Power Sourcing

Japan's race for resources.
by Willhemina Wahlin and Kaoru Natsuda

It's only natural that in light of the high level of consumption in the developed world in the last 100 years, something was going to have to give. Now, in an increasingly unstable world, where developing nations are quickly developing and developed nations are quietly panicking, governments are beginning to take the idea of resource security very seriously indeed. Japan, one of the world's most resource-poor countries, recently unveiled the New National Energy Strategy (NNES) - an aggressive plan to procure sources of energy to keep its economy humming. The Japanese will use their expertise in energy-efficient technology and such things as Official Development Assistance (ODA) and the Kyoto Protocol's Clean Development Mechanism (CDM) to exploit other countries' energy sources. But they must work quickly. Geopolitical lines are already being drawn in the sand. Japan may have to sacrifice some of its oldest alliances in favor of stronger ties with energy-rich countries.

The New National Energy Strategy at a Glance
The Ministry of Economy, Trade and Industry of Japan (METI) announced in May the NNES, which has three main objectives: to establish energy security measures, create a foundation for sustainable development through funding of innovative technologies, and make a firm commitment to assisting other nations, its Asian neighbors in particular, in improving efficiency of energy consumption.

A greater analytical understanding of the global supply-demand structure is essential if Japan is to succeed in its energy security plans. Supply routes are currently being stymied by poor infrastructure, particularly pipelines, and the volatile political situation in the Middle East, from which Japan imports around 90 percent of its oil, has forced it into a race to diversify its sources. Russia, owing to its closer geographical proximity and vast reserves of both gas and oil, is of particular interest to Japan. The supply of other raw materials such as steel, uranium and gas is crucial for Japan's economic growth.

On the other hand, analyzing supply is only half of the job. Demand must also be reduced to achieve sustainability. Domestically, the NNES outlines a plan to reduce Japan's dependency on oil to 40 percent by 2030, down from the current 50 percent, while simultaneously increasing energy efficiency by another 30 percent, adding to the 37 percent increase it has already achieved since the 1970s. While this plan relies too much on nuclear power for some people's comfort, the NNES does give a wide scope for increases in R&D for innovative technologies, such as coal to liquid (CTL) technology for cars, which Japan hopes to introduce to China.

International demand is diverting resources from Japan, as evident in China's aggressive acquisition of oil and gas reserves worldwide through companies such as the China National Offshore Oil Corporation (CNOOC). However, China and India, which have the world'fastest growing economies, have not experienced an oil shock. An energy crisis in either country could trigger a panic in the trade of crude. "There's a great possibility that China can buy oil at a higher price than the market price," says Mr. Shigeo Naruse, Director of the Fuel Policy Planning Office for METI's Agency for Natural Resources and Energy. He organized in June 2006 the Energy Security Study Group, the results of which underpin the NNES. "So this [could create] trouble in the market," he adds. "This is one of the vital risks for security."

In addition, both China and India are becoming powerful global players as a member and observer, respectively, of the Shanghai Cooperation Organization (SCO). This inter-governmental organization was formed in 2001 with the aim of partial demilitarization of the borders of its member countries, which include China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan. Since then it has welcomed Uzbekistan as a full member. Iran, Mongolia, Pakistan and Afghanistan are also observers. The SCO has actively begun securing resources for member nations and has established the SCO Business Council and the Interbank Association, worth USD900 million in funds supplied by China, to increase economic cooperation among member states. Many view the SCO's recent movements as a purposeful redrawing of geopolitical borders at the expense of the US's sphere of influence.

