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Shell Still Faces Flak Over Iraqi Gas Deal

Iraq's cabinet is expected to finalize a natural gas megadeal with Royal Dutch Shell later this month, despite opponents' continued attempts to derail the $17.5 billion contract.

"There are still some internal issues, but the final agreement will be approved in the coming weeks," Iraqi government spokesman Ali al-Dabbagh told International Oil Daily on the sidelines of an Iraq mining conference in London on Thursday.

After nearly three years in the works, the contract was initialed in early July (IOD Aug.31'11. But debate over the deal to capture and use gas now flared at Iraq's supergiant southern oil fields has heated up in the past few weeks after the 300-page agreement was forwarded to parliament's oil and energy committee and leaked to the press.

Deputy Oil Minister Ahmed al-Shamma, Iraq's lead negotiator for the venture, said opponents are not "technically oriented" and that Shell has gone a long way to meet last-minute modifications that make the joint venture "more favorable to the Iraqi side."

He said he believes the deal should pass the cabinet, but there is opposition from those hoping to grab the contract themselves. "They've done a lot to pave the way by using unethical methods," he claims.

Al-Shamma said Baghdad is now getting a better deal after some of the Iraqi obligations were made less onerous on gas offtake and ship-and-pay, for example. Flexibility was introduced on the volumes of gas committed by Iraq and the economics were structured to minimize the burden on Baghdad.

Around 2 billion cubic feet per day of associated gas from projects run by BP at Rumaila, Exxon Mobil at West Qurna-1 and Italy's Eni at Zubair are earmarked for Basrah Gas Co. (BGC) -- in which Shell has 44%, Japan's Mitsubishi 5% and Iraq's state South Gas Co. 51%.

Countering those who criticize the deal for being negotiated directly, al-Shamma said Shell is the best choice when it comes to rebuilding gas facilities neglected during decades of sanctions and wars, and ending the flaring of some 700 million cubic feet per day of gas from the oil fields.

"Our gas industry is in bad shape. It needs a strong partner to lift it to international standards," he said. "I don't think any other player has a presence in the area better than Shell." And after drafting Iraq's gas master plan, the Anglo-Dutch supermajor knows the country's gas sector back-to-front. "That cuts down on time," he said.

The complexity of this industrial-scale venture made direct negotiations more practical, if a hard sell at home. "This is not a project where you could ask for a quotation. ... I felt that we tried to do something which the country is not yet prepared to do: A joint venture with an expatriate company," al-Shamma said. "Everybody is only looking at what the expatriate is getting and not what benefits we are getting."

BGC will have to coordinate with the oil companies developing the three southern fields, and there are concerns this could lead to operational difficulties.

The firms are themselves keen to end flaring and handle the extra gas that will come from rising oil production, with industry sources saying BP is exploring the possibility of building a power plant with capacity of up to 1 gigawatt at Rumaila.

Al-Shamma said he is aware some companies are looking at alternatives, but they have to adhere to the terms of their technical service contracts for the oil fields. "If they want to generate power for their own needs, yes. Apart from that, the gas needs to be delivered to the Iraqi side. This is the exact text of the contract," he said. "They are not responsible for generating power for Iraq."

A coordinated effort is starting to take shape, he said. A joint steering committee and working group has been set up with Eni, and similar groups will be formed at Rumaila and West Qurna-1.

Once BGC is given the go-ahead, processing capability should swiftly ramp up by about 350 MMcf/d and lift overall capacity to 1 billion cubic feet per day, al-Shamma said. SGC's two processing plants can now process up to 700 MMcf/d, but are running at about half that rate because the gas is arriving
at low pressure.

-Ends-

© Press Release 2011