreement to accept a drastically cut stake in the Azadegan project is also apparently in line with the Japanese government's wishes.

Although it will hold a 90% stake in the Azadegan project, Iran has neither the funds nor the technological capabilities to develop the oilfield on its own. Therefore, continuing the development will be difficult unless Iran can find a new public- or private-sector investor from a country other than Japan, analysts say.

But if sanctions are put in place, China and Russia - both permanent UN Security Council members along with the US, Britain and France - would feel it difficult to join oil-development projects in Iran and thereby undermine international cooperation, the analysts say. Though the Iranian side also mentioned French oil giant Total as a potential participant in the Azadegan project, a senior Japanese government official said: "It's impossible for that to happen."

Some Japanese government officials believe that once the Iran nuclear dispute ends, Japan can have another go at increasing its stake. They believe that Iran will not be able to find a new foreign partner to replace Japan and that as a result, the development will in effect be postponed. The fact that Iran has agreed to allow Inpex Corp to maintain a minimal stake, instead of completely canceling the project, seems to have left that possibility open.

After all, Inpex Corp's settlement for a significantly smaller stake in the Azadegan project seems to be a result of efforts to strike a fine balance between international and national interests. "It will be meaningful from a long-term viewpoint on relations with Iran," said Kida, the firm's executive senior vice president. "It is an appropriate decision for the [Inpex] management."

Energy security concern
Inpex Corp and Teikoku Oil are Japan's No 1 and No 3 oil developers respectively. On April 3, the two launched a joint holding company to integrate their operations ahead of their planned complete merger in June 2008.

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. The new entity's chairman, Kunihiko Matsuo, and president, Naoki Kuroda, are both former senior officials at the Ministry of Economy, Trade and Industry (METI).

In late May, Tokyo launched the "New National Energy Strategy", which will call for various specific goals to ensure the resource-poor nation's energy security in the long term. Japan imports almost all of its oil and is also the world's largest importer of liquefied natural gas (LNG). The new strategy reflects strong concerns about energy security amid high oil prices and intensifying global rush for oil, gas and other resources, led by China and India.

The New National Energy Strategy calls for, among other things, fostering a Japanese oil major and taking other measures with the goal of increasing the ratio of "Hinomaru oil" - oil developed and imported by domestic companies - from 15% to 40% of total imports by 2030. But the cut in Inpex Corp's stake in the Azadegan project has made this goal even more difficult to achieve.

METI, Inpex Corp's largest shareholder with a 36% stake, 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 Corp absorbed another government-affiliated firm, Japan Oil Development, in 2004. Teikoku Oil was also originally established by the government. The government holds sway through the presence of former METI officials in top posts, as well as through its unrivaled equity stake.

Aggressive business strategy
Inpex Holdings has been aggressively expanding its overseas business, acquiring new interests and starting production at its existing fields.

Soon after its inception, Inpex Holdings Inc embarked on a $6 billion natural-gas development project at the Ichthys field off Western Australia. The field is believed to hold at least 6 trillion cubic feet of gas. Inpex plans to begin actual production at the field in mid-2012 for imports of LNG into Japan, where it will meet about 10% of local demand. In July, Inpex Holdings also announced the acquisition of interests - ranging from 20-35% - in three other blocks in Australia. Inpex Holdings recently singed an agreement with Total SA to give the French energy giant a 24% interest in its wholly owned Block WA 285-P, which contains the Ichthys field.

In June, an international consortium that includes Inpex Holdings, Chevron Texaco Corp and others decided to invest up to $2.4 billion to begin commercial production of crude oil in a field in the Frade Block offshore of Rio de Janeiro. Production is expected to begin in April 2009 with daily output of 100,000 barrels. It will be the first commercial oil production in Brazil involving Japanese firms. The consortium, which also includes two other Japanese firms - JOGMEC (Japan Oil, Gas and Metals National Corp) and Sojitz Corp - and Brazil's Petrobras, has determined the field has about 300 million barrels of recoverable crude.

The Baku-Tbilisi-Ceyhan (BTC) pipeline linking Azerbaijan to Turkey began shipments from a Turkish port in June. The multibillion-dollar pipeline was constructed by an international consortium including Inpex Holdings and another Japanese firm, Itochu Corp. Meanwhile, a group of companies running Kazakhstan's massive Kashagan oilfield is conducting a feasibility study into a $4 billion transportation system that would take the field's oil to the BTC pipeline. In addition to operator Eni SpA, the consortium developing the field includes ExxonMobil Corp, Royal Dutch Shell PLC, Total, ConocoPhillips, Inpex Holdings and KazMunaiGaz.

Inpex Holdings is also interested in joining an east Siberian oilfield-exploration project planned by Russia. Although Inpex Holdings and some other Japanese firms have considered joining the project, they are waffling in view of the lack of a Russian government guarantee that Moscow will build a pipeline that can deliver oil up to the Russian Pacific coast. Inpex Holdings has interests in some Indonesian oil and gas blocks, including a 100% interest in the promising Masela Block in the Timor Sea.

Meanwhile, Inpex Holdings and Nippon Oil, Japan's largest oil wholesaler, recently announced plans to increase their cross shareholdings with an eye on launching joint oil developments.

In August, Inpex Holdings reported a 25.76 billion yen ($260 million) group net profit in the April-June quarter. The holding company posted a pre-tax profit of 132.82 billion yen on sales of 223.03 billion yen. For the full year to March 2007, Inpex Holdings projects net and pretax profits of 118 billion yen and 521 billion yen, respectively, on projected sales of 918 billion yen. The company's earlier forecasts of net profits, pretax profits and sales were lower by 21 billion yen, 102 billion yen and 124 billion yen respectively. The company raised its forecasts because of increased oil prices.

One step back, one forward
Japan's oil diplomacy suffered a serious setback when Arabian Oil Co, which has strong government backing, 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 the Azadegan and other oilfields elsewhere.

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 Corp - marked the first oil-exploration concessions granted to Japanese firms in Libya.

But the latest turn of events over the Azadegan oilfield has underscored that Japan still has a long way to go before becoming a major player in global oil diplomacy and making "Hinomaru oil" rise and shine on the horizon. Another factor casting a shadow over the future business of Inpex holdings is growing competition for energy resources between Japan and China, which has raised bilateral tensions.

The two Asian neighbors are at odds over natural-gas reserves 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. Teikoku Oil was formally granted concessions in 2005 to start experimental drilling in the East China Sea, in an apparent bid to counter exploration conducted nearby by China. Tokyo has delayed experimental drilling by Teikoku Oil, however, for fear of derailing negotiations with Beijing on the gas dispute and thereby further stoking tensions.

Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is yiu45535@nifty.com.