Tuesday, November 22, 2011

Shell-Mitsubishi Natural Gas Deal Takes Another Step Forward After Three Years Of Delays

Back in 2008, Iraq’s Oil Ministry and Royal Dutch Shell came to an initial understanding over capturing natural gas that came from the production of oil in Basra province. Since then, talks have gone on and on with one issue after another coming up delaying a final agreement. In November 2011, Iraq’s cabinet announced that it had okayed the deal, but nothing has been signed yet, which means it could still be a while until a contract comes to fruition, and work actually begins.

When everything is finalized, it will be the largest natural gas deal so far in Iraq. It will be worth an estimated $17-$20 billion, and last 25 years. A new joint venture will be created with the state-run South Gas Company owning 51%, Shell 44%, and Mitsubishi 5%. The Japanese firm joined the planned consortium in February 2009. The new company will initially collect 700 million cubic feet of gas per day from the Rumaila, Zubayr, and West Qurna fields in Basra. The gas will first go to local power plants, with the surplus being exported through the South Oil Marketing Company. Shell and Mitsubishi are also expected to build a liquefied gas plant for $4.4 billion to facilitate exports. The Oil Ministry stipulated that the staff be 80% Iraqi as well. Iraq has the 5th largest gas reserves in the Middle East, and the 10th largest in the world. Currently, Iraq flares 60% of its gas, which is produced while extracting oil. In fact, the country burns more gas as a percentage of its output than any other country in the world, costing it an estimated $5 billion as a result. The Oil Ministry now hopes to become one of the major gas producers in the region, reaching 5.1 billion cubic feet of gas per year eventually. Back in 2010, Shell said that it could start production within two years of the deal being completed. If this deal could ever be finished, it would be a major step towards developing Iraq’s gas industry. Iraq has huge potential, but it is wasting most of this precious resource. That makes it all the more difficult to understand why Baghdad and the foreign companies have not been able to come to terms.

The original deal was announced back in September 2008. At first, Shell was going to collect 500-600 million cubic feet of gas per day, and the contract was said to be worth $3-$4 billion. Shell was only the second foreign energy company to enter into negotiations with Baghdad since the 2003 invasion. The first was a Chinese company that re-worked a Saddam era contract for the Ahdab oil field in Wasit. Shell was thus breaking ground, as it was the only company talking with the Oil Ministry about producing natural gas initially. It turned out, the two sides could not agree on the details.

The proposed Basra natural gas deal has run into nothing but problems since 2008. When it was first made public, members of parliament immediately criticized it. Some said that there was no transparency in the negotiations, while others argued that Iraq did not need foreign companies to produce gas. The oil and gas committee was afraid that Shell would be given a monopoly over the country’s gas sector, and that there was no bidding on the work. There were technical problems as well. Shell was supposed to sell gas to the government at international prices, but many countries subsidize their gas to make it cheaper for domestic consumption. Whether the Oil Ministry was going to subsidize the gas, and whether Shell was willing to accept that had to be worked out. The deal also did not say how much gas was going to be used for domestic use, and how much was to be exported. The foreign companies were obviously interested in exporting as much as possible because they could make more money that way. Finally, there were questions about where Shell and Mitsubishi would be operating. Would they only be collecting gas in Basra or all of southern Iraq? That last issue was eventually worked out by the middle of 2010 to be just a few oil fields in Basra. These issues and others would be the basis for the constant delays in finalizing the contract.

Every few months it seemed like something would come up over the natural gas deal. In July 2009, there was supposed to be a feasibility study, and then the contract would go to the cabinet for approval. In September, an Iraqi official told the press that negotiations were on hold until after the 2010 elections, which were originally planned for January. Talks were then given an extension in February 2010, because they were set to expire in March, which was when voting for a new parliament had been pushed back to. After balloting was done, Baghdad said that Shell and Mitsubishi would have to wait some more until a new government was formed. In April, the Oil Ministry announced that it did not have the money to pay the two foreign companies if the deal was completed. More importantly, it was revealed that the corporations that were operating the oil fields in Basra were unwilling to provide natural gas from their operations. This meant the Iraqi government had to carry out separate negotiations with all of those businesses before it could move ahead with its gas talks. That led to another six month extension being issued. (1) In May, the Oil Ministry claimed that it was sending a draft of the deal to the cabinet, (2) and that its energy committee had already approved it. The next month, the government said that it had approved the deal, but then said that it hadn’t been signed yet. It turned out the cabinet had only given the Oil Ministry more time to hold talks. By November, an Oil Ministry official said that there were legal issues holding up the contract. In February 2011, Deputy Oil Minister Ahmed al-Shamma elaborated by saying that Shell wanted the right to export gas itself, but Iraqi law only gave that right to state-run companies. Shamma said legislation had to be changed if Shell’s demands were to be met. The Oil Ministry hired an U.S.-English consulting firm to go over the deal, and work out the differences. In March, the objections of the companies operating the Basra oil fields the gas was to be collected from came up again, and the energy committee in parliament asked that the Oil Ministry go back over the economics of the deal. Later in the month however, Shell and the Ministry claimed they had overcome these last obstacles, with the former agreeing to allow the government to handle the exportation of gas. That was illusionary, because in April more legal problems were mentioned. (3) In May, Deputy Minister Shamma claimed that the deal would go back to the cabinet, but that same month, the government started threatening Shell and Mitsubishi. First, the South Gas Company said that it was ready to start producing natural gas whether a deal was signed or not, and that it was going ahead with building the basic infrastructure that went along with that. Second, the Oil Ministry told Shell and Mitsubishi they had to agree to terms immediately, or the contract would be cancelled. Despite those comments, nothing happened, and in June, it was reported that the contract was still under review. In July, the back and forth continued. First, it was reported that the two sides had worked out the legal issues, and that an agreement would happen by the end of the month. Then it turned out that there were still some differences, namely over whether the price of the gas produced would be sold at market or subsidized prices within Iraq. Still, it was alleged that Shell and Mitsubishi did sign something that month. That finally culminated in the cabinet approving the deal in November. This run down of events is mind numbing at just how many things got in the way of finalizing the deal. It was no wonder that it took three years for the Iraqi cabinet to finally get it in front of them.

The history of the negotiations between Shell, Mitsubishi, and the Oil Ministry shows that no announcement can be taken at face value. The cabinet’s approval means nothing, because there always seems to be something holding up the finalization of the contract. Until the ink is dry on the paper there has to be questions about whether this is just the last of many false claims that everything is finished, and the companies will finally get to work. All this time wasted has cost Iraq billions of dollars. Developing natural gas would be an important step in not only using a resource that is largely burned off, but it would also help diversify the economy, which is the most oil dependent in the region. With those pressing issues it would seem that Baghdad would have fast tracked these talks. Instead they have let them fester for the last three years. It can only be hoped that the Oil Ministry has finally come to terms with Shell and Mitsubishi, and production of gas can finally begin in Basra.


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