Newsletter No. 442
News-Analysis
November 20, 2006

 

AZADEGAN AUTOPSY, PART III -- THE VIEW OF INPEX CHAIRMAN KUNIHIKO MATSUO

Today the Yomiuri published an interview with Inpex Chairman Kunihiko Matsuo that was largely concerned with the Azadegan oil development.

In this interview, Matsuo is not entirely forthcoming, but he drops enough hints that an informed observer can read between the lines. He denies that Iran’s nuclear development had any affect at all on the Azadegan project, claiming that it was purely a financial issue for the company.

Well, yes and no. It is true that the immediate reason for Inpex to back out of their contract was because they didn’t receive loans from government-affiliated financial institutions, but what he avoids saying is that the reason why those institutions refused to come through on their promises of loans to Inpex was because of the Abe Administration’s changed policies regarding Iran, which was related to US political pressure and, to a lesser extent, the Iranian nuclear issue.

We do learn two new tidbits of information from this interview.

First of all, Matsuo states that Inpex will not even attempt to increase its current 10% stake in the Azadegan project. Subtly, he also contradicts the government’s line that other foreign companies will stay out of Azadegan. He seems to know that other foreign companies will invest in the giant oil field, and is resigned to its inevitability. That’s not what the Foreign Ministry and METI Minister Amari have been claiming.

Secondly, in the last section Matsuo offers an indirect criticism of Japanese government policy, suggesting that energy resource diplomacy needs to be “bolstered” through a more comprehensive package of development aid aimed at oil-producing countries, and a better partnership between government and business in Japan.

He makes the following, suggestive comment: “Oil-producing countries, for their part, have expressed concern that if they rely on certain countries as importers of their oil, it will undermine their diplomatic autonomy.” He doesn’t clarify exactly what he is referring to here, but we can guess that -- in the context of the failed Azadegan project -- he may be suggesting what I have often said: that a closer alignment to US policy will probably harm Japan’s energy security interests more than it will help them, at least as far as the Persian Gulf is concerned.

Also, his observation that, “there is a limit to what can be achieved by the private sector alone,” may be a slap at the Abe Administration, which backed away from Azadegan by claiming that it was a private business deal with no connection to the Japanese government.

DIPLOMACY KEY TO MEETING RESOURCE CHALLENGE
By Hiroshi Ikematsu
Yomiuri Shinbun Staff Writer

In a recent interview with The Yomiuri Shinbun, Kunihiko Matsuo, chairman of Inpex Holdings Inc., ruled out for the time being the possibility of Japan's largest upstream oil firm seeking to regain the stake it lost in a project to develop the Azadegan oil field in southern Iran. Under the original agreement, reached in February 2004, Inpex acquired a 75 percent stake in the 2 billion dollar Azadegan project.

But in negotiations held early last month following a delay in the project, Inpex agreed with the Iranian government to cut its concession to 10 percent.

Inpex Holdings is a holding company established in April through the merger of Inpex Corp. and Teikoku Oil Co., with the government being the biggest stakeholder with a 29.4 percent share.

Amid the uncertainty surrounding the Iranian project, due to tensions over Iran's nuclear development, the nation's biggest energy developer plans to launch large-scale projects in Australia and Indonesia. Matsuo, 71, said his company planned to boost its production of crude oil and natural gas to 1 million barrels per day by around fiscal 2015.

Following are excerpts from the interview.

Question: What do you have to say about the huge cut in Inpex's stake in the Azadegan project?

Kunihiko Matsuo: We had no alternative but to reduce our concession because of the difficulty in raising funds. Iran called for a prompt launching of the project, but current circumstances did not allow us to receive loans totaling about 2 billion dollars [about 235 billion yen] from government-affiliated financial institutions. The funds we had on hand did not allow us to acquire more than a 10 percent stake in the project.

Question: How did the estimates differ at the time the original contract was signed in February 2004?

Kunihiko Matsuo: At the time, it was anticipated that removal of land mines [laid during the 1980-88 Iran-Iraq War] would be completed in about a year. But it actually took more than two years. In the meantime, we had difficulty in assigning sufficient personnel to the Iranian project because we had to prepare for other large-scale projects such as the ones in Australia and Indonesia.

Question: Did Iran's nuclear development and North Korea's nuclear test affect the Azadegan project?

Kunihiko Matsuo: We have submitted successive progress reports to the government. But the decision to curtail our stake in the Iranian project has no connection with the nuclear issue. It was a management decision made from a viewpoint of procuring funds.

Question: Did the huge cut in the concession deal a blow to your company?

Kunihiko Matsuo: No. As we were able to remain a partner in the project, we have been able to retain a relationship of trust with the Iranian side. Iran is the second-largest oil producer among members of the Organization of Petroleum Exporting Countries. So we can expect a new project in that country. As things stand now, I believe the cut in our stake was the best solution for both sides.

Question: Is it possible that other foreign companies will acquire your lost portion of the stake?

Kunihiko Matsuo: Iran wants to launch the project promptly. From a long- and medium-term point of view, certain foreign oil companies with high financial and technological capabilities may take part in the project. For the moment, I don't think we will seek to regain the lost concession.

Question: Inpex Holdings still trails major European and U.S. oil companies in terms of size, doesn't it?

Kunihiko Matsuo: True, I admit there is a gap with the super majors. But we are ranked around the middle somewhere below them. Major oil companies' production of crude oil and natural gas has leveled off or show a downtrend, but we are planning large-scale projects for the future and are expecting our production to grow by 5 percent annually. We will continue to invest more than 200 billion yen a year. Our production volume, which stood at 380,000 barrels per day in fiscal 2005, is expected to rise to 500,000 bpd in fiscal 2010 and 1 million bpd around 2015. If we can reach that point, our company can be called a quasi-major oil firm.

Question: Japanese companies are fighting uphill battles in trying to acquire concessions for development of natural resources overseas. Is it possible for Japan to ensure a stable supply of resources in the future?

Kunihiko Matsuo: There are two reasons for the increasing difficulty in acquiring stakes in resource development projects. One is the emergence of new competitors such as China and India. The other is the rising wave of nationalism in regards to resources. China has been making an all-out effort to guarantee supplies of natural resources. Oil-producing countries, for their part, have expressed concern that if they rely on certain countries as importers of their oil, it will undermine their diplomatic autonomy. They have a good image of Japan and want to deepen relations with this country. We share common ground and mutual interests with resource-producing countries. Foreign firms are seeking to secure resources and supplies in close cooperation with their governments. Speaking of deals, we have been negotiating with ministers of oil-producing countries or their governments. So there is a limit to what can be achieved by the private sector alone, as demonstrated in our case. Unless Japan offers a comprehensive program, including official development assistance and technical transfer programs to meet their needs, it will be hard for Japanese firms to secure contracts for resource development projects in the future. In Europe and the United States, top leaders have been making diplomatic efforts to ensure a stable supply of resources. It is imperative that Japan bolster energy resource diplomacy.