Iranian Energy and Japanese Technology: A Recipe for Cooperation Despite Sanctions

On February 5, 2004, during the 25th anniversary of the revolution that ousted the pro-American shah and brought Islamists to power, Iranian and Japanese corporate executives and government officials celebrated the beginning of a new business partnership in the South Pars gas field, the world’s largest.

Gathered in the port city of Assaluyeh, one of Iran’s industrial zones and the field’s “glittering jewel,” representatives from Iranian energy developer Petropars Ltd., Japan’s Toyo Engineering Corporation, and other partners threw coins into the foundations of the plant to inaugurate the project.

A few months before, Petropars had awarded a consortium of companies headed by Toyo Engineering a $1.2 billion contract to implement three of the nearly 30 development projects, or phases, of the South Pars gas field, which Iran shares with Qatar. The consortium was in charge of designing, constructing and providing commissioning services for a natural gas processing plant that would recover the gas from facilities located 105 km offshore.

“I am confidant that the presence of reputable Japanese companies will help increase the level of standards for health, safety, environment, and quality issues in addition to the positive influence and growth to technical knowledge and management techniques,” then-Oil Minister Bijan Namdar Zangeneh said during the ceremony, according to Iranian media. “We hope to work on additional projects with our Japanese partners.”

It did not take long before Iran sought Japan’s technical cooperation beyond the Assaluyeh plant.

Incorporation records and private emails leaked from the Panamanian law firm Mossack Fonseca reveal that, in 2009, a few months after the completion of the three phases, Petropars, Toyo Engineering, and Al Remal Trading Group, a Qatari company, set up a joint-venture called Petrotech Global Engineering Ltd. in the British Virgin Islands (BVI). The documents are part of the Panama Papers, a cache of 11.5 million files obtained by the German newspaper Suddeutsche Zeitung and shared with the International Consortium of Investigative Journalists (ICIJ) and their media partners. They span from 1977 to 2015 and document the inner workings of more than 200,000 offshore companies across the world.

According to the documents, executives from all three parties were appointed to direct the joint venture. Petropars, with a 60 percent stake, was represented by Gholamreza Manouchehri Ardestani, former chief executive; Nematollah Alirezaei, the current director, and a former member of Iran’s energy commission; and Mohammad Hassan Mirzaei Fard, former deputy chief engineer. Toyo Engineering owned 30 percent and acting as representatives for the company were Senior Executive Director Masaru Takezawa and Yoshinori Nishimura. Ebrahim Al Neama represented Al Remal Trading Group, which had a 10 percent stake in the joint-venture.

The details of the incorporation of Petrotech reveal more than a business partnership between an Iranian energy developer and a Japanese engineering company. The files provide a window into the decades-long partnership between Iran, a country aiming to reach its economic independence in spite of stringent international rules, and Japan, caught between its dependence on energy resources and its alliance with the United States.

Petropars wanted to retain a skilled workforce after the project was finished, a Toyo Engineering spokesperson said in an emailed statement. “We’ve trained Iranian engineers but once the plant is completed that human capital will be lost. We want to set up a company to keep that staff,” Petropars representatives told Toyo Engineering, according to the spokesperson. Petropars and Al Remal Trading did not respond to requests for comment.

According to the documents, the deal was signed on March 11, 2009, three years after the United States, Japan’s biggest ally, intensified its sanctions against Iran.

The sanctions made life very difficult for Japan due to its dependence on Iranian oil, said Jonathan Miller, fellow on East Asia for the EastWest Institute. Since 2006 the U.S. Treasury Department had been enforcing rules against companies suspected of aiding the Islamic Republic’s nuclear and missile programs. But initially the U.S. allowed Japan a waiver period through which the ally could gradually reduce dependence on Iran’s natural resources.

“There was no ‘business as usual’ in Iran during this period,” Miller said. “But there was still ‘business.’”

Toyo Engineering’s name appeared on various lists of “scrutinized companies” and divestment reports compiled by a number of American state agencies that identified firms that were conducting business with Iran despite the sanctions. However, that did not prevent the company from joining forces with its Iranian partner and setting up Petrotech.

“Our role in the joint venture was to technologically support the development of the engineering business of Petropars, which is our client,” Toyo Engineering’s spokesperson wrote. “This is not the case of a company that was set up offshore to avoid taxes.”

The decision to establish the company in the British Virgin Islands was Petropars’, he added.

Due to local regulation, incorporating a company in the British Virgin Islands may make it difficult to know who the true beneficial owners are, said Glenn Newman, a business lawyer with expertise in Japanese companies and a professor at the University of Illinois. “It’s much harder to know whom you’re ultimately dealing with.”

However, it is not illegal to establish a firm in jurisdictions like the BVI that offer low or zero taxation rates, nor it can be automatically linked to tax avoidance or evasion. In the Iranian case, it may indeed serve another purpose entirely.

