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2nd UPDATE: Iraq Oil Minister, Shell Confirm Preliminary Gas Accord

Tuesday, Jul 12, 2011

-Iraq Oil Minister, Royal Dutch Shell confirm a preliminary deal on associated gas in Iraq

-The agreement still needs approval from Iraq's Cabinet

-The venture is critical to Iraq's aspirations to raise oil output

-Analysts say there are still important questions to resolve before the venture gets off the ground

(Adds comment from analyst in paragraph 6, additional context and details)

By Hassan Hafidh

Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--Signalling progress on long-stalled negotiations, Iraq's Oil Minister Tuesday and oil giant Royal Dutch Shell PLC (RDSA) Tuesday said they had reached a preliminary accord on a $12 billion gas deal to capture and exploit associated gas from southern Iraq oil fields.

But the two sides disclosed few details about the agreement, which also still needs to be approved by the Iraqi Cabinet.

"The Iraqi Oil Minister Abdul Kareem Luaiby announced today that Iraq has signed an initial contract with Shell and Japan's Mitsubishi Corp. (8058.TO) to develop gas production in southern Iraq," the Iraqi statement said.

Shell is "very pleased the Basrah Gas Company Joint Venture agreements have been initialized," a spokesman said in a statement. The Anglo-Dutch giant will now "look forward" to Cabinet approval, Shell added.

The announcement marks a forward step on a long-discussed project considered crucial to Iraq's aspirations to raise oil output in the coming years, analysts said. But they cautioned that there still appear to be significant questions to resolve before the venture gets off the ground.

"Initialing the Iraq-Shell gas deal is a small step in a rather complicated project that needs to address many issues, such as the mechanism of pricing gas, exports and meeting Iraq's needs of gas to fuel its power stations," said a western analyst who asked not to be identified.

The venture is important to Iraq's goals of boosting long-term oil production, because of the need to produce "associated" natural gas produced concurrently with rising oil output.

The two sides signed an initial agreement in 2008 to begin negotiations, but the talks have been delayed mainly over the pricing of produced gas sold to the Iraqi government for 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 standards. Iraq Ministry officials said the issue had been resolved, but they didn't disclose details. Shell officials declined to comment beyond the prepared statement.

The deal concerns the huge volumes of gas from three giant southern oil fields: Rumaila, Zubair and West Qurna Phase 1.

Deputy Oil Minister Ahmed al-Shammaa said that the deal would help to increase Iraq's gas production to more than 2.5 billion cubic feet a day.

Iraq produces some 1.5 billion cubic feet a day, with half of that amount is being flared daily, because of lack of infrastructure to produce and market the gas.

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

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12-07-11 1646GMT