Japanese officials appear to have weathered yet another crisis in their continuing efforts to secure a deal with Iran for the development of its giant Azadegan oil field.
The field, located some 80 km west of the city of Ahvaz in Khuzestan province near the Iraqi border, is believed to be the largest onshore project in the post-1979 Islamic Revolution.
Iranian officials estimate that Azadegan contains 35-45 billion bbl of OOIP, with 5-6 billion bbl considered recoverable. It would take deep pockets to develop the field.
Financing initiatives
Japan in February sealed a $2 billion deal to develop Azadegan despite pressure from the US to back off because of its concerns that Tehran is developing nuclear weapons. Japan relies on the Middle East for about 90% of its oil. After Saudi Arabia and the UAE, Iran was Japan's third largest oil supplier in 2002, providing some 576,000 b/d. Consequently, the island nation is caught between its desire to develop Azadegan and pressure from the US, its key security ally (OGJ Online, July 1, 2003).
In Japan's effort to secure future Iranian oil, the state-run Japan Bank for International Cooperation announced Mar. 25 that it would join with four major Japanese banks to extend a $1.2 billion syndicated loan to Iran's National Iranian Oil Co. (NIOC) for oil development. NIOC is the main Iranian partner in the Azadegan deal.
Japan Bank will provide 85% of the $1.2 billion loan, while the remainder will be divided among Mitsubishi Tokyo Financial Group Inc., Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group, and UFJ Holdings Inc.
Japan's Nihon Keizai Shimbun (Nikkei) newspaper reported that the loan payments would be made via the annual proceeds that NIOC will generate from sales of crude oil to Japanese trading companies. In turn, the Japanese trading firms will pass on the payments directly to the banks, bypassing the Iranian side completely, Nikkei said.
Nikkei also reported that the agreement for the loan, which carries a term of 9 years, stipulates that Iran must make an effort to increase its crude oil supplies to Japan if an emergency erupts in the Middle East.
Development plans
Japan and Iran signed the basic agreement on Feb. 18 for the project, to be led by a Japanese consortium of Inpex Corp., Tomen Corp., and Japan Petroleum Exploration Co. (Japex).
Inpex Corp., along with NIOC and Naftiran Intertrade Co. Ltd. (NICO), signed the contract for the integrated appraisal and development operations of Azadegan field.
Under terms of the contract, both Inpex and NICO will become contractors to NIOC to develop the field. The two sides are reported to have agreed to invest a total of $2 billion, with the Inpex group contributing 75% and the Iranian oil company 25%.
Development is to be implemented in two phases to target the production of 150,000 b/d in Phase 1 and 260,000 b/d in Phase 2.
Initial production of 50,000 b/d is expected within 40 months, rising to 150,000 b/d after 52 months and 260,000 b/d in 8 years.
The contract stipulates the drilling of 36 wells in Phase 1 and 39 more in Phase 2, along with the construction and installation of oil and natural gas production facilities, the laying of oil and gas pipelines for export, and the injection of water and gas to maintain pressure in Azadegan field.
The Japanese participants in the oil consortium initially planned to set up a project firm with a capitalization of 10-30 billion yen.
Under that plan, Japan Oil, Gas, and Metals National Corp., an independent administrative agency, was to contribute 49% of the capital, and Inpex, Tomen, and Japan Petroleum the remaining 51%.
Since winning the deal, however, the government-affiliated Inpex said it would have to regroup the international consortium in order to develop the site.
The oil development firm had asked Royal Dutch/Shell Group to provide technical assistance, but the world's second-largest oil concern told OGJ that it "has not made any formal decision on participation yet."
Early press reports cited a Shell spokeswoman as saying "the terms and conditions of the deal between the Japanese companies and Iran do not look attractive against Shell's current project economics criteria."
But the Shell spokesman told OGJ that the firm "cannot comment on the specifics of the negotiations or the terms and conditions."
With Shell's position uncertain, Inpex announced in early March that French oil company Total SA and four other unnamed foreign companies had offered to participate in the project.
Inpex reportedly expects the Total group to contribute more than 40% of its 75% share in the deal.
In addition, Inpex said it plans to invite Japanese oil wholesalers and trading houses to join the consortium following a decision by Tomen to leave the project to focus on reducing its own debts.
The trading firm, reportedly working on rehabilitation with the help of Toyota Motor Corp., Toyota Tsusho Corp., and others, may well have dropped out because Toyota could be adversely affected by Tomen's involvement in the project, due to possible opposition by the US, the world's largest car market.
Meanwhile, Japex, which is under the control of government-affiliated Japan National Oil Corp., is believed to be considering sharply reducing or even scrapping its investment in the Azadegan project.
