Newsletter No. 65
August 23, 2005

THE BATTLE OF AZADEGAN HEATS UP

After the election of moderate President Khatami in Iran in 1997, and the lack of any change in Washington’s hardline policies toward that country in the months and years that followed, Tokyo began to grow more and more uncomfortable with the American line. As a result, by about 1999 the Japanese government began to seek closer relations with Tehran. This was symbolized by Foreign Minister Masahiko Komura’s visit to Iran in August 1999, and the resumption of yen loans to the country.

In the following months and years, Japanese-Iranian relations began to accelerate quickly. When in February 2000 the Japanese-owned Arabian Oil Co. lost its long-term concession in Saudi Arabia’s Khafji oil field, Japanese economic officials in MITI and elsewhere began to consider Iran as a suitable alternative. In November 2000, President Khatami visited Tokyo and announced that his government would give Japan preference in negotiations over the development of the massive Azadegan oil field, near the Iraqi border. MITI Minister Takeo Hiranuma was quite enthusiastic about this project, and vowed to work closely with Iranian Oil Minister Bijan Zanganeh to reach a deal quickly. In the following month the Japan National Oil Corporation signaled its agreement to participate.

True to his word, Hiranuma visited Tehran with an 80-man delegation of Japanese economic leaders in July 2001. Japan-Iran relations were on the fast track, as MITI as well as business leaders were eager to get involved in the Iran market. Tehran was also pleased. As for the Azadegan mega-project, a December 2001 goalpost was set up for the conclusion of the negotiations and the signing of the agreement.

There were some pressures from Washington, but Japan seemed prepared to weather them. Commented one Japanese official in August 2001: “We are not sure if the US administration will apply the Iran-Libya Sanctions Act (ILSA) to Japan’s development of the Azadegan oil field. But we remain opposed to taking a sanctions policy toward Iran. We are pursuing favorable changes in Iran through dialogue and contacts. If the US punishes Japanese firms under ILSA, Japan may consider filing a complaint with the World Trade Organization against the US measures.”

But then came September 11.

Suddenly, Tokyo began to put much more emphasis on the US-Japan security alliance, and became much more worried about doing anything that might annoy Washington at that volatile time. Matters became even worse when President Bush, in his January 2002 State of the Union speech, identified Iran as one of the countries that support terrorism and included it in his “Axis of Evil.” The Japanese-Iranian negotiations continued, but at a very casual pace. Tokyo was now in no hurry to close the deal. Many months passed…

Finally, by June 2003, the business negotiations were more-or-less complete, and all that needed to be done was to sign the paper. Tokyo had kept Washington informed of all this, and so just before the deal was to be signed, the Bush Administration launched a diplomatic offensive on Tokyo. National Security Advisor Condoleezza Rice, Secretary of State Colin Powell, and Deputy Secretary of State Richard Armitage made phone calls all over Tokyo with a blunt message: Signing this deal with Teheran could damage the US-Japan alliance. They brought up the nuclear issue in Iran as a main concern, as well as making arguments about Iran’s support for terrorism and its relationship with North Korea.

Japan was inclined to continue delaying, but in early July, Tehran began to retaliate against Japanese dilly-dallying. Foreign Minister Kamal Kharrazi released a statement that if Japan didn’t get its act together, then Iran would begin negotiating with countries like China, India, or Russia on the Azadegan deal. In this stark manner, Tehran reminded Tokyo that they too had other options. At the same time, however, Tehran said that they still preferred Japan to other candidates, and that they would not give up on the negotiations.

The United States and its allies, meanwhile, had invaded Iraq in March, and at about this time US Neocons had sugarplums dancing in their heads about what would happen there. Although the information is vague and unsubstantiated, it seems that, at about this time, Washington dangled the possibility that Japan might share in the Iraqi bonanza if they gave up the Iran deal. Tokyo apparently didn’t bite, but neither did they close the deal with Teheran.

In August 2003, Iranian Foreign Minister Kharrazi visited Tokyo and urged Japanese leaders to defy the US pressure. In return, the Koizumi Administration urged Iran to clear up its dispute with the IAEA, and to resolve the doubts over the country’s nuclear program.

