Recent events surrounding energy-development projects overseas highlight resource-poor Japan’s vulnerability. They underscore the need for both the government and the private sector to develop a multipronged long-term strategy that will enable the nation to flexibly cope with unexpected changes in the energy-supply situation.

Oil accounts for about 50 percent of Japan’s primary energy. Japan imports most of its oil, with about 90 percent of it coming from the Middle East. Iran alone, in fiscal 2005, provided 13.8 percent of Japan’s oil imports.

Japan can never rest assured that it has secured enough energy supplies for the future, since resource exploration and development agreements involve more than national interests. In early October, for example, Inpex Holdings Inc., which is 29.35 percent owned by the Japanese government, was forced to cut its concession in southwest Iran’s Azadegan oil field to 10 percent from the original 75 percent because of international political concerns. Inpex had signed a contract with National Iranian Oil Co. in February 2004 to develop the oil field, whose reserves amount to an estimated 26 billion barrels.

One reason that Inpex was unable to proceed as planned with the $2 billion project was that the United Nations Security Council was considering whether to impose economic sanctions on Tehran over its uranium-enrichment program. If Japan had gone ahead with its original plan, it could not have escaped criticism from the international community, especially the United States and major European countries.

In mid-September, the Russian Ministry of Natural Resources canceled an environmental permit for the $20 billion Sakhalin-2 project, the world’s biggest privately funded oil and natural gas development, claiming that it would pollute rivers and seas. Anglo-Dutch major Royal Dutch Shell has a 55 percent stake in the project while Japan’s Mitsui & Co. and Mitsubishi Corp. own 25 percent and 20 percent, respectively. The Japanese side hopes to liquefy natural gas from Sakhalin-2 and send it to Japan through a pipeline.

Russian natural resources minister Yuri Trutnev mentioned the possibility of suspending some activities at the project to demonstrate that environmental protection should take precedence over natural resources development. If Russia’s environmental worries are legitimate, the Sakhalin-2 investors should take corrective measures.

But given Russian President Vladimir Putin’s general move toward strengthening government control over natural resources development, Japan and Western countries are inclined to suspect that the cancellation of the environmental permit was politically motivated. Russia’s strong financial position brought about by oil exports at high prices has emboldened Mr. Putin.

When the agreement for the project was signed in 1994 under the administration of President Boris Yeltsin, oil prices were low and Russia needed foreign investment. Russian firms showed little interest in the project. Under a production-sharing agreement, foreign investors in Sakhalin-2 are to pay the Russian government a portion of their profits after they have recouped their development costs. Until then, only 6 percent of the revenues are to be paid to Russia.

Russia apparently hopes that Gazprom, Russia’s state gas company, will take part in the project so that Moscow will have a say in running it. There is speculation that the withdrawal of the environmental permit for Sakhalin-2 was aimed at getting investors to let Gazprom participate in the project.

Moreover, the Sakhalin-2 consortium recently raised its estimate of project-development costs from the initial $12 billion to $20 billion. It is suspected that this revision prodded Russia to take a tough line with the consortium. The higher estimate meant that investors would need more time to recoup costs, thus putting off larger payments to the Russian government. Investors may yet have to make concessions to Russia.

Elsewhere, it was announced in late October that ExxonMobil of the U.S. had signed a preliminary agreement with China National Petroleum to sell CNP all of the natural gas from Sakhalin-1, in which Japan also has a stake.

The accelerating energy demands of China, as well as India, have tightened global energy supplies. Japan needs to redouble its efforts to ensure its own energy security, including honing negotiation skills, improving energy efficiency, diversifying sources of energy imports, developing alternative energy sources and strategically allocating government money for energy development overseas.

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