Japan's energy drive stalls over
Iran By Hisane Masaki
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.
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