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In the Land of Rising Sun

Iranian President Mohammad Khatami arrived in Tokyo on October 31, starting a four-day visit to Japan, which was mainly aimed at boosting political and economic ties. The long-expected landmark was the first official visit by an Iranian head of state to Japan in 42 years. Sharing several cultural, regional and economic interests, Tehran and Tokyo were back in business to pave the way for greater cooperation. The main topics discussed around the table were indicated by the two ministers of oil and foreign affairs who accompanied President Khatami during the trip. Perhaps the most significant achievement of this visit was an agreement with the Japanese regarding the development of Azadegan oil field, one of the largest in the Middle East:

During his visit, President Khatami met with Japanese Emperor Akihito, Prime Minister Yoshiro Mori, Japanese Foreign Minister Yohei Kono, business leaders of Japan’s six major economic organizations and other officials. The President also spoke at Tokyo Institute of Technology and was awarded an honorary doctorate degree by the Institute.
Japan is currently Iran’s largest trade partner, with 10% of its oil requirements met by Iran. Iran is Japan’s third-largest oil supplier, selling 450,000 barrels of oil per day to the Japanese. A trade surplus heavily in favor of Japan was expected to be one of the main issues discussed by Khatami in Japan. He was also expected to try to lure more Japanese investment to Iran.

Biggest Oil Deal: Japan and Iran clinched a landmark deal on November 1 which could give Tokyo access to one of the world’s biggest undeveloped oil fields, as the two heads of state agreed to forge better bilateral ties. The agreement is crucial for the resource-poor Japan. Japanese firms are interested in investing in Iran, but they are moving cautiously partly due to worries about U.S. sanctions. There has been no new Japanese investment in Iran since 1993, one reason for which maybe the extra-territorial Iran-Libya Sanctions Act (ILSA), due to expire next August.

Japanese Investment: Now Japanese firms are set to gain an advantage over their Western rivals in negotiating rights to develop Iran’s huge Azadegan oil field, a step that offers the opportunity of breaking into the global upstream sector.
The Azadegan field has the potential to produce up to 400,000 barrels of crude oil per day — more than 80% of the amount that Japan, which must import virtually all its oil, now gets from Iran, its third-largest supplier.
The agreement is crucial after Tokyo-based developer Arabian Oil Co. Ltd. lost a key 40-year-old oil concession in February in the Saudi Arabian section of the Neutral Zone. The agreement, which gives Japanese oil firms negotiating rights for appraisal and development of a specific area of the huge field — which has at least five to six billion barrels of recoverable crude oil — could pave the way for Japan’s largest investment in Iran since the Islamic Revolution in 1979. Iran has been especially eager for overseas investment in its energy sector, which the agreement is likely to promote.
In addition, Japan’s Trade Ministry announced that Iran might also encourage and support Japanese oil companies’ participation as minority partners in the development of other oil and gas fields. Japan also decided to extend 60 billion yen ($552.2 million) in trade insurance to three Japanese projects planned in Iran.

The Japanese’ decision to take part in the process of investment in Iran and transfer of technological know-how to the country will prove to be of tremendous benefit to both sides

Earlier on November 1, President Khatami spoke to Japan’s parliament, calling for better relations between his country and Japan:
“Our two nations have long been supported by deep and friendly feelings and it is our duty now to realize this by developing cooperative ties still further. I ask all of you for your help in this endeavor.”
President Khatami, whose visit ended on November 3, also urged Japanese business executives to invest more in Iran. “I am certain that the timely decision of Japanese organizations and companies to take part in the process of investment in Iran and the transfer of technological know-how to our country will prove to be of tremendous benefit to both sides,” he told a group of business executives.

Going Upstream: Japanese firms have been only minor players in the lucrative global upstream sector, playing second fiddle to the world’s major energy companies. While industry officials say more test drills need to be conducted before the actual size of the Azadegan field can be ascertained, they acknowledge that the field has great potential.
Initial reaction from Japan’s energy industry has been low-key, however. One senior oil company executive said: “We have no information on the oil field, nor have we received any information from the government.”
Two firms were named by Japan’s Ministry of International Trade and Industry (MITI) as having shown an interest in the field. Both firms — Japan Petroleum Exploration Co. Ltd. (JAPEX) and Indonesia Petroleum Ltd. — are semi-governmental, with state-run Japan National Oil Corp. (JNOC) having stakes in them of 65.7% and 50% respectively.
The level of private-sector interest was hard to gauge, but one industry source says he believes the matter is far from being in the bag, which was why only the names of semi-governmental firms had so far been raised. Japan imports virtually all its oil requirements.

Iran Offers Golden Opportunity: Nevertheless, some energy experts say Japanese firms should make the most of this opportunity to gain a foothold in this major oil producing area. Iran alone is home to the world’s second-largest deposits of gas and the fifth-largest proven oil reserves.
Ken Koyama – group manager at the Institute of Energy Economics Japan (IEEJ) – says Japan should concentrate its strength and take part in a large development project rather than divide its strength by taking part in several different small projects, which was what commonly happened in the past.
“It goes without saying that there are risks involved,” he said, but added that the possible profits to be gained for private firms would also be substantial. “It is a huge investment opportunity...that Japanese firms should take advantage of,” Koyama stated.
The return on investment — about 15-20% even under a buy-back scheme — is higher than Japanese firms are currently earning. Under Iran’s buy-back scheme, foreign firms receive crude as compensation and profit in return for investing in projects under a formula that denies them a direct equity stake.
Tehran-Tokyo trade has been mostly one-sided for the past years, with Japan’s exports to Iran totaling about $361 million between January and August this year, according to Finance Ministry data. By contrast, imports from Iran amounted to $3.4 billion, with crude oil accounting for some 96% of the total.

Hailing Reform Efforts: Prime Minister Yoshiro Mori, in an informal meeting with visiting Iranian President Mohammad Khatami on November 1 expressed support for Iran’s domestic reform efforts and improved ties with the international community.
During the meeting, which followed a welcoming ceremony for the President at the State Guesthouse in Tokyo, Mori said he welcomed President Khatami’s reform efforts. President Khatami stated that in his talks with Prime Minister Mori, he intended to discuss cooperation measures, not only to boost bilateral relations but also for international peace and security.

Addressing the House: In a speech at the Lower House plenary session in Japan, President Khatami said that Iranian democracy under Islamic principles should be respected as one rooted in its own culture and heritage. It should jointly exist with the Western idea of democracy, instead of being overruled by it.
President Mohammad Khatami, an advocate of “dialogue among the civilizations,” under which Western and Eastern countries should listen to, and learn from each other, said Japan is a good example of a nation that has sought democracy while preserving its own values during the process of modernization.
“Japan’s democracy today is the fruit of the mix between Western civilization and Japan’s own culture. From our perspective, democracy does not run counter to religion. A uniform idea that ignores the diversity and independence of other governments and people cannot be recognized as one that promotes peace and security in the world. Listening to other people’s ideas and understanding them, and then reconstructing our own ideas based on that understanding . . . is one way of realizing dialogue between civilizations.”