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Iraq plots a gassier future as Shell's project advances

The advance of Shell’s long-standing southern gas joint venture heralds progress of sorts for Iraq, but key constitutional issues must first be finalised, reports James Gavin

BAGHDAD residents suffering in near 50°C heat with barely four hours a day of electricity may be excused a diffident shrug at news that Iraq may soon become a liquefied natural gas (LNG) exporter. Domestic discontent at the failure to put the country’s gas endowment to work in the power sector has been a bone of contention in post-Saddam Hussein Iraq.

But that should not diminish the significance of news that Shell inched closer to signing a landmark deal with state-owned South Gas Company (SGC) with the mid-July signing-off of a project that would end flaring of more than 700 million cubic feet a day (cf/d) of associated gas from three oilfields in the south of the country.

The project will tap a domestic gas resource that could help solve the chronic power shortages that have plagued Iraq since Saddam’s downfall and endow the government with a healthy line in gas-export revenues to complement oil income that is slated to rise exponentially over the next six years.

"Execution of the deal will open the door for Iraq to export LNG to the international market," said SGC head Ali al-Khudhier.

Green light

For Shell, already active in Iraq through a service contract to develop the 12.6 billion barrel Majnoon oilfield (see Table 1), SGC’s green light heralds a significant breakthrough – although government approval is needed and the $12.5 billion investment project must still navigate a series of hurdles if the dream of re-engineering Iraq as a gas exporter is to be realised.

Under the heads-of-agreement (HOA) for the 25-year project, signed in September 2008, SGC holds 51%, Shell 44% and Japan’s Mitsubishi 5% in Basra Gas (BGC), which will develop associated gas from the huge Rumaila (20 billion barrels), West Qurna-1 (8.7 billion barrels) and Zubair (6 billion barrels) oilfields. An LNG plant, with a maximum capacity of 600 million cf/d (around 4 million tonnes a year), would export any excess gas.

With associated gas output rising in line with increased in crude production from southern fields – Iraq exported 2.27 million barrels a day (b/d) in June, the highest level since 2003 – pressure has grown on the Iraqi authorities to prioritise Shell’s gas plan to monetise an untapped gas resource estimated at 112 trillion cf. The BGC project represents the fastest way of raising the southern fields’ production of 1.05 billion cf/d to provide much needed feedstock for the country’s power stations.

But the no-bid gas project has been a magnet for criticism – Shell was awarded the project without a competitive bidding process. Much of the scorn reflects perceptions that Shell has been handed monopoly rights to southern gas resources, with BGC insisting on marketing exclusivity. BGC appears also to have secured concessions over the price of gas sold to the government, although details have not been revealed.

"The original deal looked monopolistic as it talked about three provinces that represent 70% of the country’s gas resources," said Luay al-Khatteeb, director of the Iraq Energy Institute. "The worst part of the HOA is that the government had no right to negotiate the southern gas deal with competitors when they signed Shell deal, leaving Shell to decide the fate of the opportunity for its 25-year lifetime," he added.

The drip-drip of criticism over three years has had an effect. On 4 July, the parliamentary oil and energy committee called on MPs to ban the government from signing any new oil or gas deals until a federal oil and gas law is enacted. And the scope of the associated gas resources has been scaled back from Missan, Nasirya and Basra provinces, down to just three supergiant fields, Rumaila, Zubair and West Qurna.

Nonetheless, said al-Khatteeb, although the scope of the project has been downsized, this remains a sizeable amount of gas that has been taken out of competition. "Many other international oil companies (IOCs) and medium-sized players wanted to invest in southern gas and deliver a solution, piece by piece, that could have helped Iraq to triple its power generating capacity [from 5.2 gigawatts now]," said al-Khatteeb.

The BGC deal is not the only recent milestone for Iraq’s hydrocarbons sector. In May, BP received its first 2 million barrels of oil as payment for development work at Rumaila. This was the debut payout under the ambitious service-contract programme, through which IOCs are committed to increasing oil production to a headline, and overly ambitious, 12 million b/d by 2017 (PE 6/11 p30).

BP and partner Chinese state-owned CNPC will increase Rumaila output to 1.3 million b/d this year, from 1.06m b/d. Meanwhile, Eni’s Zubair development has added 150,000 b/d to reach 270,000 b/d; and ExxonMobil and Shell have increase West Qurna-1 output to 347,000 b/d from 230,000 b/d.

The oil ministry expects these increases to hike Iraqi output by around 500,000 b/d by the end of the year, pushing the total above 3 million b/d for the first time in more than a decade (see Figure 1).

These advances have placed added pressure on the Iraqi authorities to give serious thought to the constitutional issues that have held up progress on a number of fronts, notably relations between the autonomous Kurdistan Regional Government and the central government in Baghdad.

A package of four important new laws – to reconstitute Iraq National Oil Corporation (INOC); the federal hydrocarbon law; the restructuring of the oil ministry; and the revenue-sharing law – became embroiled in the political horse trading that led to the formation of today’s government in December, under the leadership of prime minister Nouri al-Maliki (PE 12/10 p5). With a government in place, there are no excuses for failing to push key pieces of hydrocarbons legislation forward.

Iraq’s 2005 constitution calls for the enactment of an oil and gas law to underpin all investment in the country’s hydrocarbons sector. But although a draft was circulated in 2007, there has been precious little progress since then. All oil deals struck with IOCs have been without explicit parliamentary approval.

This has raised the ire of the parliament oil and gas committee, which in early July called on MPs to ban both the central government and provincial governments from signing any new contracts until a new hydrocarbon law is enacted.

Maliki, his ally, deputy prime minister for energy affairs Hussein al-Shahristani, and oil minister Abdul Kareem Luaibi, are unlikely to pay too much heed to these demands – a fourth licensing round was launched in May, covering 12 oil and gas blocks, mostly in the remote west of the country (PE 5/11 p37).

Politicians at loggerheads

Politicians are also at loggerheads over proposals to reconfigure INOC, which Saddam dismantled into its constituent parts in 1987. The parliamentary oil and gas committee is scheduled to debate a second reading of the law to reconstitute INOC, but the all-powerful oil ministry has shown little enthusiasm to grant the revived national oil company a more prominent role. Under the existing law, INOC would be able to form partnerships and even compete with IOCs to develop Iraqi fields.

But minister Luaibi claims the recreation of INOC would disrupt the work of the oil ministry and is unnecessary. The duties prescribed for INOC under the draft bill, which include entering exploration, drilling, development and production contracts, as well as contracts for shipping oil and gas, could duplicate activities, he said.

While Shahristani and Luaibi want a reconstituted INOC to be answerable to the oil ministry, a rival camp – led by the influential former oil minister Thamer Ghadhban – have called for INOC to operate independently, leaving the latter to formulate oil policy while INOC takes a hands-on role in developing the hydrocarbons sector.

There is widespread concern in senior Iraqi circles that the ministry has already secured too much power. The former head of State Oil Marketing Organisation, Mussab al-Dujaili, told the July Iraq Petroleum conference in London that the ministry now enjoyed a monopoly of the oil sector, and that its powers were based on laws passed by the Saddam regime rather than those of a democratic Iraq.

If Iraq does meet its production target of 3 million b/d by year-end, policymakers will have less excuse to put off the tough decisions needed to put the hydrocarbons on a firm footing and enable the federal government in Baghdad to patch up its relations with the KRG.

The gas deal with Shell would be a start, despite the attendant criticism. But political dysfunction may yet scupper the country’s best efforts to rebuild an oil and gas sector capable of competing with neighbouring Saudi Arabia.

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