Japan Ponders Investment in Post-sanctions Iran
Japan might have stolen a march on other countries and oil companies considering investing in post-sanctions Iran. The foreign ministers of Iran and Japan have agreed in discussions in Tehran on the 19th of October to expedite the conclusion of a bilateral investment agreement. A statement issued after the conclusion of their discussions also called for close cooperation between the two countries in the implementation of the International Atomic Energy Agency’s (IAEA) safeguards in order to help Iran implement its part of the nuclear deal reached last month with the major powers (P5+1) – namely the United States, Russia, China, France, Britain and Germany.
Future foreign investment including Japan’s in Iran would overwhelmingly focus on the oil and gas industry.
As a start, Japan’s largest oil exploration company, Inpex, is eying up a return to Iran’s upstream some five years after pulling out of the country. Inpex has been active in Iran’s upstream for almost a decade as part of a Japanese consortium developing the massive Azadagan oilfield close to Iran’s border with Iraq, but was forced to exit the project and country following Tokyo’s 2010 decision to follow Washington’s lead and enforce tougher sanctions on companies doing business in Iran.
But following last month’s landmark nuclear deal between Iran and the P5+1, Inpex, like a host of other predominantly European oil and gas companies, has voiced its desire to once again work in Iran.
However, any return to the Iranian upstream sector, would only come after an eventual lifting of the sanctions and would largely depend on the investment terms Iran will be offering to international oil companies (IOCs) under the new upstream contract to be unveiled in December this year.
The new contract, dubbed the Iran Petroleum Contract (IPC) will replace the old buyback contract, which earned a reputation among foreign oil companies for offering incredibly unattractive terms – a viewpoint Iranian oil ministry officials have also recently shared.
Iran is in urgent need of investment, the latest technology and better project management practices for the development of its oil and gas industry. Iranian deputy oil minister Amir Hossein Zamaninia said Iran welcomes the best proposals for long-term cooperation. “No country or company will have a priority in Iran’s oil sector”, he said. “It is Iran that ultimately decides”.
Japan is one of six countries to have continued importing Iranian crude in spite of the mid-2012 introduction of US and EU sanctions on the purchase of Iranian crude oil. Along with China, India, South Korea, Turkey and Taiwan, Japan was given 180-day waivers by the US government to continue importing crude from Iran, though only at reduced levels.
Japanese oil imports from Iran averaged 172,000 barrels a day (b/d) in the first half of 2015, according to latest figures from Japan’s Ministry of Energy, Trade and Industry (METI). These volumes are well down on pre-sanctions average imports of 313,500 b/d, which previously made Iran Japan’s fourth biggest oil supplier.
Speaking on 9 August, Director for International Affairs at the National Iranian Oil Company (NIOC) Mohsen Qamsari said Iran was targeting an increase in oil sales to Japan to pre-sanctions levels. “This will come as part of the Iranian oil ministry’s efforts to boost both its oil production and exports as soon as the political situation allows, in order to reclaim the market share it lost since sanctions on its oil sales were introduced, and its position as OPEC’s second largest producer behind Saudi Arabia – a post now held by Iraq. Iran’s crude oil output is currently around 2.8 million barrels a day (mbd), down from 3.5 mbd in 2011, with crude oil exports at around 776,000 b/d, down from 1.6 mbd in 2011.
But despite Iranian officials’ skillful promotion of the investment potential of their country, investors will be few and far between given the current global investment climate and Iran’s demanding terms for investment.
Iran’s ailing oil industry needs $200 bn and the latest technology according to the International Energy Agency (IEA). However, given current market conditions, only limited international investment will likely be available. At today's oil prices, investors are cutting back everywhere. Global investments have already been cut this year by $100 bn or 20%. Investors are concerned about investing money due to the simmering geopolitical tensions, especially in the Middle East and the Ukraine. The economic slowdown in Europe and China is another reason for the investors to be wary of reconsidering their decisions to park their money in troubled regions.
Still, Japan might have the edge over its European and American counterparts in that it has never had any political conflicts with Iran and has always been considered by the Iranians as a reliable partner. However, Japan might face some tough competition from China and South Korea.
**Dr Mamdouh Salameh is a Visiting Professor teaching on ESCP Europe's Executive Master in Energy Management (EMEM). To find our more about the EMEM programme and its individual modules please click here. Dr. Salameh is an international oil economist, a consultant to the World Bank in Washington DC on oil & energy and a technical expert of the United Nations Industrial Development Organization (UNIDO) in Vienna.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of ESCP Europe Business School.