Japan Eyes Iran Oil
Japan, as a leading country in different sectors of industry and technology, is facing a daily growing need for energy, particularly oil. That comes against the backdrop of Japan's limited energy resources. This Asian state can meet only 16% of its energy needs; therefore, its industries heavily depend on oil imports from other countries. That is why Japan is the third largest importer of crude oil in the world, just behind the United States and China.
Although the Japanese government's energy strategy is based on energy saving and efficient energy use and this country has managed to manage energy consumption in many sectors including household consumption, its industries continue to remain dependent on petroleum industry.
Japan's oil reserves, which are mainly located in its western coasts, are very limited. Due to its territorial disputes with China, Japan is not able to extract oil from some of these reservoirs. That leaves Japan no other option but to import energy. However, Japan which heavily depends on oil imports to supply its needs has moved to build oil storage facilities in a bid to deal with possible oil price fluctuations. These storage facilities are either state-owned or run by private entities.
Oil price decline in the past two years has been of significance for Japan's economy in terms of consumption. However, persistence of this trend could affect the output of some industries in Japan and reduce their sales to oil producing countries, in particular in the Middle East. Meanwhile, in case oil prices remain low for a long period of time Japanese companies operating in the energy sector will face consequences as they will not be eager to invest in new projects.
Where Does Iran Stand in Japan Strategy?
Japan imported 3,311 mb/d of oil from Iran in 2016, down 1.9% year-on-year. OPEC member states' average oil export to Japan stood at 2.906 mb/d last year when oil accounted for 87.7% of Japan's imports. Furthermore, Middle East nations' oil exports to Japan stood at 2.86 mb/d or 86.6% of Japan's crude oil imports in that year.
Saudi Arabia is currently selling more than 1 mb/d of crude oil to Japan. That makes up 33% of Japan's total oil imports. Saudi Arabia is followed by the United Arab Emirates with 800,000 b/d of oil delivery to Japan. Qatar comes third with 300,000 b/d of oil exports to Japan. And then comes Iran in the fourth position.
Iran-Japan energy ties could be discussed from two aspects:
Oil Purchase from Iran: Iran and Japan have long had interaction in the energy sector. Over recent years, this interaction was clouded by tough economic sanctions against Iran. However, the relations were never cut. After Iran's nuclear deal with six world powers, known as the Joint Comprehensive Plan of Action (JCPOA), was signed and took effect, Iran regained its share in Japan's market. In 2016, Iran became again the fourth supplier of oil to Japan after a 33% increase in its oil exports to that country.
Investment in Iran Oil Sector: Despite the fact that Japan lacks extensive and rich sources of energy, Japanese companies operating in the energy sector have won foothold in international markets. Most of these companies have been active in engineering projects, advanced technology, investment and management of oil and gas projects across the globe. Japanese oil companies are eager to invest in Iran's energy projects. These companies have seen their operation in Iran decline due to sanctions which were lifted in 2016. After the JCPOA entered into force in early 2016, Japanese companies renewed their interest for investment in Iran. For example, Japan's Inpex had to pull out of Azadegan oil field in 2010 under pressure from Western governments. But now it is seeking to develop oil fields in Iran and it has signed a memorandum of understanding for the development of Azadegan. Japanese companies are willing to get involved in different sectors of energy industry in Iran. For instance, due to the profitability of petrochemical projects, these companies are keen to finance petrochemical projects. Last but not least, the Japanese pay due attention to Iran in their energy strategies.
Iran is a longtime supplier of oil to Japan and it would be very important for Tokyo to continue its ties with Iran as a major producer of crude oil. In the eyes of the Japanese, Iran's return to oil market following the lifting of sanctions could help Japan experience a further balance vis-à-vis Arab states. During years of sanctions, Japan had to receive its oil from Arab countries particularly Saudi Arabia. However, importing oil from Iran is so important for the Japanese that even when international sanctions were tightened against Iran, the Japanese government announced its intention to go ahead with its crude oil imports from Iran. To that effect, insurance companies in Japan offered maritime insurance cover in a bid to let more tankers carry crude oil from Iran.
In the meantime, it is important for Iran to have good ties with Japan. In the pre-sanctions era, Japan was the third buyer of crude oil from Iran and Tehran hopes to regain its previous share in Japan's oil market. Generally speaking, expansion of ties with Asian countries, particularly a country like Japan which refused to join the West-engineered sanctions against Iran and continued to buy oil from Iran, is of high significance for Tehran. Even before this and after nationalization of oil industry in Iran in the 1950s and the ensuing embargo on Iran's oil, Japan was still buying oil from Iran. This history of cooperation between Iran and Japan is indicative of strong energy bonds between the two sides. In the light of serious efforts made by the two countries to broaden their ties, Iran's oil exports to Japan are set to increase in the future. Furthermore, Japanese companies operating in the oil, gas and petrochemical sector are widely expected to make investment in Iran.