Growing Japan-Iran ties
Japanese Prime Minister Junichiro Koizumi recently reiterated confidence in his country's growing relationship with Tehran during a visit to Japan by Hasan Rowhani, the secretary general of Iran's Supreme National Security Council.
"Japan-Iran relations have been strengthening as seen in the agreement to develop the Azadegan oil field, and I very much hope this will go farther," Koizumi said, after receiving assurances about Iran's nuclear ambitions from Rowhani.
Considered to be Iran's top nuclear policymaker, Rowhani announced in early March that Japanese officials had invited him to Tokyo to discuss his country's nuclear activities and especially its willingness to ratify the so-called Additional Protocol of the Nuclear Nonproliferation Treaty (NPT).
In addition to the NPT, Iran signed in December the Additional Protocol of the International Atomic Energy Agency (IAEA), which grants the United Nations broader inspection powers and the right to secure much more information about a country's nuclear program than granted by the basic treaty.
The Japanese also were said to be concerned about Iran's Mar. 13 decision to indefinitely shut out IAEA inspectors in protest of a resolution by the agency's 35-nation governing board that "deplores" Iran's failure to disclose its possession of P-2 centrifuge designs.
The US contends that such information relates to parts of a program that is devoted to the secret development of nuclear weapons, a charge Iran denies.
Threats to the deal
Apart from their own worries about nuclear weapons, the Japanese are concerned by the charges against Iran, since they could undo Tokyo's deal to develop Azadegan field.
On Mar. 16, the day before he met Koizumi, however, Rowhani announced that Tehran had agreed to let UN nuclear inspectors back into the country on Mar. 27 without any conditions.
That inspection was expected to shed light on the P-2 centrifuge designs as well as questions about IAEA's discovery in Iran of traces of highly enriched uranium that could be weapons-grade. Tehran claims the uranium traces were already on the used equipment it purchased.
On Mar. 17, Rowhani assured Koizumi that Tehran "will continue cooperating with the IAEA so that the international community will have no concern over Iran's peaceful use of atomic energy."
Koizumi expressed his satisfaction by saying that "Iran is trying to respond sincerely to the IAEA resolution" and that he appreciates the efforts of Rowhani, which "are very important for developing ties between Japan and Iran."
US Sanctions
Washington, DC, has maintained various sanctions against Iran since 1979, following seizure of the US embassy in Tehran.
In March 2003, US President George W. Bush extended for another year sanctions imposed in 1995 by then-President Bill Clinton, citing Iran's "support for international terrorism, efforts to undermine the Middle East peace process, and acquisition of weapons of mass destruction."
A senior US diplomat, however, reportedly said the US would "reluctantly" acquiesce to Japan's Azadegan deal if its implementation were conditional on Iran's faithfully observing its nuclear obligations to IAEA.
Japan's Koizumi appeared to stress that point on Feb. 19, when he called for Iran to cooperate regarding international nuclear inspections.
Japan shares a concern about nuclear proliferation with the IAEA. I want [Iran] to faithfully comply" with resolutions the UN nuclear watchdog adopted to urge Tehran to cooperate in its inspections, Koizumi told reporters.
Koizumi also said Japan believes that "Iran has been dealing with [the nuclear issue] fully taking into consideration the relationships with the IAEA."
At the same time, the Japanese premier stressed the concerns of his government, saying: "It is not only the United States but [also] Japan that is concerned about nuclear proliferation."
Tokyo's efforts to assure Washington appear to have worked.
John Bolton, US undersecretary of state, in Tokyo the next day said he was "very confident that the view of Japan and the United States on the Iranian nuclear weapons program is essentially the same."
That was a considerable turnabout from the previous day in Washington, when US Department of State Spokesman Richard Boucher told reporters: "Our policy has been, with respect to Iran, to oppose petroleum investment there."
Boucher said the government would look at the 1996 Iran-Libya Sanctions Act to see whether it can take action against companies investing in Iran.
"We do not encourage investment in Iran's petroleum sector," Boucher said. "We have laws that affect our attitudes toward these investments. And we will have to look at those laws appropriately."
Boucher added: "We remain deeply concerned about deals such as this and disappointed that these things might go forward."
One Japanese official brushed aside the criticism, saying: "Of course the US had to say that they were 'disappointed' with the deal due to their strong attitude against Iran, but we have continually kept them informed and updated on the Azadegan situation."
Tehran and Tokyo had no hesitation in praising the deal. In a joint statement they said, "the parties do hope this project will be successfully conducted, strengthen the economic ties between the Islamic Republic of Iran and Japan and contribute to further development of relationship between the two countries."
