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The Wall Street Journal: Japanese Energy Firms Look to Gulf of Mexico To Skirt Political Risk

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By YUKA HAYASHI and RUSSELL GOLD
October 16, 2007; Page A11

TOKYO — For most of the past decade, Japanese companies have looked for energy in places like Iran and Russia, taking on higher political risk in search of bigger rewards. Now, as they face setbacks in those countries, they are steering around geopolitical uncertainty and shifting focus to the Gulf of Mexico.

The move is part of a broader trend: As oil prices rise, resource-rich nations have begun to flex their muscles to get better deals. Japanese companies are snapping up stakes in U.S. energy fields off the coasts of Texas and Louisiana — an area with lower potential than the Middle East but considered virtually free of political shocks.

This year, three Japanese companies have purchased stakes in energy fields in the Gulf of Mexico. Nippon Oil Corp., Japan’s largest refiner by refining capacity, and Mitsubishi Corp., a trading firm, spent $1.2 billion in March on a stake in an offshore field held by Anadarko Petroleum Corp., of The Woodlands, Texas. Marubeni Corp., a big trading company, spent $1.3 billion in February 2006 for stakes in a number of deep-water fields held by Pioneer Natural Resources Co., an Irving, Texas, oil company.

In the past decade, companies from energy-poor Japan have invested in risky areas to secure supply amid competition from China and others.

Last year, Japan faced setbacks in two of its biggest overseas energy projects. In the Azadegan oil project in Iran, the Iranian government slashed the stake held by a Japanese consortium to 10% from 65%. At the Sakhalin II natural-gas project led by Royal Dutch Shell PLC, Japanese trading firms Mitsui & Co. and Mitsubishi saw their stake chopped in half from their original 45%.

“In order to balance out our portfolio, we have been buying up assets in low-risk countries,” said Masanobu Takagi, deputy chief operating officer of the energy-development division at Itochu Corp., a trading company.

Itochu, which started in oil development in Indonesia in the 1970s, has stakes in an oil field in the Caspian Sea area of Azerbaijan and an oil-and-gas project at Sakhalin Island. But in the past year, Itochu has been expanding its efforts in the Gulf of Mexico. In April, it acquired assets in shallow waters from Range Resources Corp., a Fort Worth, Texas, energy producer.
 
Alarmed by the competition for energy from China and other developing nations, the Japanese government last year unveiled an ambitious goal to boost overseas oil development by Japanese companies. By 2030, it wants some 40% of its total oil imports to come from fields owned by Japanese companies, compared with 15% now. To encourage private companies to invest, the government recently began injecting more money into energy-development projects.

But the Japanese companies face stiff competition in the Gulf, which already is crowded with foreign companies looking for development areas with lower political risk.

“If you are in the business of selling a major oil-and-gas company or assets [in the Gulf], the first thing you do is to get on a plane to Beijing and Tokyo,” said Adam Waterous, who heads Scotia Waterous, a Calgary mergers-and-acquisitions firm specializing in energy projects.

On Oct. 3, the U.S. government said it attracted $2.9 billion in successful bids for its sale of offshore oil-and-gas leases in the Gulf of Mexico, the highest amount since 1983, when it initially invited bids for a range of tracts. A total of 84 companies submitted bids on 723 tracts, and winners included foreign companies like Petroleo Brasileiro SA, the Brazilian state oil company, and relatively new companies such as Cobalt International Energy LP, a two-year-old Houston company backed by private-equity funds.

Because the Gulf has long been explored, companies need to venture to untouched deep waters to find oil. This requires spending heavily on seismic surveys and drilling deep wells.

The area is home ground for big U.S. oil companies, but Japanese executives said they hope to learn from their local partners advanced skills in such areas as deep-water exploration and production of gas from sedimentary rock called shale. They said personal connections with U.S. oil executives also may come in handy as Japanese companies fish for energy projects elsewhere around the world.

“By being in the Gulf of Mexico, we’ll have access to lots of information and expertise,” said Teruo Omori, president and chief executive of Nippon Oil Exploration Ltd. The company, which used to focus its oil development in Southeast Asian countries such as Vietnam and Malaysia, has recently stepped up investment in the North Sea and Australia, in addition to the Gulf of Mexico.

SEEKING STABILITY
 
• What’s Happening? Japanese companies are snapping up oil-and-gas concessions in the Gulf of Mexico, turning to more stable regions and away from areas where geopolitical risk and potential rewards are higher.

• Background: Japan wants to boost overseas oil production to secure a stable supply. But recent efforts in areas such as the Russian Far East and Iran have faced difficulty.

• Outlook: The entry of Japanese companies adds to already fierce competition for oil and gas in the U.S. and could boost the prices of concessions.

Write to Yuka Hayashi at [email protected] and Russell Gold at [email protected]

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