Japan energy: Goodbye Iran, hello Iraq
By Hisane Masaki
TOKYO - Fresh from a serious setback in Iran, where it lost its controlling
stake in the huge Azadegan oilfield, Japan has launched diplomatic efforts in
earnest to secure petroleum in neighboring Iraq.
Recently, Tokyo invited Iraqi Oil Minister Hussain al-Shahristani to Japan and
they issued a joint communique pledging Japanese assistance for improvements to
the oil and gas infrastructure in the war-torn country. Japan specifically
pledged to provide loans
of about 20 billion yen (US$170 million) to Iraq as part of the $3.5 billion
aid package already committed.
Iraq is believed to have the world's third-largest oil reserves, after Saudi
Arabia and Iran. Despite its huge potential, however, the country is relatively
unexplored because of years of sanctions and war. Only a quarter of its 80
discovered fields are pumping oil at present. By extending loans and increasing
involvement in the reconstruction process, Tokyo is hoping it can acquire a
good share of these massive oil reserves.
Japan imports almost all of its oil, and nearly 90% of that comes from the
Middle East. In a significant setback for its energy-security policy, Japan
agreed last month to give up its controlling interest in Iran's massive
Azadegan oilfield - one of the world's largest, with an estimated 26 billion
barrels of reserves - amid international tensions over Tehran's nuclear
program.
After sustained discussions on the topic, Japan's Inpex Corp and Iran's
National Iranian Oil Co reached a basic agreement reducing the Japanese
developer's stake in the southwestern oilfield to 10%, down from 75%. Inpex is
also to renounce its status as the operator. This development has thrown the
Japanese government's aim - of ensuring energy security through Japanese-own
companies' increased foreign output - into jeopardy.
At present, Iraqi oil accounts for only a minuscule percentage of the East
Asian country's overall imports. To enlarge on this, Japan has its eyes on at
least three Iraqi fields, including the giant East Baghdad oilfield, which has
an estimated 18 billion barrels of reserves. The two other oilfields are
Gharraf and Tuba, both in southern Iraq.
The Gharraf and Tuba fields have proven oil reserves of 1.1 billion and 1.5
billion barrels, respectively. After returning to Baghdad, the Iraqi oil
minister said Japanese firms have also shown an interest in the Nassiriya
oilfield, in southern Iraq, which has proven oil reserves of between 2 billion
and 2.6 billion barrels.
Meanwhile, two Tokyo-backed oil developers - Arabian Oil Co and the Japan
Petroleum Exploration Co (JAPEX) - have recently renewed, for another year,
their respective agreements with the Iraqi Oil Ministry to provide
technological assistance, hoping to take a share of the oil wealth in future.
Iraqi Oil Minister Shahristani's Asia-Pacific tour also took him to Australia
and China. China and Japan are, respectively, the world's second- and
third-largest importers of energy resources. In a report issued early this
year, the government-affiliated Japan External Trade Organization (JETRO)
warned of an ever-intensifying global competition for oil and gas. The report
said China's oil consumption will nearly double by 2020 from the current level.
The setback in Iran came at an awkward time for Japan, which launched its New
National Energy Strategy in late May. The new strategy calls for various
specific goals to ensure the nation's energy security in the long term. In
addition to importing almost all of its oil, Japan is 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, increasing the
ratio of "Hinomaru oil" - oil developed and imported by domestic companies -
from 15% to 40% of total imports by 2030. But the draconian cut in Inpex Corp's
stake in the Azadegan project has made this ambitious goal even more difficult
to achieve.
Japan's invitation of the Iraqi oil minister came only two weeks after Inpex
Corp was pushed out of the driver's seat in the Azadegan project in Iran,
underscoring how passionately Tokyo is wooing Baghdad.
Although Japan withdrew its troops from Iraq in the summer, it has taken a high
profile in Iraq's reconstruction. Tokyo hopes its generous aid pledges - $5
billion in total, with $1.5 billion in grants and the remaining $3.5 billion in
soft loans - will be rewarded with access to Iraq's extensive oil reserves.
Japan's aid is the largest by any single nation, except the United States. The
$1.5 billion portion has already been disbursed, and the $3.5 billion soft loan
is to be fully allocated by the end of 2007, with the focus likely to be on
energy-sector developments.
Shahristani met with Japanese Minister of Economy, Trade and Industry Akira
Amari and other officials in Tokyo. The Japanese side specified that about 20
billion yen ($170 million) in loans would be spent on upgrading an oil refinery
and working on a fertilizer plant, near the southern port city of Basra. The
repayment period for these soft loans is 40 years and they carry an annual
interest rate of 0.75%. Japan and Iraq also agreed to hold energy talks at
least once a year.
Japanese investment
"The oil industry is important for the reconstruction of Iraq," the Iraqi
minister told Amari. "But investment is not sufficient," he continued. "We
would like Japanese companies as well as Japanese official loans to come to
Iraq. [We are] not short of funds [now]" thanks to recent high oil prices, but
the country hopes to start "major construction [of oil facilities] next year,
and we will need more funds", Shahristani said.
The two countries issued a joint statement calling for Japanese companies to
work in Iraq's oil- and natural-gas-development projects. "Both sides welcomed
that Japanese corporations have the intention to keep performing activities
which aim at obtaining a secure energy supply, and contributing to the
development of the oil and gas fields in Iraq in a positive way," the statement
said.