All along, one of the key men pushing for Japan to do the Azadegan deal was MITI/METI Minister Hiranuma. However, in September there was a cabinet reshuffle, and Hiranuma was replaced by Shoichi Nakagawa, a rightwing nationalist close to the farm lobby. Nakagawa was much more skeptical about Iran than Hiranuma had been. Upon taking office, he told an interviewer: “For us, Iran is on the same level as North Korea. We shouldn’t be lost in trying to find an oil field… In light of our national interest, both issues [oil and nuclear proliferation] should be weighed equally.” With the departure of Hiranuma, the Azadegan deal lost a key ally on the Japan side.

Finally fed up with Japan’s delays, Iran set a December 15 deadline. If Tokyo didn’t clarify its intentions by that point, Tehran would begin negotiations with other countries. Japan did nothing, and let the deadline pass.

Many important LDP leaders were annoyed at the Koizumi-Nakagawa policies that allowed the relationship with Iran to sour. They felt that Koizumi’s deference to US sensitivities were excessive. Former Prime Minister Ryutaro Hashimoto (himself a former MITI Minister) went public with his dissatisfaction: “Currently, Japan’s ties with other nations other than the US are like dotted lines. We should at least try to make those dotted lines into solid ones as well… It is very regrettable that the relationship with Iran that Japan had long worked so hard to build was completely damaged by the current administration.”

Apparently, criticisms such as Hashimoto’s had some effect. Also, in early 2004 Japan sent its SDF to Samawa in accordance with Washington’s strong wishes, and this may have made Tokyo feel more secure about defying the Bush Administration on Iran. Additionally, Iran’s negotiations with the IAEA seemed to be going better.

So, on February 18, 2004, Japan finally went ahead with the Azadegan deal and signed the agreement. From the Japanese side, the Inpex Corporation took the leading role. A State Department spokesman criticized the deal, but oddly, the hardline State Department official John Bolton, who may have been in charge of this issue in Washington, seemed to take it rather philosophically.

This may have simply reflected the fact that Washington was resigned to the eventuality of the deal, and that, in any case, US-Japan relations were very strong at that time. However, the following month a House Democrat, Brad Sherman, made the following outburst during a hearing: “An administration desperate for re-election will take 550 soldiers from Japan, which provide the veneer of international support and credibility for our relations in Iraq, which is the preoccupation of the electorate, and give the green light to $2.8 billion going from Japan to Iran.” Bolton’s response was, “Absolutely not true.”

It remains unclear if Congressman Sherman had any hard information to support his claim that Washington acknowledged the Iran deal as a clear quid-pro-quo over Iraq, but certainly the SDF mission had some role in muting US criticism.

Even though the Bush Administration didn’t push back very hard, some rightwing commentators did attack the deal. In Japan, the most vocal of these was Robyn Lim, who argued that Tokyo was making a mistake that could seriously damage the US-Japan alliance. Her conclusion: “Japan cannot allow its oil interests in Iran to trump its vital interests in the US alliance and in non-proliferation.”

Even now that the Azadegan deal is signed, it’s future may still be in doubt. In August 2004, Washington prodded Japan once again to cancel the deal and pursue oil interests in Libya instead. Again, Tokyo didn’t bite.

However, the balance of forces that supported the February 2004 deal is now weakening. One of Japan’s main arguments all along was that engagement with Tehran would help moderate forces make positive changes in Iran. However, the election of hardline President Mahmud Ahmadinejad in June has seriously damaged that line of argument. Related to this, the new political flare-up over Iran’s nuclear program is also bad news for Japan-Iran relations. Both of these events together will put Tokyo’s policy under serious strain.

At the same time, some of the Azadegan deal’s key political allies are disappearing. Hashimoto has just announced his retirement from politics. Hiranuma was a foe of postal reform, and has effectively been pushed out of the LDP for the time being. This doesn’t bode well for the future of the deal.

However, and this is the most recent development, it seems that the Ahmadinejad Administration has one more card to play: China.

It appears that Tehran is suggesting, cleverly, that if Japan goes cold on the Azadegan deal, then China will be happy to step in. For anti-China rightwingers like METI Minister Shoichi Nakagawa, that may be just the right pitch.

For more, see the Japan Times article below.

