Shadow of Iran oil failure looms over Japan's Sakhalin decision

Pressure to leave Russia echoes Azadegan exit, which opened door for China
Exxon Mobil has announced it is exiting the Sakhalin 1 oil project. (Exxon Neftegas via Kyodo) TOMOHIRO EBUCHI, Nikkei staff writer
Exxon Mobil has announced it is exiting the Sakhalin 1 oil project. (Exxon Neftegas via Kyodo)

TOKYO — Twelve years after leaving an oil field project in southwestern Iran under pressure from Washington, Japan finds itself in a familiar position, this time over an energy project in Russia’s Far East.

With 26 billion barrels, Iran’s Azadegan oil field had one of the world’s largest reserves. The government-funded Japan Oil Development Co. (now INPEX) acquired a 75% stake in the project in 2004, eager to develop an oil field that Japan had strong control over. 

Japan and Iran have historically had good relations. Even after the 1979 Islamic Revolution, which kicked off a four-decade souring of U.S.-Iran ties, Tokyo and Tehran maintained diplomatic relations. As the U.S. and Europe slapped sanctions on Iran over its nuclear development, Japan stuck with the Azadegan project in the 2000s.

But in the end, the U.S. government made clear to Tokyo that if Japan continued to hold its stake in Azadegan, it would be hit with sanctions. «We gave it up with a heavy heart,» a senior official at the Ministry of Energy, Trade and Industry (METI) recalled.

Burned by the experience in Iran, Japan turned to Russia’s Far East to reduce its energy dependence on the Persian Gulf. 

But in a twist of fate, Japan’s stakes in the Sakhalin energy projects there are now under the spotlight. Following the invasion of Ukraine, oil giants ExxonMobil and Shell announced their withdrawal from the Sakhalin 1 oil field and the Sakhalin 2 gas field, respectively.

Japan’s METI and trading houses Itochu Corporation and Marubeni Corporation have invested in Sakhalin 1. Rival trading houses Mitsui & Co. and Mitsubishi Corporation are investing in Sakhalin 2.

Shadow of Iran oil failure looms over Japan's Sakhalin decision
In February 2001, then-Iranian Oil Minister Bijan Namdar Zangeneh, left, is welcomed by Japanese Prime Minister Yoshiro Mori at the prime minister's official residence in Tokyo. The two discussed Iran's giant Azadegan oil field project. © Reuters

The exit from Azadegan had painful consequences. At the time, the U.S. had warned METI to make sure China did not end up acquiring the concessions Japan was giving up. Japan initially sold its stake to the National Iranian Oil Company, but the rights were ultimately purchased by the China National Petroleum Corporation.

Sakhalin could turn out the same. Speaking on national broadcaster NHK on March 6, upper house lawmaker Hiroshige Seko, who promoted economic cooperation with Russia as METI minister under former Prime Minister Shinzo Abe, said, «If we leave now, there are countries like China who desperately want liquified natural gas. Those countries will take the gas for cheap.»

METI Minister Koichi Hagiuda agrees. «If a third country immediately takes [the concessions] and Russia does not feel any pain, it’s meaningless,» he told an upper house committee on March 8.

Russia accounts for 8.8% of Japan’s liquefied natural gas imports and 3.6% of its crude oil imports.

«When standing up to Russia, it would be a mistake to give up stable procurement and weaken oneself,» a Japanese official said.

But as was the case in 2010, the criticism METI faced when it withdrew from Azadegan is relevant today: Procurement from countries that are under international sanctions is not a formula for energy security.

Regardless of any immediate decisions, it is becoming clear that Russia cannot serve as a viable alternative for Middle East energy. And as long as Japan is dependent on fossil fuel, it will have difficulty finding a sustainable path forward.

The need to shift to renewable sources and nuclear power looks as imperative as ever.

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