As a result of such a global geopolitical climate, the NNES stresses that Japan must increase its corporations' investment capabilities, particularly within the energy sector. Although Mr. Naruse says that Japan is interested in the SCO, whether or not Japan will seek membership is unknown. Instead, Japan will utilize other existing frameworks, such as ASEAN+3, APEC and the International Energy Forum (IEF) to form diplomatic ties with other nations, including SCO members, effectively opening a path for industry to follow. The Minister for METI, Toshihiro Nishai, recently undertook a whirlwind tour to nations of strategic importance for the NNES, including Qatar and China. In addition, Japanese Prime Minister Junichiro Koizumi became the first Prime Minister in Japanese history to visit Central Asia when he officially met with both Kazakhstan and Uzbekistan officials in August this year. "Japan has come to be actively involved with Central Asia for the sake of the region's stability, by promoting self-sustaining development and intra-regional cooperation among Central Asian countries," states the Ministry of Foreign Affairs website. Kazakhstan is of particular importance to Japan, as it holds one of the world's largest reserves of uranium.

Japan has long used ODA to establish deeper diplomatic ties with other nations, as well as secure rights in oil, gas and other resource projects. ODA includes Grant Aid (which imposes no obligation of repayment), Loan Aid (untied low-interest loans with long repayment periods) and Technical Cooperation (technology transfers). Japan's plan is to utilize these measures to increase the energy efficiency of its neighbors. And CDM has become a powerful tool for Japan's private sector. More controversially, Japan plans to create a nuclear framework across the Asian region and will push for nuclear power to be included in CDM. Interestingly, both ODA and CDM, by bolstering private investment in energy, could contribute to increasing Japan's rights and interests in all of its imported oil, from the current 15 percent to a target of 40 percent by 2030.

The policy is based on the realization that Japan's strengths are its advanced, energy-efficient technology and its capital. It also acknowledges that as a region, Asia will soon surpass both the US and EU as the world's most voracious consumer of energy. Without much subtlety, however, Japan is also ensuring its diplomatic measures are backed up by a more powerful military force. The ruling party introduced to parliament a bill to upgrade the Self-Defence Force Agency to a Ministry, while Japan's Chief Cabinet Secretary, Shinzo Abe, widely believed to be Koizumi's successor in the Prime Ministerial chair, has been calling for a review of the pacifist constitution to allow pre-emptive strikes. In addition, there is widening discussion over Japan's emerging stockpile of plutonium, which, according to Korea's Donga.com news outlet, is estimated at 40 tons, the fourth largest in the world. The stockpile is viewed with increasing suspicion, as Japan has the technological capability to manufacture nuclear arms.

The Strategic Importance of the Azadegan Project
The current world stage upon which oil is the main player is looking more like a Greek tragedy every day. The Iraq War has destabilized the Middle East, and as the recent escalation of violence between Lebanon and Israel clearly demonstrated, the region's oil and gas supplies are vulnerable. Crude oil prices are spiking at record highs, and with the 'Peak Oil' debate gaining currency, a significant drop does not appear on the horizon.

Importantly, the Organization of Petroleum Exporting Countries' ability to stabilize supplies and set world oil prices is slipping. Iraq began trading oil in Euros instead of dollars in 2000, and its United Nations 'Food for Oil' account was also in Euros. Since 2003, however, the currency has been changed back to the dollar as a result of the occupation. Other countries such as Venezuela, Iran, Libya, Russia, Indonesia and Malaysia have all begun trading in Euros, and China has also proposed switching part of its reserve to the 'new international currency.' Russia has also discussed trading oil and gas in the ruble. The US has long enjoyed an oil-backed currency, and the gradual shift to the Euro has been an alarming development for the superpower. "A widespread rejection of the dollar in oil trading would have an impact on the US economy somewhere between serious and fatal," writes Professor Richard Heinberg, a specialist in ecological issues, in his article "Energy Politics 2006." He explains that this could have serious consequences for Japan. "Japan has, for many years, been the primary holder of US foreign debt, banking on the ongoing stability of the dollar while enabling Washington to run up enormous deficits."

While diplomatic ties are strong between Japan and the US, and recently re-enforced by North Korea's latest missile launches, Heinberg believes that a decrease in the US's ability to provide financial security or military protection could see the relationship be whittled by the force of other needs - namely, securing energy.

