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Wednesday, February 08, 2006

Japan, between a rock and a hard place

Japan just seems to have a knack at getting themselves in the middle of impossible situations. It has done so again, this time between the US and Iran.

What?!? How did they do this you ask? They did it by ignoring the advice of the US and offering billions of dollars to open up oil fields in Iran to insure their oil supply.

Two years ago, against strong American urging, Inpex agreed to develop the southern section of the Azadegan field, with 75 per cent equity. The northern contract is yet to be let, though Tehran is said to favour China's state oil company Sinopec.

Japan imports about 4.2 million barrels of oil daily, of which Japanese companies control only 450,000 bpd. Azadegan and other possible large-scale investment in Iran offer significant relief for Japan's acute external energy dependency.

Whatever its position in the vanguard of anti-nuclear proliferation efforts, Japan is loathe to drop Azadegan or, as a Foreign Ministry official put it, "punch Iran in the face".

More than 13 per cent of Japan's oil already comes from Iran, but supply isn't the pressing issue in the looming sanctions campaign. There's no panic among Japanese and other Asian refiners, according to Petroleum Intelligence Weekly, because heavy crude supplies are currently abundant. Plus, Iran is telling customers not to worry about oil being caught up in any sanctions campaign.

Oil investment, on the other hand, would be a sanctions target and Japan's particular problem is that any economic blockade would almost certainly be run, not by the UN, but by its Washington friends.
Okay, so Japan hasn't actually spent the money yet. So what is the problem, besides the fact that Japan gets 13% of its oil from Iran?

All five UN Security Council permanent members voted last week in the International Atomic Energy Agency to refer Iran to the UN. So did Japan.

But even if Tehran remains unbending, China and Russia will be unwilling to join any economic sanctions motion. So will India, which has recently secured a foothold in another big Iranian oil project, Yadavaran, and is a growing presence in the international jostling to secure energy supplies.

So the US is likely to come away from the Security Council with some kind of non-binding condemnatory motion that it will use to demand its allies and friends join a sanctions campaign against Iran.

For Japan, this is the worst of all likely scenarios. Harry Harding, research director at Eurasia Group, an international political risk consultancy, says it constitutes the most immediate risk of stress in the US-Japan alliance.

If everyone else were involved in an investment embargo, the Japanese might be quite happy. All foreign investors in Iranian oil struggle with Tehran's tough investment regime and might hope a blanket ban would force an easing of conditions in future.

But only Japan is directly vulnerable to US government-to-government pressure. The Japanese Government still controls Inpex which, though publicly listed, remains 36 per cent state-owned and its strategic decisions are subject to government veto.

Ouch! Japan is definitely finding itself in a tough spot. Cutting of 13% of your oil supply could be disasterous to the economy. But, how can Japan not go along with sanctions against Iran? We are talking nuclear weapons here. It would be hypocritical of Japan to try and ignore it. Japan's best hope is that continued negotions will end with a break through easing concerns and solving the nuclear armaments issue.

Personally, I think Japan has some tough decisions to make soon.