Japan publicly pulled back from the deal under pressure from the US in early July, prompting Iran to announce the commencement of talks with Russian and Chinese oil firms. However, both sides say they are still talking and only the second-phase development of Azadegan is likely to be put out to international tender. Each phase is expected to produce about 300,000 barrels a day (b/d).

'Despite US pressures, the Azadegan oil deal with Japan is nearing finalisation,' Oil Minister Bijan Namdar Zanganeh said in mid-July. Japanese officials had earlier in the month cited US pressure on the deal when asking to extend the talks. Washington's unfavourable view of major international deals in Iran had been heightened by its efforts to persuade Tehran to sign additional protocols of the nuclear non-proliferation treaty.

But it is far from clear how close an agreement would have been without the additional political pressure. 'My understanding is that there were major unresolved areas still under negotiation,' said a foreign oil executive in Tehran. 'I did not expect to see a deal by the end of the exclusivity period, but that does not mean the Japanese are not still frontrunners to develop Azadegan.'

With estimated recoverable reserves of 26,000 million barrels, the field was among the largest undeveloped oil reserves in the world when it was discovered in the late 1990s. However, efforts to develop it have progressed slowly, as Iran's energy focus has shifted to gas. The other major oil field development on the table - the Bangestan project now being negotiated by France's Total, the Royal Dutch/Shell Groupand the UK's BP- has also faced severe delays. Industry analysts in Iran say the Islamic republic needs to accelerate its oil field development to offset depletion in existing fields.

Japan imports roughly 80 per cent of its oil from the Middle East and wants to diversify its energy sources. However, the Azadegan deal is part of a strategic attempt to replace the production it lost to Saudi Aramcoin 2000, when the Arabian Oil Company concession in the Saudi portion of the offshore Neutral Zone ended. Because the deal is to be made on a buyback basis, Azadegan will not guarantee a long-term supply of oil to Japan.

The Japanese-led consortium, comprising Japan National Oil Company (JNOC), Indonesia Petroleum (Inpex) and Japan Petroleum Exploration Company (Japex), both majority Japanese-government owned, and Tomen Corporation, also of Japan, won exclusive negotiating rights to develop the field two years ago.

Tokyo has since paid some $3,000 million in related financing for Japanese-Iranian joint venture projects.