This has been exemplified in the on-going difference of opinion between Tokyo and Washington over Japan's multi-billion dollar investment in Iran's Azadegan oil project. The US is convinced that Iran is secretly enriching uranium to develop nuclear arms. Tehran denies plans to build a nuclear arsenal, reminding its critics that as a signatory to the non-proliferation treaty it has the right to develop nuclear energy. While Japan has backed the US's referral of Iran to the UN Security Council, Japan also has a history of strong diplomatic ties with the Islamic state. The US has requested that Japan at least suspend its involvement in the Azadegan project, as it believes the revenue from the venture would fund Tehran's uranium enrichment.

The Japanese, however, believe that the issues should be treated separately. According to a news report by Aljazeera in March 2005, Chief Cabinet Secretary Abe stressed that the project is vital for securing Japan's energy supplies. "We would like to deal with this firmly based upon our basic recognition that both the nuclear non-proliferation issue and stable crude oil supplies are important," he said. There is also the other possibility that, in the event the US does invade Iran, the Azadegan oil field could well slip into their hands instead.

According to Iran Petroleum, the Azadegan oil field elevated Iran to number one in oil discoveries when it was confirmed in 1999. Japanese company INPEX Corporation signed a deal with Iran in 2004 to develop the oil field, giving them an acquisition of working rights totalling 75 percent. The National Iranian Oil Company (NIOC) and its subsidiary, Naftiran Intertrade Co. Ltd. (NICO), hold the balance of 25 percent.

"As a designated national flag company with advantageous access to desirable projects through diplomacy of energy resources by the Japanese Government, INPEX is working to ensure the stable and efficient supply of energy to Japan," states their website. INPEX Corporation and Teikoku Oil became wholly owned subsidiaries of INPEX Holdings in April this year, in a bid to create a Japanese competitor for some of the world's largest oil and gas companies. Mr. Naruse explains that Japan has no major oil company that can compete with the majors such as BP, ExxonMobil or Royal Dutch Shell. "They are very big, which means big money, so larger investments are possible," he explained. "Unfortunately in Japan, we donﾕt have that big, major oil company, so in order to explore or develop overseas, we have to have a lot of money, and a lot of information on technology." There exist only very small companies in Japan, and this is creating a very big problem for Japan's security. "We have to promote oil companies," he added.

The Japanese government holds a 29.3 percent stake in INPEX Holdings, and with capital currently sitting at 30 billion yen, its recent merger can be seen as the epitome of Japan's future public and private sector cooperation. There are also additional plans to add part of Eneos into the group at a later stage. However, Nippon Oil, a private firm who owns 3.8 percent of the company, has already announced that it will decrease imports from Iran by 15 percent in light of a possible conflict.

Despite Japan's close ties with Iran, the project has not been problem free. Japan is now trying to renegotiate a ceiling for investment, as the sharp jump in prices of steel and other manufacturing products have blown out the project's budget. Recently, Medhi Bazargan, the managing director of Petroleum Engineering and Development Co., a subsidiary of NIOC, warned Japan not to procrastinate on the development of Azadegan, calling on significant work to be completed by September. "The contract will be terminated automatically...Extending the deadline is not written in the contract," he was quoted as saying in XFN Asia recently. Asked whether Iran would then ask China for assistance, he said: "What is available on the market, we will of course use."

Azadegan's strategic importance for Japan has one more crucial factor: Iran holds the second largest known natural gas reserves in the world. If Japan loosens its already tenuous hold on the project, Azadegan could fall into Chinese or, in the event of war, American hands. In line with the NNES, Japan is already showing signs of reconfiguring its alliances in support of achieving energy security.

The Art of Prickly Diplomacy
While Japan speaks of increased diplomatic relations in its new energy policy, it is, nevertheless, currently in territorial disputes with all of its nearest neighbors.

An island group south of Okinawa that the Japanese call "Sengaku" is also claimed by both Taiwan and China, who call it "Diaoyu." The Japanese proposed a joint development of the region with China. According to Mr. Naruse, the response from China is part of a secret diplomatic exchange yet to be decided.

