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Goodbye Iran, Hello Iraq
[Analysis] Fresh from a setback in Iran, resource-poor Japan pins its hopes on Iraq
Hisane Masaki (hmasaki)     Print Article 
Published 2006-11-07 07:33 (KST)   
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.

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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 percent 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 percent, down from 75 percent. 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.

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 percent to 40 percent 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 percent. Japan and Iraq also agreed to hold energy talks at least once a year.

"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 in June, and Shahristani noted at the time that this was to increase to 2.7 million barrels per day by the end of the year. Before the war, output was about 3 million barrels per day, peaking at a record of 3.5 million barrels

In Australia en route to Tokyo, Shahristani expressed his confidence again that international investment would help Iraq more than double its oil output to 6 million barrels per day by 2012-14. In Tokyo, he also said Iraq hopes to export more than 4 million barrels per day by 2010. "We are determined to go beyond that to 6 million [barrels per day] by cooperating with foreign companies," he said.

He said the oil sector, which accounts for about 70 percent of Iraq's gross domestic product (GDP) and 90 percent 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."

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.

Despite Tokyo's calls for the domestic private sector to pump more money into overseas oil and gas projects, investment in Iraq will be difficult as violence is unlikely to cease anytime soon.

Shahristani acknowledged that if it were not for the increasingly frequent attacks by saboteurs on northern pipelines, Iraq could be shipping about 400,000 barrels per day 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.
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Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. This is part of an article that originally appeared on Asia Times.
©2006 OhmyNews
Other articles by reporter Hisane Masaki

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