Tuesday, July 6, 2010

Shell-Mitsubishi Natural Gas Deal Inches Ahead

On June 29, 2010 the Iraqi government announced that it had approved a $17 billion natural gas deal with Shell and Mitsubishi. The negotiations have been dragging on for over a year and a half now, and are still not finalized yet.

On September 8, 2008 the Iraqi cabinet originally approved the deal with Shell, the first with a major international energy company. At first, the two sides discussed Shell collecting natural gas from the oil fields in Basra province. Shell would work as part of a joint venture with the state-run South Oil Company, which would own 51% of the business. The plan was immediately criticized by parliament. Members of the Oil and Gas Committee complained that the talks lacked transparency, that there was no competitive bidding, and that Shell would get a monopoly with a 25-year contract, making the deal illegal. That didn’t stop Mitsubishi from joining with Shell as a minor partner in February 2009. By September however, the Oil Ministry announced that these political disputes would hold up the natural gas deal until after Iraq’s 2010 elections. In May 2010 another delay was announced when the government said it had no money to pay the two companies if the joint venture was finalized. Things suddenly moved ahead later that month with the proposal going to the cabinet to once again ratify it. That was finally done at the end of June. The actual papers are still not signed however, meaning more waiting. 

Natural gas being burned off at the Rumaila oil field in Basra. Iraq loses and estimated $70 bil a year through this practice

Iraq has an estimated 112 trillion cubic feet of natural gas reserves. Around 1.5 billion cubic feet of gas is produced a day, but half of that is burned off in oil wells, costing Iraq an estimated $70 billion in lost revenue a year. 60% of the gas is produced in Basra, which is where Shell and Mitsubishi will be operating. They will work on four oil fields that were recently auctioned off in 2009 by the Oil Ministry. A new Basra Gas Company is being created, which will be split between the government, 51% ownership, Shell, 44%, and Mitsubishi, 5%. The estimated cost of the venture is $17 billion, with $5 billion for infrastructure. Baghdad is hoping that by 2014 it will be producing 2.75 billion cubic feet of gas a day through this deal and an auction for three gas fields later this year.

The devil is still in the details however. The Oil Ministry has yet to sign the contract with Shell and Mitsubishi. It also needs to work out how the joint venture will work with the foreign companies that are operating the four oil wells in Basra because they too use gas in the extraction process. Hopefully these matters will be worked out soon so that the country can begin harnessing its second greatest resource. Given how slow the talks have gone so far, no one should hold their breath.

SOURCES

Daood, Mayada, “iraq burns 70 billion dollars a year,” Niqash, 5/5/10

Khidhir, Qassim, “Iraq has no budget to develop oil industry,” Kurdish Globe, 6/19/10

Salaheddin, Sinan, “Iraq approves gas deal with Shell,” Associated Press, 6/29/10

7 comments:

Maury said...

At least the oil deals seem to be moving forward. Shell is taking bids to drill 15 new wells in Majnoon. Majnoon is a super-giant with 23 billion barrels of reserves. It produces only 45,000 bpd. It could produce 1,000,000 bpd for the next 50 years, at current recovery rates.

Saudi Arabia has 7 super-giant fields. Iraq has 9. The largest concentration in the world. Most super-giants have been producing heavily for almost 50 years. Iraq's have barely been touched. If politicians ever get their act together, Iraq could easily be the worlds largest producer.

Joel Wing said...

The question as ever is then what? If Iraq does finally build up its infrastructure and finally gets oil production up, what happens next? The record of developing countries with oil is not good, especially because Iraq has a relatively large population. Oil really hasn't helped with the development of Mexico, Nigeria, etc.

Maury said...

Iraq is comparable to Saudi Arabia in oil reserves and population. Saudi per capita income is around $20,000. Not great, but it beats the heck out of the $4000 or so Iraq has. Like Iraq, KSA gets almost all government revenue from oil. Unemployment is high, but only because Wahhabi's are above physical labor. 7 million laborors are imported from third world countries.

Joel Wing said...

I don't think Iraq will ever reach the level of Saudi Arabia. The government is too corrupt and incompetent right now to effectively use the added revenue. I don't think they'll be able to diversify the economy, because they have no actual plans on how to do so, a lot of money will simply be skimmed off by corruption and smuggling as happens now, and a lot of the funds will be spent on misguided development plans. Much will probably be spent on more useless government jobs whose main goal is to pacify the public rather than actually develop anything.

Aymenn Jawad Al-Tamimi said...

Hi Joe:

Thank you for this recent post. Though my question may seem off-topic, may I ask how big a part you think the troop surge played in the reduction of violence in Iraq from 2007 onwards?

Don Cox said...

Iraq has two curses: oil and religion.

Joel Wing said...

Aymenn I think the Surge had a huge affect upon security in Iraq. It created the Sons of Iraq, which led most of the insurgency to turn against Al Qaeda in Iraq. The blast walls limited the movement of militants and attacks in Baghdad and the surrounding cities they were implemented in. The counterinsurgency tactics it employed were long over due. It helped lead to Sadr's cease-fire as the U.S. began focusing upon his militia. Finally, the improvement in security allowed Maliki to assert himself as leader as it took out many of his main rivals, and that led him to the launch the Basra, Maysan, Mosul operations, which completely changed his image and standing in the country.

That being said, I don't think the Surge alone changed the security situation in Iraq. I think the Sunnis were getting tired of the civil war and were beginning to realize that they were going to lose to either the Islamists or the Americans. That's why the Anbar tribes turned back in 2005 on Al Qaeda. Baghdad was also pretty much carved up by sect by time most of the Surge troops arrived and the U.S. cemented those demographic changes.

So overall, the Surge happened at a good time when other events were also leading to a change in Iraq.

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