Economy, Business And Markets

Japan Eyes Investment, Oil in Iran

Japan Eyes Investment, Oil in Iran
Japan Eyes Investment, Oil in Iran

Iranian President Hassan Rouhani and Japanese Prime Minister Shinzo Abe focused on economic ties during a meeting on the sidelines of the United Nations General Assembly in New York last week.

They agreed to work closely to conclude a mutual investment deal that would facilitate investments by Japanese companies in Iran. But Japan is also keen to resume the flow of energy imports from Iran, which were largely curbed as a result of the UN Security Council-mandated sanctions in place before the nuclear deal, wrote World Politics Review.

With the deal’s finalization, Tokyo is looking to kick-start relations with Tehran and revive previous efforts at making investments in Iran’s energy sector. Japan isn’t alone, of course; Russia, China and several European countries have been stepping up efforts to get an early foothold in the Iranian market as it opens up to the world.

Japan’s motivation to compete for a share of the investment opportunities in Iran is unambiguous. As Yoshihide Suga, Japan’s chief Cabinet secretary, recently explained about the bilateral investment treaty: “The aim of these negotiations is to protect the investment activities of Japanese companies. Japan will take the necessary steps and not be later than other nations.”

On Monday, Japan’s Foreign Minister Fumio Kishida is due to visit Tehran, where he is expected to finalize the investment treaty with his Iranian counterpart Mohammad Javad Zarif, Nikkei Asian Review reported.

Representatives from 22 companies and other organizations active in automotive, engineering, medicine, energy and education fields will accompany Kishida to Iran. Japan and Iran will create councils for intergovernmental talks on partnerships involving transportation, environment, healthcare and other fields, the Japanese business journal added.

One of Japan’s key targets is Iran’s potentially lucrative Azadegan oilfields, near the border with Iraq. According to Iranian government estimates, the Azadegan fields could contain over 30 billion barrels of oil in reserve.

Tokyo has been interested in working with Tehran to develop the oilfields for the past two decades and at one point, in 1996, had a nearly 75% stake in the southern Azadegan fields through Inpex, a Japanese oil company. That investment gradually dwindled over the years, but Japan still had a considerable 10% stake in Azadegan until 2010, when it was forced to pull out of Iran under pressure from the United States as sanctions were tightened.

Following Japan’s withdrawal, China moved in to seize the opportunity in Azadegan, adding intrigue and a new rival to Japan’s investment plans.

China National Petroleum Corporation acquired a stake in Azadegan’s development in 2010, but the deal was short-lived. Frustrated by delays from CNPC, Tehran eventually dissolved the contract in April 2014. That has provided another opportunity for Japan to get back into Azadegan, as Iran is looking for investors with strong technical expertise.  

It should come as little surprise that better ties between Japan and Iran are framed predominantly around energy security issues. Japan, after all, remains highly dependent on foreign sources of energy, especially from the Middle East. Last year, more than 80% of Japan’s crude oil imports came from the region. The largest suppliers are Arab countries such as Saudi Arabia (34%), the UAE (24%), Qatar (11%) and Kuwait (7%). Iran’s market share of oil exports to Japan has dropped precipitously over the past decade, from a peak of 16% of Japan’s total oil imports in 2003 to 5% last year.

Prior to the sanctions on Iran in 2006, Japan relied on Iran as one of its primary sources of foreign energy. Even during the sanctions period, Japan’s level of imports of Iranian oil remained significant—nearly 12% of total energy imports—until the US increased pressure on its allies for stronger compliance with the sanctions regime in 2012.

That year, Tokyo was the fifth-largest importer of Iranian crude oil. But under the brunt of more stringent sanctions, Iranian oil exports to Japan dropped by more than 60% within a year. Tokyo’s energy needs have been magnified by the four-year self-imposed moratorium on nuclear reactors as a result of the 2011 nuclear crisis at Fukushima.

Only recently have a few reactors gone back on stream in the country. Japan previously relied on nuclear power generation for nearly a third of its domestic energy.

But it isn’t all about energy. Aside from the push to secure steady access to Middle Eastern oil, the Abe administration has been making a concerted effort over the past few years to strengthen Japan’s international role, working to dispel the notion of an isolated island. Amid this backdrop, Abe has made three trips to the Middle East since he was elected in December 2012.

With the Iran deal and improving ties between Tehran and the international community, it is possible that Abe may look to visit Iran in the coming years. At the very least, one can expect a higher exchange of senior diplomats and businesspeople between the two countries.

Last month, Japan’s vice minister for economy, trade and industry visited Tehran, accompanied by several business officials in the oil and gas sector.