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An Eclipse of 'Hinomaru Oil'
[Analysis] Japan's energy drive stalls in Iran
Hisane Masaki (hmasaki)     Print Article 
Published 2006-10-11 02:17 (KST)   
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 percent from 75 percent. 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 percent 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 percent 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 Aug. 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 Sept. 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 U.N. 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 U.N. 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 U.S. pressure
Japan has been under U.S. 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.

U.S. 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 percent 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 U.S. 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 percent 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 U.N. Security Council members along with the U.S., 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."
Hisane Masaki is a Tokyo-based commentator and scholar on international politics and economy. This is a significantly abbreviated version of an article that originally appeared on Asia Times.
©2006 OhmyNews
Other articles by reporter Hisane Masaki

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