Iraq-Shell Natural Gas Deal May Finally Become A Reality

Finally, after three years, the Shell-Mitsubishi natural gas deal with Iraq may be heading towards fruition. Back in 2008, Royal Dutch Shell signed an initial agreement with Iraq’s Oil Ministry to develop gas produced from Basra’s petroleum fields. Later Mitsubishi joined as a junior partner. Talks dragged on and on over legal, procedural, and operational issues. That may finally be coming to an end, and the dream of developing Iraq’s vast natural gas resources could become a reality.

On June 19, 2011, it was reported that Shell and Mitsubishi were finally starting some preparatory work in Basra province. Bloomberg news reported that Shell had completed a geographical survey of the Shatt al-Arab waterway, Iraq’s access to the Persian Gulf. In July, it’s supposed to install fifteen production wells and a pipeline at the Majnoon oil field, which it won a contract to develop with Malaysia’s Petronas in 2009. The company also plans on building a pier in the waterway to help bring in equipment, and to upgrade two degassing stations, and build a processing plant in the governorate. This is the first work that Shell has done in Basra for its gas project. The Oil Ministry still has not come to a final agreement however. The result is that around 700 million cubic feet of gas is flared per day during the production of oil from Basra’s fields.

Shell, and later Mitsubishi have been talking with the Iraqi government over this deal since 2008, but has run into a never-ending series of problems. This year, the Oil Ministry has repeatedly said that these issues are being resolved, but there is still no agreement. At the end of January, the Deputy Oil Minister Ahmed al-Shamma said that the two sides were still working on the details, but the most difficult parts had been resolved. The next month, it was said that legal and constitutional barriers were holding up the deal. The Deputy Oil Minister said that old laws only allowed the government to export gas, and those needed to be changed for things to move forward. In March, the oil and gas committee in parliament told the Ministry that it needed to review the economics of the plan. Then at the end of the month, the government claimed that the final obstacles had been overcome. The issue of exports had been resolved when Shell and Mitsubishi agreed to allow the State Oil Marketing Organization to handle them. That announcement was contradicted in April, when legal problems were brought up again, but then a draft contract was announced in May, which was supposed to be completed within a week. That same month, the government claimed it would develop the gas from Basra whether the differences with Shell and Mitsubishi were worked out or not, and then threatened the two companies that they had to sign a deal immediately or be dropped. Then suddenly in June, everything seemed to be back on track. What all this back and forth shows, is that the Oil Ministry’s public announcements on this affair cannot be trusted. It has claimed again and again, that a resolution is just around the corner, but then nothing happens. This has been going on for three straight years. It even had the audacity to threaten Shell and Mitsubishi with canceling their contract if they didn’t agree to all of Baghdad’s demands. Their latest statements could be thrown into this same lot if not for the fact that Shell has finally started some actual work in Basra.

If ever completed, the deal would be a major step forward to develop Iraq’s natural gas. Shell and Mitsubishi would be given a 20-year contract to collect the gas produced from the Majnoon, Rumaila, West Qurna 1, and Zubair oil fields. Up to 3 billion cubic feet of gas could be provided in 6-7 years as other foreign companies develop the fields. Most of that would be used for the country’s power plants, but also for exports. Iraq hopes to become a major energy source for the region, East Asia, and Europe in the future. The deal in June 2010 could be worth up to $12.5 billion. With such a large and important prize in sight, it’s amazing that nothing substantive has happened so far. Iraq has always been known to miss almost every important deadline it has ever set, but this takes things to the extreme.

Iraq has some of the largest natural gas reserves in the Middle East. Barely any of it is being used. Three gas fields were successfully auctioned off in 2010. The Shell-Mitsubishi deal would be even larger. For whatever reasons, none of which seem to be clear, the Oil Ministry has not been able to complete the negotiations. Every month almost, it claims that some progress has been made, but there are no results. Hopefully all of this is coming to a successful end with Shell starting to develop some of the necessary infrastructure in Basra, otherwise the country’s gas will continue to be largely wasted, costing it millions of dollars in lost revenues and fuel for its electricity plants.

SOURCES

Bloomberg, “Iraq, Shell to Draft Contract for Gas Project Within a Week,” 5/10/11

El Gamal, Rania, “ANALYSIS-Iraq seeks a plan B if Shell gas deal falters,” Reuters, 3/2/11
- “UPDATE 1-Iraq won’t cut 12 mln bpd oil output capacity goal,” Reuters, 5/8/11

Hafidh, Hassan, “Iraq Says Last Obstacle to Shell Gas Deal Removed,” Wall Street Journal, 3/29/11
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Kumagai, Takeo, “Iraq says still negotiating final details of gas deal with Shell,” Platts, 1/27/11

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Razzouk, Nayla, “Shell Ready to Start $12.5 Billion Project to Conserve Iraq’s Natural Gas,” Bloomberg, 6/19/11

Reuters, “Iraq moves on with gas development, awaits Shell deal,” 5/22/11