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Saturday, Oct. 14, 2006

Iran oil deal gone, as is headache

Azadegan setback eases U.S. strain, but at China's gain?

Staff writer

A Foreign Ministry official seemed more relieved than disheartened when he heard last week that Inpex Holdings Inc.'s concession in Iran's Azadegan oil field was cut to 10 percent from the original 75 percent because the Japanese firm failed to get started on the project.

News photo
Negotiators from Inpex Holdings Inc. and the Iranian National Oil Co. sign a contract Feb. 18, 2004, giving the Japanese firm a 75 percent stake in the 2 dollar million joint project to develop the Azadegan oil field. KYODO PHOTOS

"You can't help it, with what is going on in the United Nations Security Council," the official, who asked not to be named, said about the standoff with Tehran over its uranium enrichment program.

Resource-poor Japan was caught in the dilemma of needing to go on with the project and the harsh eyes of the world, especially the United States, to back off amid global pressures to compel Iran to drop its nuclear quest.

For the Foreign Ministry, which did not want to damage U.S. relations, last week's agreement put an end to the diplomatic tension while allowing Tokyo to still hold onto a portion of the project.

On Oct. 6, Inpex, owned 29.35 percent by the Japanese government, said it agreed with National Iranian Oil Co. to cut its concession in the $2 billion project to 10 percent from 75 percent.

The following day, Mehdi Bazargan, managing director of Petroleum Engineering & Development Co., Iran's state-run firm in charge of the project, hinted that Inpex could someday regain its lost stake in developing the oil field, without elaborating.

The setback came amid rising tensions in the international community over Iran's uranium enrichment program.

Iran refused to suspend the program despite repeated calls from the United States and European countries. Now those nations are seeking a U.N. Security Council resolution calling for economic sanctions.

News photo
Inpex Holdings Inc. Director Katsujiro Kida announces Oct. 6 in Tokyo that the firm's Azadegan concession will be cut to 10 percent.

"It was a realistic solution," Masahisa Naito, chairman of the Institute of Energy Economics, Japan, and a former senior official of the Ministry of Economy, Trade and Industry, said in a lecture Wednesday in Tokyo.

With Japan getting nearly 90 percent of its oil from the Middle East, of which 15 percent comes from Iran, last week's move highlighted Japan's energy vulnerability to international politics.

But Sadashi Fukuda, director general of the Institute of Developing Economics, reckons there is little Japan can do to dramatically change the situation.

"With most of the world's oil fields already developed, exploiting new fields becomes very difficult, but not entirely impossible," Fukuda said.

Measures Japan can take, he said, include diversifying its oil importers, seeking alternative energy sources and making its industry less dependent on oil.

Japan's dependency on oil declined from 77.9 percent in 1973 to 49.5 percent in 2004, shifting more to nuclear energy and natural gas.

But still, Japan's energy self-sufficiency is remarkably low compared with other economies.

The U.S. supplies 72 percent of its own oil, compared with 50 percent for France, 39 percent for Germany and 16 percent for Japan, according to the Organization for Economic Cooperation and Development. Japan has vowed to raise its figure to 40 percent by the end of 2030.

And with rising demand for oil from growing economies like China and India, the global race to secure supply is becoming harsher by the year.

In recent years, Japanese diplomats stationed in Africa and South America have been increasingly frustrated by China's blunt tactics of purchasing small mines and oil fields in those regions.

"They've effectively been piling up bank notes," said another senior Foreign Ministry official who asked not to be named, noting one way China woos energy concessions overseas is to bankroll and build government buildings in the targeted areas.

Since a large portion of Middle East oil is already secured by the U.S. and European countries, newcomers, including China, are pursuing resources in undeveloped oil fields and mines in Africa and South America, the official said.

Now speculation is ripe that China, France and Russia will try to fill the void left by Japan in the Azadegan field, where crude oil reserves are estimated at 26 million barrels. Iran had threatened to turn to China and Russia when Japan dragged its heels on getting started on the $2 billion project.

For the sake of ensuring adequate energy supplies, voices are mounting in the Foreign Ministry to use official development assistance as a strategic tool to this end.

"We can provide ODA, including building infrastructure, to nations where Japanese companies are trying to get a deal on projects, so they can do their business smoothly," the ministry official said.

But experts say Japan is too jumpy about China's doings and instead should focus on steady negotiations to maintain a steady flow of oil from the Middle East.

"Japan should not be mislead by China's aggressive steps," said Sachi Sakanashi, a senior researcher at the Institute of Energy Economics, Japan. "It's important that Japan be unfazed by such moves and pursue its own course."

China needs to secure oil because its energy demand is rising rapidly, whereas Japan already has a steady flow of oil from the Middle East and slower economic growth, she said.

Sakanashi pointed out that China's actions are leaving investors with the impression that oil resources are becoming scarce, fueling the price spikes of recent years.

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