South Korea claims the islands they call "Dokdo," as does Japan, where they are known as "Takeshima," and the two recently exchanged heated words when South Korea surveyed the adjacent waters.

Russia, in a move likely to antagonize an already frosty relationship with Japan over the territorial rights in the Kuril Islands, has announced it will launch oil and gas exploration in the region. The islands were annexed by Russia at the end of World War II, and Japan insists on their return. According to Oil and Gas magazine, oil and gas deposits on the continental shelf surrounding the four small Islands off the Hokkaido coast have been confirmed. These are estimated to total 360 million tons of oil, enough to power Japan for a year.

The disputes are hampering progress towards achieving regional stability. Recently, Koizumi has called for a peace treaty between Japan and Russia. Presumably such a treaty would not only force a settlement of the Kuril Islands dispute, but would also forge a Moscow-Tokyo alliance that would facilitate Japanese access to the bounty of Russian resources. In a recent interview with Interfax, Koizumi stated that projects such as the Siberian-Pacific pipeline could serve to stabilize the Asia and Pacific energy market.

The deals surrounding the Siberian pipeline are the stuff of political intrigue. Koizumi paid a personal visit to Russian President Vladimir Putin in May 2003, promising a record Japanese soft loan of US$14 billion for the pipeline and an extra US$8 billion for other gas and oil projects. According to John Chan in a Worldwide Socialist Web Site report, Koizumi argued that although the Chinese pipeline was shorter and cheaper, the longer and much more expensive pipeline to the Pacific would diversify the market for Russian oil in the Asia-Pacific region. It would also have another, very important function. All oil from the Middle East is carried through the pirate-infested Malacca Strait. A pipeline to the Pacific could three birds with one stone for Japan: reduce its dependency on the Middle East, increase the security of resource transit, and radically reduce the cost of shipping.

Japan signed a deal with Russia in 2004 for the construction of a pipeline from Taishet in Eastern Siberia to Nakhodka, on the Pacific Coast. Estimated to cost USD16 billion to transport 80 million tons of crude each year to Japan, it was seen as a major coup over China's bid. However, just weeks after the deal was signed, Russia announced that it would build a branch of the pipeline to China during the first phase of construction.

Japan is now increasingly worried that only the first phase of construction will eventuate, and a new deal is yet to be struck over the second phase of construction. Without any assurances from Moscow that the second phase will go ahead, Japanese corporations have been hesitant to bid on the project. As of July, METI and corporations such as INPEX have been in talks over a recent government proposal to increase subsidies for the project. But it may not be as simple as that. As reported in July by the Japan Times, at the G8 Summit in St Petersburg Putin said: "At present, the Japanese side wants us to sign an intergovernmental agreement on this problem. Our position is that this project is purely commercial and the state should not take on any obligations connected with its implementation."

It is obvious that the strong relationship between SCO members China and Russia is leaving Japan's proposed pipeline in grave doubt. Koizumi's soft loan offer seems to be like water off a duck's back to Putin, who realizes Japan's urgent need for his nation's resources. However, not all is lost for Japan. If it does manage to sign a peace treaty with Russia, there could result a strong Russo-Japanese alliance, which would have huge benefits for the whole region.

There is no doubt that energy security is one of the most crucial issues facing the globe today, for social, economic and environmental reasons. The NNES is a bold plan for the world's most advanced, resource-poor nation. A country that could rise from the ashes of World War II has a good chance of securing energy through diplomacy and international assistance in the 21st century. If Japan can increase its neighbors' energy efficiency, it would be doing us all a favor. No one is sure if that can be tempered by the diplomacy that the NNES advocates or knows the degree to which diplomacy will be backed by the sword. JI

Willhemina Wahlin is an editor of J@pan Inc. Kaoru Natsuda, who earned a PhD in Economics from the University of Sydney, is an Official Development Assistance (ODA) researcher for Ernst & Young Shin Nihon in Tokyo.