Japan Hits Big Setbacks in Push for Energy

TOKYO Oct 25, 2006 (Dow Jones Newswires from the Wall Street Journal Asia)

Just five months after it was unveiled, Japan's ambitious 25-year plan to sharply increase oil and gas development is hitting snags, suggesting Tokyo may find it even harder than expected to stabilize the nation's future energy supply.

On Monday, Exxon Mobil Corp. said it reached a preliminary agreement to sell natural gas from a giant project off Russia's Sakhalin Island to China, instead of to Japan as originally planned. This came several weeks after Russia ratcheted up regulatory pressure that could jeopardize another Sakhalin gas project in which the bulk of the planned output of nearly 10 million tons a year -- about a fifth of Japan's current natural-gas imports -- was destined for Japan.

And earlier this month, Iran canceled the right held by Inpex Holdings Inc., Japan's largest oil-development company, to participate in a $2 billion project in the Azadegan oil field. At its peak, the project was expected to meet as much as 6% of Japan's total demand for oil.

The developments are a blow to Japan, which had counted on the deals as a major component of its push to expand its access to energy. The world's second-largest national economy relies nearly entirely on imports for its oil and gas, making it vulnerable to swings in global oil prices or political tensions in energy-producing regions.

In May, Tokyo announced a long-term strategy that urges Japanese companies, including developers such as Inpex and trading companies such as Mitsubishi Corp., to boost energy exploration and development around the world to help secure a stable flow of oil and gas. Its goal: to import 40% of its oil needs from Japanese-owned concessions by 2030, up from the current 15%.

The strategy, while flexible, was supposed to help Japan overcome its vulnerable position. Unlike most developed countries, Japan doesn't have a large state-run oil firm or powerful private oil companies with stakes in the world's largest oil fields. That means Japan has had to cobble together oil and gas supplies from small Japanese companies that could invest only in small-scale projects, sometimes in politically risky areas such as Libya or Iran. Japan is Iran's largest foreign oil customer, purchasing 581,000 barrels of crude a day last year, or 14% of Japan's total oil imports.

But expanding Japan's activity overseas is proving increasingly difficult, as energy-rich nations, empowered by rising fuel prices over the past several years, flex their muscles to get better deals. What is more, other fuel-hungry nations such as China are eager to one-up Japan, snatching away deals Tokyo thought it had locked up and competing fiercely for new projects.

"Both Azadegan and Sakhalin were to represent big chunks of Japan's energy supply," says Koichi Iwama, a Wako University professor and a governmental adviser on energy issues. "Without these projects, it would simply be impossible to reach the target." Mr. Iwama says Japan should rethink its long-term energy strategy, expanding the role of the government or possibly setting up a state oil company.

The projects in Russia and Iran are a reminder of the challenges Japan faces. In September, the Kremlin suddenly began meddling in a Sakhalin gas project led by Royal Dutch Shell PLC that also involved two Japanese trading companies, Mitsubishi and Mitsui & Co. The government has accused Shell of violating environmental standards and threatened to pull its permits.

But industry experts speculate Russia wants to renegotiate the contract to receive a bigger share of the output. The initial contract was signed in the 1990s, when oil prices were low and producing nations had to sweeten their offers to entice foreign oil companies to develop fields.

In Iran, Inpex had faced a series of obstacles since it signed a contract in 2004 with the National Iranian Oil Co. that gave it a 75% stake in the giant Azadegan field and the right to lead the development. Washington, which had tightened sanctions on Iran in the 1990s in response to Tehran's efforts to acquire nuclear expertise and reputed support for terrorist groups, griped about Japan's involvement. Inpex went ahead with negotiations anyway, but repeatedly asked Iran to postpone the deadline for concluding a deal, hoping the political tensions would eventually ease.

Instead, the situation got worse. What is more, Inpex's hopes of reaping a profit from the project dwindled. The United Nations Security Council is now considering whether to impose further sanctions to pressure Iran to give up its uranium-enrichment program, which the U.S. and others say is a precursor to weapons production and the Iranians claim is for civilian use. If sanctions are imposed, the Japanese government would have to halt its plans to provide loans and low-cost trade insurance. That would make it difficult for Inpex to raise enough money to fund the project, let alone make it profitable.

Iran, for its part, grew increasingly impatient with Japan's slow response. In August, Iranian officials threatened to give the Azadegan project to China or Russia. In early October, Inpex lost its operator status and its stake was cut to a token 10%. Inpex says discussions over project details are continuing.

Despite the recent difficulties, some experts say Japan should continue seeking new projects to develop. Indeed, it has no choice, says Masahisa Naito, chairman and chief executive of the Institute of Energy Economics Japan, a government-affiliated research group. "It's such an important element if we want to secure a stable energy supply," he says.

Copyright (c) 2006 Dow Jones & Company, Inc.


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