The Iranian constitution strictly regulates foreign companies’ involvement in energy projects. It does not allow any form of agreement resulting in foreign control over national and economic resources and insists on "prevention of foreign economic domination over the country's economy."

In the past, the Iranian government set up subsidiaries offshore to circumvent those restrictions and “pursue investment as well as ambitions to develop in-house abilities,” according to an analysis by William Yong of the Oxford Institute for Energy Studies.

Petropars is an example of those offshore companies and its priority was to foster domestic expertise. “Like a mother who feeds and raises her children, we also help Iranian companies to grow and develop,” Petropars CEO Gholamreza said in an interview with The Business Year magazine in 2011. “We work with well-known foreign companies [such as Toyo] mainly in the basic engineering processes,” he said. 

Although Iranian energy companies collaborate with European and Asian companies too, experts attribute the Islamic Republic’s long-time cooperation with Japan not only to its technological expertise but also to its political stance.

“Japan has never interfered with Iran's domestic affairs and has always been a non-political economic power," said Ali Dadpay, member of the advisory board at the United States-Iran Chamber of Commerce. Besides that, Japan’s professional technicians and engineers are known to offer high-quality services, Dadpay said. "Japan has always been a development model for Iran and for a while Iran was trying to be an Islamic Japan."

“Japan was a good option”

Diplomatic relations between Japan and Iran date back to 1929. About three decades later, when the oil industry was nationalized, Japanese companies began to enter the Iranian extraction and exploration sector.

After an Islamic government came to power with the 1979 revolution, the Islamic Republic did not have good relations with “Westerners,” said Fereydoun Khavand, an economic analyst based in Paris. “Therefore Iran tried to ‘asianize’ its relations and naturally Japan was a good option.”

Japan’s lack of natural resources makes the country a logical trading partner for Iran, which is one of Tokyo’s largest oil suppliers after Saudi Arabia and the United Arab Emirates. As of 2013, hydrocarbon-based fuel, like oil and gas, accounted for nearly 99 percent of Japanese imports from Iran, according to Japan’s foreign ministry data. In exchange, Japan has been exporting autos and electrical goods to the Islamic Republic for decades.

It was around the turn of the 21st century that Japanese companies became more involved in developing the infrastructure of Iran’s energy industry, only a few years after the Iranian government had found the way to circumvent domestic restrictions on foreign participation into the domestic market.

In the late 1990s, the National Iranian Oil Company, or NIOC, which according to Yong has ownership rights over Iran’s oil resources, registered subsidiaries offshore. The entities were commercially independent and could “tender for domestic contracts in partnership with foreign firms,” while the state-owned NIOC was able to have complete control of the projects, Yong writes.

That was also the purpose of the incorporation of Petropars. The oil and gas developer is not an Iran-registered company and as such is not subjected to Iranian law. Although connected to the state-owned company through shareholding, it was established in the British Virgin Islands through Mossack Fonseca, the law firm at the center of the Panama Papers. According to the ICIJ database, Petropars’ shareholders include NIOC Pension Fund, a parastatal investment fund controlled by NIOC, and Naftiran Intertrade Company, a Jersey-based company which is also a subsidiary of NIOC.

In 2000, during the first visit of an Iranian head of state to Tokyo, NIOC secured a $2 billion loan to be repaid in oil exports to Japan. Such a pay-back system is the only one allowed in Iran to compensate foreign companies, which cannot have an equity stake in the energy sector.

With that contract, Japan secured its presence in Iran and, soon after, its involvement in the infrastructure business intensified. ­

Toyo Engineering became a major player, along with other Japanese companies, and from 2000 to 2004 the engineering firm became involved in at least three large-scale projects near Assaluyeh, including an aromatics complex planned by Iran’s National Petrochemical Corporation and a fertilizer plant -- “the largest in the world” -- in cooperation with Mitsui and Chiyoda Corporation, according to the company’s website.

When in 2006 the United States intensified its economic sanctions against Iran, Japan’s oil imports began to drop -- from 16 percent in 2003 down to 5 percent in 2014 -- but Japanese companies carried on their business with their Iranian counterparts. So did Toyo Engineering, company reports show.

In 2009, when the Japanese firm and Petropars registered the tech joint venture Petrotech, in the British Virgin Islands, their partnership was already consolidated.

The timing of the incorporation coincided with Iran’s push for to use independence in the oil industry as a way to counter the effects of the United Nations Security Council’s new economic sanctions. Only a year later, in 2010, the supreme leader mentioned the phrase “resistance economy” in one of his speeches for the first time; that is, the idea of emphasizing domestic capacities to circumvent international sanctions over its nuclear programme.

That year, the United States added Petropars and Naftiran Trade to the list of companies subjected to sanctions by the Treasury’s Office of Foreign Assets Controls (OFAC).

