After the U.S., Japan is the world's largest oil importer. Japan imports most of its oil from the Middle East (88.4% in 2001.) In an effort to secure its energy supply, Japan has been pursuing a $2.8 billion deal with Iran to develop oil at Azadegan in the oil-rich Khuzestan Province where an estimated reserve of six billion barrels is located.

Japanese officials, reported the Economist, were warned by the U.S. that Japanese consortiums might be punished with sanctions were they to sign the Azadegan deal. Richard Boucher, U.S. State Department spokesman, said this was a "particularly unfortunate time" to be striking deals with Iran.

The U.S. opposes the oil deal for two reasons. First, it would strengthen Iran's economy, rolling back the efforts by local opposition to undermine the ruling clerics, whose Islamic regime is described by the State Department as the world's "most active state sponsor of terrorism." Second, oil revenues may be used for Iran's nuclear program, which the U.S. believes masks efforts to develop nuclear weapons. Just last month Iran equipped its elite revolutionary guards with a locally made ballistic missile - the Shahab-3 - capable of carrying a nuclear warhead and reaching U.S. forces stationed in Saudi Arabia and Turkey.

The strong American opposition puts Japan in a delicate position. Japan is reluctant to compromise its relations with the U.S, on which it depends for both its economy and its security, by enriching a country its ally considers a threat. Japan needs the U.S. to serve as a deterrent to a nuclear armed North Korea and must be sensitive to U.S. concerns regarding Iran's nuclear capability (it's worth noting that Iran's Shahab-3 is based on the design of North Korea's No-dong ballistic missile.)

Unlike the U.S, however, Japan maintains diplomatic and economic relations with Iran - in fact, Iran is its third-largest supplier of oil.

On July 1, Japan suggested a compromise aimed at securing the deal while allaying American concerns: Japan would sign the deal if Iran would sign an additional protocol to the Non-Proliferation Treaty allowing for surprise visits to suspected nuclear sites. Iran refused. Two days later, Japan announced the deal would be "prolonged" while concerns about Iran's nuclear program were addressed. Iran responded by playing down Japan's decision. As of this writing it is not yet clear if the deal will fall through, but there are signs that due to Iran's difficult economic problems some influential Iranians are coming round to the idea of signing the additional protocol. Iranian Oil Minister Bijan Namdar Zanganeh has said Iran and Japan are close to an agreement despite U.S. objections.

Were the deal to fall through, Chinese, Indian and Russian oil and gas companies would likely compete over rights to develop Azadegan. China Petroleum & Chemical Corp., known as Sinopec, has announced it is "more willing than ever before'' to enter into joint ventures with Iran. India's petroleum ministry, for its part, announced that India will be "perfectly happy" if given the field.

The obstacle to its deal with Iran comes at a pivotal moment for the future of Japanese oil supply. Due to its excessive reliance on the Middle East, Japan has sought to diversify its sources of oil, looking particularly to Russia. However, Japan's Russian prospects plummeted in May, when China's National Petroleum Corporation (CNPC) signed a $150 billion preliminary agreement with the Russian company Yukos to pump oil from Siberia to Daqing. Japan, which had proposed a pipeline from Siberia to Nakhodka (a port in Russia's Far East,) had been competing with China for the deal.

Despite initial press reports indicating that the Sino-Russian deal was final, Japan has not surrendered the field. It has continued to send officials to Moscow to plead its case, and its labors might bear fruit. Two days after CNPC and Yukos inked the deal during a state visit by Chinese President Hu Jintao to Russian President Vladimir Putin, the Russian leader emerged from a meeting with Japanese Prime Minister Junichiro Koizumi and announced that neither possibility had been ruled out. Three weeks later, Putin indicated that he actually preferred Nakhodka, because oil could be transported from there not to either China or Japan but to both, and to the entire Asia-Pacific region, as well. During a June 28 visit to Vladivostok, Japan's Foreign Minister boosted an offer made in mid-April to help Russia develop oil fields in Western Siberia in exchange for the Nakhodka pipeline. This story continues to develop.

Also see:
Japanese Government: Fundamental Philosophy of Japan's Oil Policy
Japan and the Middle East: Signs of Change?
Chinese Oil Demand and the Middle East
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