Shell Natural Gas Deal Held Up By Iraqi Politics

At the beginning of September 2008 the Iraqi Oil Ministry signed a preliminary deal with Royal Dutch Shell to exploit natural gas in the Basra area. It was only the second agreement signed between Iraq and a foreign company to exploit its natural resources since the U.S. invasion in 2003. The Oil Ministry has been criticized by a variety of different groups within Iraq for this action, leading to inertia one year later. Now it’s been announced that Shell will have to wait even longer as officials say that nothing can be done until after the January 2010 Iraqi national elections.

The Deputy Oil Minister announced on September 5, 2009 that the Shell deal would have to wait for finalization until after the 2010 elections. He said that Iraqi politics would not allow any movement until afterward.

The preliminary agreement is a three-way deal between Royal Dutch Shell, Japan’s Mitsubishi, and the Iraqi Oil Ministry. Because Iraq has no new hydrocarbons law, the Oil Ministry used an old Saddam era laws to work out the proposed contract with Shell. Originally, the state-owned South Oil Company was going to own 51% of a joint venture, and Shell would have the other 49%. In February 2009 Mitsubishi joined with Shell, and pledged to go in 5%. The deal could be worth between $3-$4 billion over five years, and involve 500-600 cubic feet of natural gas per day. Currently Iraq has the 10th largest natural gas reserves in the world, and produces 1.7 billion cubic feet a day, but wants to increase that to 5.1 billion by 2015. Most of the natural gas in Basra is burned off instead of captured because Iraq lacks the infrastructure to do so. Overall, Iraq claims it looses more than 60% of its natural gas at a cost of up to $40 million a day.

The initial deal received immediate approval by the cabinet, but has been criticized by a number of groups. First, was the former oil minister under Saddam who asked why the government offered no-bids on such a large project. Second, members of parliament criticized the negotiations as being non-transparent. Third, the Oil and Gas Committee in the legislature worried that Shell would be given a monopoly with a 25-year contract. The committee, as well as the Fadhila party that held the governorship of Basra at the time, also said that they should’ve be included in the negotiations. Members of the committee have also claimed the deal is unconstitutional since it did not include parliament. Finally, there are disputes about how much of the natural gas will go to domestic needs, and how much will be exported, as well as the area of operations Shell will be given, will it be just for Basra or all of southern Iraq?

Iraq’s natural gas is largely underdeveloped, but has huge potential. Like the country’s oil it is a highly contested resource. On the one hand the Oil Ministry believes that foreign companies are required to exploit it, and the Oil Minister believes he can make these deals with only cabinet approval. Iraq’s parliament objects to this, claiming that they should be included in the negotiations, and have any contract ratified by them. There are also nationalist factions, and those that mistrust foreign companies, that think that the gas, like Iraq’s petroleum, should only be developed by the state. All of these arguments have held up the Shell-Mitsubishi deal for one year now, and there’s no telling whether the 2010 parliamentary elections will allow any further movement. This is the price foreign companies have to pay for attempting to do business in Iraq right now since the government is largely incapable of making big decisions because it is so divided and dysfunctional. In the meantime Iraq will be wasting most of its gas until some kind of final deal is worked out.

SOURCES

Ciszuk, Samuel, “Iraq politics impact Shell gas deal,” Iraq Oil Report, 4/20/09

Crooks, Ed and Khalaf, Roula, “Shell in Iraqi gas deal worth up to $4bn,” Financial Times, 9/8/08

Dow Jones, “Shell, Iraq gas Deal Progressing, Cabinet To OK Study-Official,” 7/6/09

Graeber, Dan, “Iraq approves gas deal with Royal Dutch Shell,” Iraq Oil Report, 9/7/08

Iraq Oil Report, “Iraq opts for long term oil deals, ditches no-bids,” 9/9/08

Khadduri, Walid, “Oil in a Week – Iraqi Oil 2008-2009,” Al-Hayat, 1/12/09

Lando, Ben, “Shell-Iraq gas company is a monopoly, secret agreement shows,” UPI, 11/4/08

Lando, Ben and Majeed, Alaa, “Gas deal no monopoly, Shell and Iraq say,” UPI, 11/6/08

Macalister, Terry, “Iraq parliament promises to push Shell out of gas deal,” Guardian, 4/18/09
- “Iraqi government fuels ‘war for oil’ theories by putting reserves up for biggest ever sale,” Guardian, 10/13/08

Rasheed, Ahmed, “Iraq Lawmakers Say Will Challenge Shell Gas Deal,” Reuters, 11/26/08

Salahedin, Sinan, “Iraq-Shell gas deal likely to be delayed until after January elections, official says,” Associated Press, 9/5/09
- “Iraqi official: Mitsubishi to join Iraq gas deal,” Associated Press, 2/12/09

Yacoub, Sameer, “Iraq, Shell sign deal,” Associated Press, 9/22/08