The statement also confirmed that "it is essential to explore Iraq's oil and
natural-gas reserves ... as well as to restore and expand Iraq's existing
facilities and to develop related industry in the sector, in order to
reconstruct Iraq".
Promisingly for the Japanese government, Iraq's oil production rose to 2.5
million barrels per day (mbpd) in June, and Shahristani noted at the time that
this was to increase to 2.7mbpd by the end of the year. Before the war, output
was about 3mbpd, peaking at a record of 3.5mbpd.
In Australia en route to Tokyo, Shahristani expressed his confidence again that
international investment would help Iraq more than double its oil output to
6mbpd by 2012-14. In Tokyo, he also said Iraq hopes to export more than 4mbpd
by 2010. "We are determined to go beyond that to 6 million [bpd] by cooperating
with foreign companies," he said.
He said the oil sector, which accounts for about 70% of Iraq's gross domestic
product (GDP) and 90% of its national income, would receive a boost after a new
hydrocarbon law expected by the end of the year that will provide further
guarantees for foreign investors.
Asia is seen as a major target market for Iraq once production and exports are
increased. "We are not exporting enough at the time being, but that is only
transitional," he said. "Our increased production will be for the Asian
markets."
Security concerns
It is clear that Japan is interested in increasing its profile in Iraq's energy
sector, but the main obstacle to ramping up investment remains the endemic
violence that persists in the Middle Eastern country.
Shahristani acknowledged that if it were not for the increasingly frequent
attacks by saboteurs on northern pipelines, Iraq could be shipping about
400,000bpd more in crude-oil exports.
"The pipeline that takes the oil through Turkey has been attacked more
viciously in recent months," he said. "We are talking with the minister of
defense to provide better protection." But he said he hopes to see an
improvement in pipeline security soon.
China in Iraq
Japanese officials and analysts also worry that countries such as China might
have an edge over Japan in gaining access to Iraq's energy resources, since it
has more experience operating in inhospitable environments such as Sudan and
Angola.
In fact, the new government in Baghdad has courted Beijing because Chinese
producers have been willing to invest in countries that are considered
dangerous or politically isolated. Beijing had previously been thought to be
out of the running for major contracts in postwar Iraq, with the best deals
going to the United States and its allies. But the upsurge in violence there
has made the country less attractive to Western producers.
In Beijing, Shahristani and Chinese officials agreed to revive a 1997 deal
worth $1.2 billion signed by China and Saddam Hussein's government to develop
the al-Ahdab oilfield. Al-Ahdab, with an estimated development cost of $700
million, was awarded to China National Petroleum Corp and Chinese state arms
manufacturer Norinco by Saddam. The deal was frozen by international sanctions
and then Saddam's overthrow.
Competition for gas
Concerns about tougher competition for natural-gas supplies in the medium and
long terms are also growing in Japan as many countries, led by China, are
stepping up LNG purchases.
China began to import liquefied natural gas in May. The first LNG shipment into
China came from Australia. China's LNG imports have also come at a time when
Japan and China - the two Asian giants - are locked in the simmering
territorial dispute over gas resources in the East China Sea. Japan is now the
world's largest LNG importer, accounting for more than 40% of total global
imports. But China is expected to catch up with and possibly overtake Japan as
the world's largest LNG importer in 2020.
Malaysian national oil company Petroliam Nasional Bhd (Petronas) said at the
end of last month that it had signed a deal to supply LNG to Shanghai for 25
years, starting in 2009. In other recent developments, China National Offshore
Oil Corp (CNOOC) signed frameworks with Suez SA, Total SA and Shell Eastern
Trading Ltd to buy spot shipments of LNG to make up for any supply shortfalls.
ExxonMobil Corp also reached a preliminary agreement recently to sell natural
gas from the Sakhalin-1 oil and gas project in Russia's Far East to China -
instead of to Japan as originally planned. That deal faces hurdles, however,
including the economics of building a very long pipeline and getting the
cooperation of OAO Gazprom, Russia's natural-gas-distribution monopoly.
Other participants in the Sakhalin-1 project include Tokyo-based Sakhalin Oil
and Gas Development Co (SODECO), jointly owned by the Japanese government and
private sector, and Russia's state-owned oil firm Rosneft. SODECO has a 30%
interest in the project, while the Russian firm has a 20% stake. The project
operator ExxonMobil holds the right to decide which parties receive natural-gas
exports.
Japan purchased 58 million tons of LNG from abroad in 2005, of which 25% was
from Indonesia. Most of Indonesia's long-term LNG supply contracts with East
Asian countries, such as Japan, China, Taiwan and South Korea, start expiring
from 2010. Indonesia is poised to cut in half its Japan-bound exports of gas
when long-term contracts expire in 2010 in order to boost the availability of
fuel for domestic industries amid decreasing natural-gas, as well as oil,
production at home.
Despite being a member of the Organization of Petroleum Exporting Countries,
Indonesia became a net importer of crude oil in 2004. Qatar is expected to
replace Indonesia as the world's largest LNG exporter in 2010.
The report by JETRO, released early this year, predicted that the percentage of
oil as an energy source will level off in China at about 26% by 2020 while that
of gas will sharply grow to nearly 9% because of a sharp increase in imports
from Indonesia and Russia.
As China - and to a lesser extent India - demonstrates a willingness to pay
higher prices to ensure gas supplies, producers are likely to push ahead.
Still, most industry observers expect the Asian LNG market to remain tight in
coming years, keeping prices high.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on
international politics and economy. Masaki's e-mail address is yiu45535@nifty.com.
