Tokyo Turns Back On US, Signs Iran Oil Deal
February 19, 2004
Dow Jones Newswires
Sally Jones
LONDON -- Eager to gain a foothold in Iran's energy sector, Japan opted to ignore U.S. pressure to stall talks with Iranian oil officials and signed a much-delayed deal in Tehran late Wednesday to develop the country's massive Azadegan oil field.
The deal, valued at a little under $3 billion, advances import-dependent Japan's efforts to secure Mideast oil supplies and shows Iran's willingness to loosen what have been restrictive investment terms to boost ties with an economic superpower and pull in much needed foreign capital.
It also drew a rebuke from the U.S. State Department, which said the agreement, which it has long opposed, was poorly timed given renewed questions about whether Iran has fully disclosed its nuclear capabilities.
"It's deeply disconcerting," said Greg Sullivan, spokesman for the State Department's Near Eastern Affairs Bureau. "It's been something we've repeatedly raised with the Japanese."
Tapping into Azadegan's huge oil reserves of around 30 billion barrels has long been a top priority for Japan, which relies on imports to cover the bulk of its energy needs. Japan lost oil rights in Saudi Arabia in 2001.
Keen to bag a deal to develop the onshore oil field in southwestern Iran, Tokyo moved quickly to secure negotiatings rights to develop Azadegan back in 2000. It showed Iran just how serious it was by pledging $3 billion in credits.
"It is very essential for Japan to tap into Azadegan," Yoshihisa Ohno, an official with Japan's Ministry of Economy, Trade and Industry said. "Japan has virtually no oil of its own."
Improved Terms
Although the contract was signed under Iran's unpopular "buyback" scheme, industry sources pointed to positive changes in the terms.
Under the the deal signed with the National Iranian Oil Co. (NIO.YY), a Japanese consortium led by Inpex Corp. and including Tomen Corp. (8003.TO) and Japan Petroleum Exploration Co.(1662.TO) will be allowed to develop the onshore field for about 16 years - about twice as long as previous deals allowed.
"Iran realizes that it has to be more flexible," a senior Iranian oil source said. "What we are seeing is more relaxed and prolonged terms."
Buybacks skirt the Iranian constitution, which prohibits foreign firms from taking an equity stake in Iran's energy sector. Instead, they participate in a project for a limited period and are repaid in oil or gas revenues.
The main gripe of potential investors has been that the time frame for participating in Iranian energy projects has been too limited.
Tokyo will hold a 75% stake in the project, and local company the NaftIran Intertrade Co. will hold the remainder. Capital expenditure on the project is valued at $2 billion. Other costs such as customs and taxes will push the total figure closer to $3 billion, people close to the deal said.
For Iran, the deal with Japan is a big step in securing better relations with an economic superpower. It also triggers much needed foreign investment. So far Iran has only locked in around $12 billion of the $24 billion in foreign investment projected during coming years.
Iranian Minister of Petroleum Bijan Namdar Zangeneh said Wednesday the deal will open the door to more investment by Japanese companies and others. The country is in talks with Japanese companies about a project at Kharg Island in the Persian Gulf to collect now-wasted natural gas that is found in oil fields, the minister said.
Talks are also under way with Chinese and Indian oil companies over the development of northern areas of the Azadegan field, and Iran will soon sign a contract to develop oil in the South Pars natural gas field in the Persian Gulf, the minister said.
The minister also encouraged the Japanese companies to bring in a European oil major as a partner in Azadegan.
New Capacity
Iran, facing growing competition from its neighbors and soaring domestic demand for energy, is keen to hike oil output, and quickly.
The Azadegan field is expected to produce 150,000 barrels a day in the first phase, which will be complete in 52 months, and 260,000 barrels a day in the second phase, which will be wrapped up in eight years, the minister said. An Iranian oil source said Wednesday that he expects the first barrels to be pumped in the next 22 months.
The extra oil will go a long way to securing Iran's position as the No. 2 producer in the Organization of Petroleum Exporting Countries. Today, Tehran's crude oil production capacity stands at just over 4 million barrels a day, about 40% of the capacity of top OPEC producer Saudi Arabia.
Under pressure from Washington, which is nervous about Iran's nuclear power program, Japan backed off from signing a deal for Azadegan last June. Sources close to the negotiations said discussions between the two sides also were mired in differences over contract terms.
The talks resumed in earnest after Iran signed an additional protocol to the Nuclear Non-Proliferation Treaty late last year allowing snap inspections of its nuclear sites.
New concerns about Iran's intentions have arisen in the U.S., however, with revelations the country possessed drawings for a more sophisticated nuclear centrifuge design than it had acknowledged in disclosures to the International Atomic Energy Agency.
"Given the recent revelations about the sensitive centrifuge designs, it raises all kinds of concerns about Iran pursuing development of nuclear weapons," Sullivan said.
Industry sources said they weren't surprised that Japan finally went ahead and inked the deal. They say Tokyo was concerned it might jeopardize a project that would offer it a steady flow of oil.
"Japan needs to invest to ensure its oil supplies for the future," said Ali Granmayeh, political expert and lecturer at the University of London.
-By Sally Jones, Dow Jones Newswires; 44-207-842-9347;
sally.jones@dowjones.com (John M. Biers in Houston and Hashem Kalantari in Tehran contributed to this article).
http://framehosting.dowjonesnews.com/sample/samplestory.asp?StoryID=2004021823220000&Take=1When the regime collapses, the autographs that the Japanese have on their contract won't mean much. Maybe they'll learn a lesson.