As pressure from the American government grew, Khavand said, “Tehran­-Tokyo relations went down the hill.”

The operations of the joint venture between Toyo Engineering and Petropars came to a halt, too.

“In the end the project fell through and we didn’t shell out a yen,” Toyo Engineering’s spokesperson wrote in the statement.

It is not uncommon to set up a company without infusing any capital into it, said Newman. “It can be a shell company and can be available for future use when business opportunities arise.”

Petrotech was not dissolved but its Iranian shareholder, Petropars, began to get unwanted attention. Its close relation with the Iranian government and subsequent blacklisting raised a red flag in the Swiss and UK offices of Mossack Fonseca, the law firm that helped incorporate the oil developer as well as at least two other shell companies of which it held a stake, the leaked documents show.

In September 2010, a client of the Panamanian law firm complained that his company was assigned the same PO box and address as Petropars, which was already in the international list of companies that were owned or controlled by Tehran.

When the news reached Jürgen Mossack, one of the two partners of the law firm, his reaction was immediate. “This is dangerous!” he wrote in an email. “Everybody knows that there are United Nations sanctions against Iran, and we certainly want no business with regimes and individuals from such places! Not because of OFAC but out of principle.”

In the email to his subordinates, Mossack complained about the lack of due diligence from the staff that should have taken proper measures before the client’s finding.

In response to questions about the firm’s involvement with a sanctioned company, Mossack Fonseca said that they have never “knowingly” allowed the use of their companies by individuals having any relationship with countries that have been listed by a sanctioning body. “If for some reason, unbeknownst to us, some company formed by us ended up in the hands of people having such relations for whatever criminal or unlawful purpose, we strongly condemned that situation,” a spokesperson said in an emailed statement.

After more than two decades, Mossack Fonseca’s compliance team recommended resigning as registered agent of Petropars. Still, Petrotech, of which the Iranian developer was a shareholder along with Toyo and Al Remal Trading, remained active.

Only months after Japan, at the end of 2012, announced concrete steps to comply with U.S. and the UN sanctions, Petrotech was dissolved. Records show that, on April 16, 2013, executives of Toyo Engineering, Petropars, and the Qatari partner met in Tehran to sign the dissolution agreement. Later that year a liquidator confirmed that “the company has not traded and has had no transaction since incorporation.” Finally, in October, a short announcement published on the Tehran Times made the end of Petrotech official.

A Cautious Comeback

Today, a maze of gas pipelines, storage tanks, and flare stacks extends for about 10 kilometers along the narrow strip of land of the Bandar Assaluyeh region, between the Persian Gulf and the barren Zagros mountain range.

More than 500,000 barrels of gas condensate are produced every day from the Iranian part of the 3,700 square kilometer-wide South Pars gas field, according to Ali Akbar Shabanpour, the managing-director of Iran’s Pars Oil and Gas Company. Although some of the senior engineers were recently reported saying that they took the brunt of the sanctions and the subsequent shortage of specialized equipment, Iranian executives have often told local media that Iranian workforce and expertise were paramount in the development of the refining facilities, “in line with the principles of the economy of Resistance.” About 70 percent of the material comes from Iranian manufacturers, Shabanpour told CNN.

But foreign experts believe that Iran’s energy industry is not completely self-sufficient yet. ”The petroleum-product manufacturing industry isn’t keeping up with the increasing domestic production and demand,” said Tsuyoshi Nakai, the chief executive of Japan Cooperation Center Petroleum (JCCP), a consortium of companies that have been providing technical cooperation in oil refining, gas processing and distribution to the Middle East after the oil crisis hit Japan three decades ago. “Iran’s main challenges today are mainly in the refining operations.” 

When Iran and the United States finalized the nuclear deal last January, the agreement was seen as a game-changer for both the countries.

Although some economic restrictions remain, experts say that the lifting of the sanctions upon Iran’s agreement to roll back its nuclear activities represents a new opportunity for Japan to re-enter the Iranian market and resume investment.

On February 5, 2016, exactly 12 years since the inauguration of the Toyo-Petropars partnership in the Assaluyeh project, the two countries signed a bilateral investment treaty.

Despite cautiousness over the risks of new disputes, Japanese companies have already begun to look at new business opportunities in Iran. In March, Toyo Engineering launched feasibility studies to beat foreign competitors, Japanese newspaper Nikkei reported. In May, the JCCP dispatched personnel to Iran for the first time after a six-year hiatus.

“We have heard that Iran is facing challenges with security, safety, environmental safeguard and energy saving in their oil refineries and we have been talking to people on the ground to see what we can do to provide our expertise,” JCCP’s Nakai said. At present there is no concrete plan yet, he added, but the Center would like to continue the dialogue with its Iranian partners and carry on human resource development “one step at the time.”