Iraq Energy Institute Report On The South Gas Project

Iraq Energy Institute Report On The South Gas Project

The following is the text of a report by the Iraq Energy Institute, which officially was asked by Iraq’s Parliamentary Oil and Energy Committee to assess the South Gas Project, for which an agreement is expected to be signed between the Iraqi Government and the consortium of Shell and Mitsubishi. The report is dated 31 July 2011 and is based on the summary document submitted by the Ministry of Oil to the Parliamentary Oil and Energy Committee.

General Observations On The Ministry Of Oil’s Summary Document

As per the announced data on this agreement, the governmental company will purchase processed dry gas from the joint project within Iraq at a price linked to international prices, and sell it within Iraq at a subsidized price. If the export aspect of this agreement expands, as is expected, at the expense of the volume allocated for local consumption, Iraq will have to resort to importing at a higher price. As to LPG, the summary does not include the method of purchase and sale within Iraq. All this will drastically change the pricing mechanism of Iraqi gas for local industries. The change should be very carefully and cautiously taken into consideration. Although the Ministry of Oil has not revealed the detailed economics of the project, the summary regarding the project however shows that the foreign partner will have more financial benefits, as is explained in the following points:

1. The summary lists the available production capacity at 2.0bn cfd. The figure is not based on any facts officially announced. The production capacity of crude oil from the relevant fields as per concluded contracts is still the same, which results in at least 3.3bn cfd of raw gas, not 2.0bn cfd. Some statements have been made as to the possibility of decreasing the production of crude oil, but this has not been confirmed yet. Thus the adoption of lesser volumes in the calculations may suggest less profit, whereas the profits may reach higher levels.  

2. The requested funding referred to from South Gas Company (SGC) has been decreased, and that of the foreign partner increased; the former lacking the value of current assets that are an integral part of the funding, and the latter should be closer to $5.0bn than the referred to $6.982bn. If the requested funding from SGC is $5.236bn, being the funding of the partner holding 51%, the funding for the partner holding 49% should be around $5.030bn only. In addition, it is not necessary to refer to the optional loan, being optional and not mandatory, as its inclusion maximizes the role of the foreign partner in the funding.  

3. Oil prices in the calculations are set at $75/B, which in our estimation is low. We estimate the price at $90/B, which is more realistic for the calculations of the project. Using the $90/B estimate, the sale price of dry gas would directly increase by 20%, which greatly increases the revenues of the alliance.  

4. The liquidation of the share of the foreign partner and presenting it with the equivalent of its assets by the end of the project is extremely prejudicial to Iraq. The assets are in fact jointly calculated and established from “zero” for the purpose of the project. The value of these assets gradually depreciates over the lifetime of the project, which generates billions of dollars, to reach “zero” again by its end. The foreign partner is therefore not entitled to any financial payments by the end of the project.  

5. The subsidy amounts to be borne for the imports of Iraq over the lifetime of the project are huge. There is no reference in the summary to production and sale of LPG and oil condensates, or the manner of their marketing within and outside Iraq. If the sale of liquefied gas is subsidized, it will increase the subsidy amounts. If these products are sold at international prices, that will add additional profits to what is mentioned in the previous paragraph.  

6. The netback for SGC is referred to, but not that of the foreign partner. If the net cash flow of SGC, the partner holding 51%, is $18.851bn, the net cash flow for the foreign partner is $18.111bn. When adding and subtracting from the cash flow for SGC as per these figures, the end result is: the net for SGC is $9.057bn and for the foreign partner $18.111bn, almost double that of SGC.  

7. The detailed description of the NPV [net present value] and its profile in the summary suggests that SGC’s profit is higher than that of the foreign partner, whereas this may not be the case.  

8. It is unnecessary to refer to the netback of Iraq, as this is not usually included in projects calculations. The mentioned taxes are already part of the project calculations. The net financial position of Iraq is in no way relevant to the partners.

Financial Assumptions Based On Ministry Of Oil Summary Document

• South Gas Company purchases dry gas at global price from joint venture and sells it domestically at subsidized price.  

• Subsidy increases with increased production and consumption.  

• LPG purchase and sales pricing mechanism is not mentioned.  

• Ministry of Oil did not explain all the different factors affecting the pricing mechanisms under the agreement.  

• It is imperative that the Ministry of Oil provides all contractual and economic details of the agreement.

Copyright MEES 2011.