Oil field exit reveals balancing act

Inpex's retreat from Azadegan shows how political risks hinder Japan's energy quest


Japan’s withdrawal from one of the world’s largest untapped sources of oil, in Azadegan, Iran, shows the country must walk a tightrope to secure stable energy resources while prioritizing the alliance with the United States.

Given the worldwide shortage of easy-to-explore oil fields in areas of political stability, Japan also has no choice but to compete with China and other emerging economies until it finds a viable alternative to crude.

Inpex Holdings Inc., 19 percent of which is owned by the trade minister by title, announced Friday it will scrap its 10 percent concession in the Iranian oil field.

The decision implies Tokyo will sacrifice amicable relations with Tehran to support the U.S. in condemning Iran’s nuclear activities, said Ken Koyama, a director at the strategy and industry research unit of the Institute of Energy Economics, Japan. He added the Azadegan stake had long been a Japanese diplomatic success story.

It is believed Inpex had earlier decided to withdraw from the field, which is believed to contain 26 billion barrels of crude, because it was not on the list of Iran-related companies that will be targeted by U.S. sanctions. The sanctions took effect Sept. 29.

“Had Inpex been listed as a target of U.S. sanctions, it would not have been able to do business with not only the U.S. but also European banks, or (it would) have had to pay high interest,” a senior official of the Agency for Natural Resources and Energy said on condition of anonymity, stressing that keeping the oil field stake could have caused repercussions for the firm.

The Azadegan decision jolted the nation’s energy industry just after the government’s new national energy strategy was announced in June. Part of that strategy is an ambitious plan to double Japan’s oil-drilling rate, now at 26 percent, by 2030.

“Japan now has to cultivate energy resources more vastly, develop other types of energies and curb domestic energy demand to reach the target without Azadegan,” Koyama said. “It is not an easy task, but it is not an impossible target.”

To reach that goal, Japan will need to keep acquiring stakes — even small ones — in any oil projects it can get, while simultaneously developing new energy sources, including oil shale, and continuing research on nuclear power and renewable energy, he said.

Japan needs to diversify because it is still dependent on the Middle East for nearly 90 percent of its oil.

Iran was responsible for about 11.5 percent of that supply in 2009.

That dependency briefly dropped to 67.4 percent in 1987, after the oil crises of the 1970s prompted Japan to import more from China and Indonesia. But rising demand soon revived the addiction to Middle East oil, bringing its status as the prime source back up to 89.78 percent in 2009, nearly the level of 1968, according to the Agency for Natural Resources and Energy.

Japan has stakes of 10 to 30 percent in oil projects in southern Iraq, Abu Dhabi, Sakhalin, Kazakhstan and Azerbaijan, as well as larger stakes in Western Australia and Indonesia.

Some industry sources, however, played down the impact of the Azadegan exit because it could save Japan from troublesome quality and safety issues.

“From the beginning, some people have said that the impact of any withdrawal would not be significant,” said an oil refinery source who does not wish for he or his company to be identified.

Part of this, he said, is because the oil in Azadegan is heavy and expensive to separate from normal or light oil. There is also the problem of all the land mines planted in the 1980s during the Iran-Iraq War, he said.

Even though Japan gave up the 10 percent stake in Azadegan, industry sources said the impact is smaller compared with when Inpex, under pressure from the United States, in 2006 slashed its 75 percent concession, a void China reportedly swooped in to fill.

Japan had considered Azadegan one of the few stable sources of crude it could tap to make up for the concessions it lost in the Saudi-controlled part of the Khafji oil field in 2000. Inpex initially planned to start drilling in Azadegan in 2008 but encountered delays.

Inpex’s constant, decade-long investment in Azadegan reflects the strength of diplomatic ties that held firm even during the 1970s oil crises, experts said.

Inpex’s accumulated investment in the field totaled ¥12.5 billion in June, said company spokesman Kazuhiko Itano. Half the amount is set aside as a reserve, he said.

The company plans to invest about ¥4 trillion over the next six years in other oil projects, in Australia, Indonesia, Kazakhstan and elsewhere, Itano said.

Experts noted that the global quest for oil is never without risk.

There are still untapped oil fields deep below the ocean floor, including in the Gulf of Mexico, in polar regions where access is difficult or where there are conflicting territorial claims, and in politically risky hot spots, such as Iran and Iraq.

“People dug down 1,000 to 2,000 meters in the 1950s and 1960s, but now it is normal to drill 5,000 meters underground from a rig floating 2,000 meters above the seafloor,” said Katsuhiro Fukaya, manager of planning and research at the Japan Petroleum Development Association.

“The deeper we drill, the more it costs because the pressure and temperature of the stratum become high,” he said.

The government has said it will back private-sector efforts to tap energy resources abroad in competition with China and Russia through a variety of measures, including financing energy explorers through Japan Oil, Gas and Metals National Corporation; providing trade insurance through Nippon Export and Investment; and extending funds to oil-rich countries via official development assistance and the Japan Bank for International Cooperation.

Koyama of the Institute of Energy Economics also pointed out that Japan has a key advantage when bargaining in the Middle East — its energy-saving expertise.

“They are very interested in our technologies and knowhow, and we need to provide them as a package,” he said.

In that case, energy explorers, trading houses, academic institutions and the government will all have to cooperate with each other, he said.

“We have to form an ‘All-Japan’ framework to compete in negotiations,” he said.