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Iran: Khatami's Japan Visit Aimed At Boosting Oil Business

Iranian President Mohammad Khatami is in Japan on a visit intended to boost economic ties between the two countries. As RFE/RL correspondent Charles Recknagel reports, Iran hopes to secure large-scale Japanese investments in its struggling energy sector.

Prague, 31 October 2000 (RFE/RL) -- President Khatami's visit to Japan this week comes as part of a continuing drive by Iran to obtain foreign investment for its ailing energy sector despite continuing U.S. sanctions.

Khatami's four-day visit, beginning today, is the first by an Iranian leader to Tokyo since the 1979 Islamic revolution. It continues a string of groundbreaking trips abroad which last year saw Khatami go to Italy as the Islamic Republic's first head of state to visit a Western capital. That trip was followed by visits to France and Germany.

On all the visits, Iranian officials have stressed the same themes. First, that Khatami's government is determined to move ahead with opening Iran's economy. And second, that Iran's energy sector is attractive enough to win the interest of key world powers -- whether or not they are close allies of Washington.

So far, those messages have found responsive audiences. European political leaders have said they see increasing trade with Iran as a way to promote reforms in the country. And several major companies have announced new investments.

Now, Khatami is balancing his openings to Europe by also going east. In Tokyo, he will try to revive a relationship which once saw Japan as Iran's main economic partner in the first decade following the 1979 Islamic revolution. The relationship later soured when Iran accused Japan of pulling out of a major petrochemical project in 1990 under US pressure. Since 1993, there has been no direct Japanese investment in Iran, even though Iran remains the third-ranking oil exporter to Iran.

Iran has said it will urge Japan to again become an active player in Iran's energy sector or risk being shut out by more aggressive European investors. Iranian Foreign Minister Kamal Kharrazi, who is accompanying Khatami, said before leaving Tehran that Japan must change its "approach toward Iran...otherwise Tokyo will fail to make good use of Iranian markets compared with European countries."

Tehran is reported to want Japan to provide mid-term commercial insurance cover for four economic projects, including the establishment of petrochemical complexes in Iran. The two nations exchanged documents finalizing a loan of some $69 million in Tehran earlier this month to help complete a hydroelectric dam.

Mojgan Djamarani, an oil expert who writes for the London-based Petroleum Review, says Iran wants investment in its energy sector primarily to increase its production potential for oil and gas in the coming decades. But to do so, Iran needs foreign participation because its own economy is too weak to provide sufficient capital. At the same time, Iran needs new technological expertise. Mojgan Djamarani:

"The oil industry was neglected a great degree particularly during the period when oil prices were down and Iran did not have enough to invest in technology and development of the fields. So, a lot of the agreements that they have with the Western companies have a training aspect tied into it, whereby not only do they have to bring in capital but new technology."

Iran currently pumps about 3.7 million barrels a day under a self-imposed quota agreed upon with other members of the Organization of Petroleum Exporting Countries (OPEC). But Tehran's stated goal is to increase its production capacity by some 900,000 barrels per day over the next five years as world consumption rises. Iran relies on oil revenue to fuel its own economy, which must grow to accommodate large numbers of young people entering the job market. About half the country's population is under 20 years old.

In recent weeks, Japan has given strong signals that it welcomes the prospect of investing in the Iranian energy sector. In the run-up to Khatami's visit, Japanese Foreign Minister Yohei Kono said Tokyo supports the Iranian president's reform program. That is the same phrase European leaders have used to encourage their energy companies to follow up Khatami's visits with new business deals.

Analysts say Tokyo considers investments in Iran's energy sector as a way to help guarantee a stable relationship with one of Japan's largest oil suppliers when oil prices are rising. At the same time, Japan -- which produces no oil domestically -- has stepped up efforts to boost ties with major oil and gas producers after this year losing a private Japanese oil concession in fields shared between Saudi Arabia and Kuwait.

But how quickly Japanese investments will follow Khatami's visit is uncertain.

Oil industry experts say Japanese companies are interested in investing in Iran but will move cautiously, partly due to worries about U.S. sanctions. Washington has overlooked large deals recently signed between European firms and the National Iranian Oil Company yet the possibility of punishment remains under the Iran-Libya Sanctions Act. The act, due to expire in August, threatens penalties for firms investing in the energy sector of Iran, a state Washington says sponsors terrorism.

And many energy investors worldwide have shown themselves hesitant to place substantial amounts of capital in Iran so long as a political contest continues there between reformers and conservatives, who oppose opening the economy.

The conservatives' resistance has assured that Iran's investment offers to foreigners have been limited. In the oil sector, opportunities have been restricted to "build-operate-transfer" arrangements. The terms allow foreign investors to operate oil facilities for short periods to recover their investments but require them to later transfer the assets to Iran.

Djamarani says that is a formula which companies do not find very attractive because it offers them lower profits than if they own the facilities and fields themselves -- something many other countries let them do. Djamarani:

"[Iranian officials] were expecting to attract more offers from western companies than they have actually received. They were hoping investments of up 20 to 30 billion ($20 to $30 billion) would come in and that hasn't happened. One reason being that build-operate-transfer is not very attractive to some of the companies."

Djamarani says that so far Iran has received only some $5 billion in investment pledges from foreign companies. And she says that such investor reluctance is likely to continue until Iran is prepared to offer investors more competitive terms.