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Sluggish—Shell, Iraq venture sets off to a sticky start
Lack of oil and gas laws and the presence of deal opposition could complicate Iraq’s venture with Royal Dutch Shell, which is essential for its multibillion-dollar infrastructure plans.
August 23, 2011 1:29 by Reuters
Shell, Europe’s biggest oil and gas company, is likely to face long delays in bringing a $17 billion gas deal with Iraq into operation as it tackles infrastructure, export constraints and sufficient access to gas from oilfields run by industry rivals.
Iraq’s state-run South Gas Co (SGC) in July, in what was hailed as a breakthrough, initialled a final draft agreement with Royal Dutch Shell and Japan’s Mitsubishi for a deal to capture associated gas flared at three major southern oilfields.
Iraq is unlikely to shelve the deal now after talks have advanced, but Shell must navigate opposition from other oil companies and Iraqi officials, who wanted the joint venture to go through a public tender like other oil contracts. The deal still requires the approval of the Iraqi cabinet.
The lack of modern oil and gas laws in Iraq and discussions over how much of the gas can be exported are also likely to complicate a final agreement.
“The deal is still facing opposition from selected Iraqi stakeholders, who are hoping to derail the final decision,” said Leila Benali at IHS Cambridge Energy Research Associates. “I think it is still too early to judge on the actual work and what will be achieved.”
The venture is a vital part of Iraq’s master plan to boost electricity production to meet an expected surge in demand and cope with a rapid rise in associated gas output as Iraq embarks on one of the biggest oil development programmes in history.
Repeated delays could force it to seek other solutions to avoid flaring volumes of gas, which have already reached an estimated 1 billion cubic feet per day. It could invite other firms to build new gas facilities or ask each producer developing southern fields to manage gas themselves.
In a sign of those complications, industry sources say some oil companies are already starting their own plans to integrate oil and gas, while others oppose handing over associated gas needed for reinjection and power generation in their fields.
BUILDING FROM SCRATCH
Under the Shell agreement, a joint venture, Iraq will own a 51 percent stake and Shell will hold 44 percent in a joint venture known as Basra Gas Company or BGC.
State-run South Gas Co (SGC) will supply BGC raw gas from three fields — Rumaila, Zubair and West Qurna Phase One. SGC will then buy the processed gas for the domestic market. SGC will also buy any natural gas liquids such as LPG for sale in Iraq and for export.
Shell must build gas facilities almost from scratch and keep up with the rapid pace of development in the oilfields, while maneuvering around opposition from other oil firms, which would prefer to process and sell the gas themselves.
Oil companies working the fields where Shell will get gas — including BP, ENI and ExxonMobil — were not involved in negotiations and have made no commitment on the amount of gas they will use and the amount they will deliver to BGC.
Under their contracts with Iraq, they are not required to capture the associated gas, and they are allowed to use it for the power they need for oil operations and re-inject it to maintain pressure in crude reservoirs.
“BP, Exxon and Eni — these companies don’t get remunerated for gas production, so why should they help gather gas for Shell if they’re not being paid for it?” said Stewart Williams, an analyst at consultancy Wood Mackenzie.
“That could have been part of the delay,” he said, adding that Shell might not have received sufficient guarantees from Iraq for the volumes it would need for the project.
Baghdad signed a series of deals with international oil companies in 2009, which could boost its crude output capacity to 12 million barrels per day.
As natural gas builds up in association with rising oil output, Iraq is under pressure to…(CONTINUED TO NEXT PAGE)
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