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CHINA TO SWOOP ON IRAN OIL FIELD IF TOKYO PULLS SUPPORT: FIRMS
By Mayumi Negishi

On the brink of tapping into one of the world's largest known oil reserves, Japanese companies are fretting over the possibility of further rivalry with China.

Mining rights to Iran's vast Azadegan oil field, secured in February 2004, are the fruit of three years of hard negotiations.

But executives at Inpex Corp. of Japan say they're nervous the Japanese government might pull out its political support for the Azadegan development project in the face of potential pressure from the United States, which has taken a hard stance against Tehran due to suspicions over its nuclear program.

"If (political backing) for the project ebbs during its first phase, China could get the drilling data and glide into the second phase without doing any of the initial grunt work," said one executive at Inpex, which leads the consortium of Japanese firms preparing to drill for oil in Azadegan.

Developing Azadegan is to take place in two stages of roughly six years each. Inpex will invest $1 billion in the first phase, according to its June securities report.

During the first phase, which began in March 2004, the consortium will raise production to 150,000 barrels a day. The second phase starting in 2010 will raise production to 260,000 barrels a day, according to the plan.

Rumors abound that Iran's Oil Ministry is in talks with China about giving a Chinese entity priority in taking over the second phase, after the first phase with Japan is completed.

The visible growth in diplomatic and commercial ties between Tehran and Beijing makes him nervous, the Inpex official added.

Trade between Iran and China came to some $7 billion in 2004, up 25 percent from $5.6 billion the previous year, with commercial exchanges projected to reach $10 billion a year by the end of 2010, according to Tehran's Iran-China Chamber of Commerce.

By comparison, Finance Ministry figures show Japan's trade with Iran came to 1.01 trillion yen in 2004, up just 2.3 percent from 991.3 billion yen in 2003.

"Iran's oil minister makes frequent visits to China," noted Noriyuki Kasuya, head of the Japan Bank of International Cooperation's Beijing office.

Chinese companies have reportedly signed contracts for oil and natural gas rights in five fields in Iran since 2001, four of which were signed in 2004 alone.

For Japan, the $2 billion deal to develop the Azadegan oil fields means a stable source of crude oil to make up for lost fields in Saudi Arabia. Negotiations to secure rights were launched after Tokyo lost concessions to the Saudi-controlled part of the Khafji oil field in the Persian Gulf in 2000.

"If the rumors (that China is bidding to develop Azadegan) are true, it might be better to go back to the negotiating table and secure the second phase for Japan before developing Azadegan further," the Inpex official said.

Last October, the magazine China Business Weekly quoted Iranian Oil Minister Bijan Zanganeh as saying: "Japan is the largest importer of our nation's energy resources. But I would like to see China take that position."

The following month, Chinese Foreign Minister Li Zhaoxing visited Tehran and promised that Beijing will veto any move by the U.S. in the U.N. Security Council to slap economic sanctions on Iran.

According to JBIC's Kasuya, China has more than proven itself eager to assist Iran economically.

Last year, China pledged to assist building liquefied natural gas transports, at the same time agreeing to buy up 250 million tons of LNG from Iran in 25 years.

China and Iran are also discussing the construction of a pipeline to bring oil from the Caspian Sea to Iran, and to connect that in the future to another pipeline under construction tying China and Kazakstan.

"Energy security is one of China's top priorities," said Li Zhidong, an associate professor of management and information system science at Nagaoka University of Technology. "China will provide technology and infrastructure for as long as necessary to get the contracts it wants."

Further, with the full backing of the government, China's three state-run oil companies can ignore cost-effectiveness, Li said, a luxury beyond the reach of their Japanese counterparts.

Foreign Ministry officials, meanwhile, offer another interpretation.

The rumors about China's bid for Azadegan development are similar to Russia's attempts to pit China and Japan in a bidding war over the development of a pipeline from Siberia, one official observed.

Russia and Iran are both using China as leverage to gain the upper hand in negotiations with Japan, he maintained.

"We cannot ignore China, but we have to ask ourselves if we really need these projects, no matter what the cost."

For instance, existing railroads may be able to transport up to 10 million tons of crude oil from Siberia to Perevoznaya on Russia's Pacific coast at lower cost and risk than a pipeline, he said. "We aren't even sure how much oil we'll be able to get by developing Siberia."