Iran Nuke Issue May Force Japan's Inpex Out Of Azadegan

Mari Iwata, Dow Jones Newswires:

With geopolitics not on its side, Japan might have to ditch its plan to secure oil from the massive Azadegan field in Iran. The country is under pressure to side with the U.S. and isolate Iran as the U.N. Security Council adopts a resolution that gives Tehran until Aug. 31 to stop its uranium enrichment activities or face sanctions.

Japan's largest oil and gas exploration company, Inpex Holdings Inc. (1605.TO), has a 75% stake in a $2 billion development project in Iran's Azadegan oil field, estimated to contain 26 billion barrels of oil reserves. State-owned National Iranian Oil Co. (NIO.YY) holds the remaining 25% stake. READ MORE

Iran has rejected the sanctions deadline, but its top nuclear negotiator said Tehran will formally respond Aug. 22 to a U.N. incentives package. Coincidentally, on the same day, National Iranian Oil and Inpex are expected to hammer out an agreement on when the development of Azadegan field will commence.

If Iran refuses to accept the U.N. resolution, Inpex, in which the Japanese government has a 30% stake, may be forced to abandon the Azadegan project as part of possible sanctions, analysts say.

Japan's foreign minister Taro Aso said Tokyo doesn't intend to change its stance regarding its stake in the Azadegan oil field, but at the same time "the priority is the nuclear issue."

Resource-poor Japan imports almost all of its energy needs from overseas, half of which are satisfied by crude oil. As a result, the world's second-largest economy has been torn between keeping good ties with Iran and siding with the U.S., its most important ally and second-largest trading partner.

But this could be an opportunity for Japan to diversify its energy sources and wean itself off Middle East oil, some analysts say.

Azadegan field, located in southeastern Iran, near the border with Iraq, is expected to pump 150,000 barrels a day by mid-2008, and reach 260,000 b/d by early 2012. Japan plans to import two-thirds of the output, which could provide as much as 10% of Japanese total crude imports.

Japanese government officials have downplayed U.S. pressure to get Inpex to withdraw from Azadegan. "This is something carried out by private companies," said Yutaka Kobayashi in late July, Japan's vice minister of Economy, Trade and Industry.

Inpex has kept saying it won't pull out of Azadegan as it delays development of the field, claiming the Iranian side hasn't finished clearing it of land mines.

"There's no change in our plan to proceed with the Azadegan project. We are waiting for the completion of de-mining," said Shuhei Miyamoto, the company's general manager of Public and Investors Relations, reiterating the same comment he has made since May.

Iranian oil minister Kazem Vaziri Hamaneh said in late July that the two sides should be able to reach an agreement by Aug. 22, after saying earlier that Iran may bring in local contractors to do the job if delays continued.

Inpex's Miyamoto said the company hasn't heard of any such notices from the Iran. Given the discrepancies and comments by foreign minister Aso, many analysts say the deal may not be salvageable this time.

"This is not about whether a private company gives up its project, but about whether the Japanese government asks a Japanese company to do so," said Masanori Maruo, a senior analyst at Deutsche Securities Japan.

"The government has a clout on Inpex. It would be difficult for the company to go against the government's will," echoed Yoshihisa Miyamoto, an analyst at Okasan Securities Co.

In the long term, however, few analysts expect a withdrawal from Azadegan to have a major impact on the country's energy needs. "I don't expect any significant impact on Japan's oil imports. The Azadegan project is still in an early stage and to take more time to produce oil," said Hirofumi Kawachi, an analyst with Mizuho Investors Securities Co.

"Clearly, Azadegan is big. But there are a lot of other oil sources," Deutsche Securities' Maruo said.

This may even help Japan diversify its energy sources, some analysts said.

"There is a risk that Japan-Iran relationships would deteriorate due to a possible exit. But I think it can be a good opportunity for Japan to turn to other nations to diversify energy sources," said Okasan Securities' Miyamoto, citing Russia as a main candidate.

Currently, Japanese companies are taking part in two major oil and natural gas projects in Sakhalin, Russia: Sakhalin I and Sakhalin II. Also, Japan was beaten by China January this year in a race for a pipeline to deliver crude oil from Siberia.

Indeed, some Japanese refiners have already reduced imports from Iran on supply disruption concerns, as Iran's nuclear development issue has heightened tensions between the Islamic nation and the U.S.

Japanese refiners and trading houses imported 4.6% of their crude oil from Iran in June. This represents a sharp drop from 13.4% in May and 10.4% in April.

Nippon Oil Corp. (5001.TO) Chairman Fumiaki Watari said in March that his company would lower imports of crude oil from Iran this year by about 15% from 2005, partly because of the threat of economic sanctions over the country's nuclear enrichment program.

He also said in late July that Nippon Oil, Japan's largest refiner in capacity terms, "is not interested in Iran's oil."

But with the new behemoth energy needs Japan's neighbors, perhaps the field won't be vacant for long.
-By Mari Iwata, Dow Jones Newswires; 813-5255-2929; mari.iwata.com

(Sherry Su contributed to this report)

-Edited by Jarrett Banks