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Iraq gives green light to Shell gas deal

Power shortages played their part in the deal

WORSENING power shortages may have played a pivotal role in prompting the government to rubber-stamp a $17bn deal with Shell to capture and sell associated gas from southern oil projects.

The Iraqi government's end-June ratification of the supermajor's heads of agreement with state-owned South Gas (SGC), initialled in September 2008, also suggests a growing acceptance among Iraqis of the need for international oil companies' (IOCs) expertise if the country is fully to develop its oil and gas resource potential.

The Shell agreement ran into strong opposition from Iraqi policymakers two years ago, amid concerns that the no-bid deal appeared to grant Shell a virtual monopoly over gas reserves in southern Iraq. Many senior Iraqis feared the joint-venture agreement would also starve Iraqi downstream industries of cheap gas feedstock.

The Basrah Gas (BGC) joint venture – SGC, 51%, Shell, 44%, and Japan's Mitsubishi, 5% – will buy the raw gas from the government at international prices, then sell the processed gas, liquefied petroleum gas (LPG) and natural gas liquids (NGLs) back to the government, also at international market prices. The government can then sell the products at a subsidised price.

But lingering wariness over the opaque terms of the contract may have been overcome by the pressing need to secure gas feedstock for the country's overburdened electricity sector. BGC is fast-tracking a tender for a 50 megawatt (MW) gas-fired power plant at Khor Zubair, in the south. The plant will secure supplies from the expanded gas project that will now include associated gas from the Majnoon oilfield development, in which Shell holds a majority 60% stake, along with gas from the Rumaila, West Qurna 1 and Zubair oilfields.

No details have been revealed about how much gas will be supplied to the power station, nor at what price, but Shell said it would issue an engineering, procurement and construction tender for the Khor Zubair power plant once the government has finalised the full terms of the agreement for BGC. Shell has previously repaired an 18 MW power plant in Rumaila.

Throughout the negotiations, Shell has quietly started gas-gathering operations in the south. By the end of 2009, projects jointly executed by Shell and SGC had already resulted in 135m cubic feet a day (cf/d) of gas and 500 tonnes a day of LPG being gathered that was previously flared – representing 20% of the country's flared gas and over a third of Iraqi's LPG import requirements – according to Shell's head of exploration and production, Malcolm Brinded.

The deal's ratification indicates a shift in the balance of power from IOCs to the government in the aftermath of the service-contract awards over the past year – 10 megaprojects have been awarded to foreign oil companies through two licensing rounds, including to Shell, BP and ExxonMobil, under terms considered very favourable to the government (PE 12/09 p11).

"One issue that triggered opposition to the [gas deal] was that the terms Shell's 49% share was subject to were unknown," says Alex Munton, an analyst at Wood Mackenzie. "Since the oil-contract awards, opposition has lessened because of a wider perception that Iraq got a good deal. This might have shifted perceptions about the government's approach to IOCs."

Shell's decision to link the gas project to the power project looks a politically astute play. Blackouts and brownouts are an ever-present reality for Iraqis during the hot summer months. Yet Shell still faces a struggle in convincing all Iraqis of the deals' virtues. "My suggestion is for the gas to be provided at cost, which would allow industries such as petrochemicals to obtain a competitive edge over similar products form advanced countries, in the same way as Saudi Arabia has," says Mohammed-Ali Zainy, an analyst and former director-general in the oil ministry.

The coming months may reveal more detail over the terms of the deal, and may provide answers to important questions, such as how the third-party companies now active in southern Iraq – including BP and ExxonMobil – will deal with additional associated gas volumes that will be produced if they meet their increased oil production targets.

Around half of Iraq's 1.5bn cf/d of associated gas output is flared because of a lack of infrastructure. "There's a challenge as to how to dispose of or utilise the additional gas volumes because, dependent on how quickly oil production ramps up, the gas additions will be huge and, for now, there's a limited domestic market and export options are yet to be developed," says Munton.

Available gas could reach as much as 4bn-5bn cf/d, if the four large oilfield developments achieve their target output. BGC is planning a 2.5m t/y floating gas-liquefaction terminal from which to export volumes surplus to domestic requirements as liquefied natural gas.

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