Under the terms of the contract, the consortium will develop the southern part of the oil field, with investment of about $2,000 million. The buyback deal will involve first production of 50,000 b/d in 2007, rising to 150,000 b/d in 2008 and 260,000 b/d in 2012. Inpex Corporation, one of the consortium members, says profits will start to accrue within 13 years of the project start-up. Azadegan, which has total proven reserves of 26,000 million barrels, is the second biggest oil field discovered since the 1980s.

The Japanese consortium, comprising Tomen Corporation, Inpex and Japan Petroleum Exploration Corporation (Japex), reached the agreement eight months after their exclusive negotiating period ran out in June last year - exactly two years after becoming the preferred bidders for the contract in June 2001. Japan has helped direct related investment worth $3,000 million as part of the agreement to win that exclusive negotiating time.

The length of discussions reflected the intricate commercial and technical difficulties associated with the project, but was also due to political concerns over Iran’s nuclear programme. In September, Japan announced it would not strike an agreement with Iran until it was convinced of the Islamic republic’s nuclear probity. But after Iran agreed to open up its programme to UN inspectors in November, Japan again felt able to move towards a deal. Foreign Affairs Minister Yoriko Kowaguchi visited Tehran in January and told local oil officials he wanted the project to go ahead.

In recent months, National Iranian Oil Company (NIOC) has moved negotiations forward by threatening to bring in other companies. France’s Total and Norway’s Statoil reported interest in the project and were early this year given data on the field. They had expected to be invited to bid for a development contract on the field if the Japanese negotiations collapsed.

But the Japanese are now looking for potential oil major partners to help it develop the project, which is reckoned too big for them to carry out alone. The Royal Dutch/Shell Group, which was earlier involved in preparing detailed studies for the consortium, has not yet ruled out involvement, but has not appeared enthusiastic. Total has made more positive noises, but will face competition from other international companies such as Russia’s Lukoil, Petrochina and India’s ONGC Videsh. The terms for investment in Iran’s oil sector are generally less generous than those in neighbouring Gulf and Central Asian states, which do not have constitutional objections to upstream foreign ownership.

The award clears the path for a series of other oil awards. Discussions on the Bangestan project have been stuck behind the priority Azadegan talks, and might now progress at a faster pace. The UK’s BP and Total submitted proposals more than a year ago and negotiations have progressed little since then.

Iran is one of Japan’s big oil suppliers, last year accounting for 16 per cent of its 4.3 million-b/d energy needs. Japan has not had Middle East upstream access since the recent end of its Arabian Oil Company concession in the Saudi Arabian/Kuwaiti Neutral Zone. The oil from Azadegan will at its peak account for about 6 per cent of Japan’s total energy consumption. The oil is medium-to-sour grade, with an API reading of between 26 and 25. Developing the field will be a complex task because of its fragmented geological structure, necessitating the drilling of many wells, and the continued presence of unexploded ordnance and landmines from the 1980-88 Gulf war.