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UPDATE: Iraq, Shell To Sign Initial $12B Gas Deal Tue-Official

Sunday, Jul 10, 2011

(Adds more details in paragraphs 2, 5-9; background)

By Hassan Hafidh

Of DOW JONES NEWSWIRES

AMMAN (Dow Jones)--Iraq and Royal Dutch Shell PLC (RDSA) and its partners hope to sign Tuesday the long-stalled $12 billion gas deal to capture and exploit huge volumes of gas flared from southern oil fields, the deputy spokesman of Iraq's oil ministry said Sunday.

The project is crucial to Iraq's plans to expand its oil production, because as oil output rises, the associated gas that is produced with the oil will need to be handled.

Once signed, the deal still needs the approval of the Iraqi government.

"We are hoping to sign an initial contract with Shell on Tuesday," Murtadha al-Jashaamy told Dow Jones Newswires by telephone from Baghdad.

Since the signing of an initial agreement in 2008 to begin negotiations on the project, the oil ministry has been working to finalize a joint venture between its South Gas Co. , Shell and Japan's Mitsubishi Corp. (8058.TO) to capture and exploit the huge volumes of gas flared from three giant southern oil fields: Rumaila, Zubair and West Qurna Phase 1.

According to a heads of agreement for the 25-year-project, which was signed in 2008, Iraq's state-run South Gas Co. holds 51%, Shell 44% and Mitsubishi 5%.

The delay in the deal was caused mainly over the pricing of produced gas that the joint venture would sell to the Iraqi government for much-needed power generation in Iraq.

Under the current system, the oil ministry sells the gas to the electricity ministry and other government entities at subsidized rates but Shell and Mitsubishi wanted the gas to be sold at prices that match international standard. That issue has been resolved but the oil ministry official didn't say how.

Iraq has 112 trillion cubic feet of gas reserves but produces only around 1.5 billion cubic feet a day, with about half of that amount flared daily because of a lack of infrastructure.

The first stage of the mega-project aims to make use of associated gas that is now flared, and Shell has already made progress on this front with more than 100 million cubic feet a day having been already exploited. Previously Iraqi fields had been flaring around 700 million cubic feet a day.

Shell is already poised to become a major player in the development of Iraq's oil, having secured the lead role at the supergiant southern Majnoon oil field and a minority stake in West Qurna- Phase 1.

-By Hassan Hafidh, Dow Jones Newswires; +962 799 831 831; hassan.hafidh@dowjones.com

(END) Dow Jones Newswires

10-07-11 1439GMT