Iraqi Cabinet Gives Initial Approval Of $17Bn Shell Gas Deal

Iraqi Cabinet Gives Initial Approval Of $17Bn Shell Gas Deal

Iraq’s cabinet on 29 June gave its approval for ratification of a Shell-led initiative covering development of 25-30 trillion cu ft of proven associated gas reserves from four of the major oil projects in the country’s southern Basra province. The move comes amid mounting public anger at the lack of electricity, which saw two demonstrators shot dead and the resignation late last month of Iraq’s electricity minister.

Some work still needs to be done before ratification, but the 29 June cabinet meeting marked “a significant step,” prime ministerial advisor and former Iraqi oil minister Thamir Ghadhban tells MEES. “Firstly, cabinet approved the formation of the joint venture company between South Gas Company (SGC), Shell and Mitsubishi,” he said. “The second thing is cabinet also approved funding for four years, covering 2013-16, of $4.15bn,” he added. Initial Iraqi funding will come in the form of SGC assets on the ground, valued at $1.5bn. Total spending over the lifetime of the project is provisionally projected at $17bn, “but this is just a working number. It could change,” Iraq’s deputy oil minister for the downstream, Ahmad al-Sham'a, tells MEES.

Funding will be staggered with $450mn to be paid in 2013, $1.25bn in each of 2014 and 2015 and $1.2bn in 2016, news reports said. The deal, which brings together SGC (51%), Shell (44%) and Mitsubishi (5%) has been controversial, with critics blasting Baghdad for the lack of competitive bidding and transparency surrounding the heads of agreement (HOA) signed in September 2008. Another charge has been that the agreement would prioritize LNG exports from the south to the detriment of local needs. This criticism Baghdad roundly denies. “The priority would be for domestic use,” oil ministry spokesman 'Asim Jihad says.

The original HOA contained clauses potentially giving Shell a virtual monopoly over the majority of Iraq’s gas (MEES, 3 November 2008). But the deal currently under negotiation has been slimmed down to cover gas from Rumaila, Zubair and West Qurna-1, and also gas from Shell’s Majnoun field oil development, which holds an estimated 9.5 trillion cu ft of associated gas (MEES, 10 May). MEES does not have a separate proven gas reserves figure for West Qurna-1, but 7.7 tcf for West Qurna as a whole would imply substantial volumes in place. Zubair holds an estimated 3 tcf, while Rumaila has 10 tcf of proven gas reserves. Given that Iraqi proven reserves figures tend to err on the conservative side, Shell is poised to launch a world class project, and one that will have significant impact on the economic development of Iraq’s south.

Press reports quoted prime ministerial spokesman Ali Dabbagh as talking of a 2.5bn cfd project, with about 600mn cfd earmarked for export, but volumes will ultimately depend on how successful the various oil projects are in reaching their target plateaus and there are a lot of question marks over these. Cabinet still needs to give approval of the final contract and annexes, before the new joint venture, Basra Gas Company, can be formed. This should happen “as soon as the two sides finish their work,” Mr Ghadhban said. This would probably be “in just over a month,” he added. It would obviously be desirable for any ratification to take place after a new government is formed – the current interim government is operating in legal grey area, observers note. The 29 June announcement already had critics of the deal bristling. “What transparency? What legitimacy? What are the terms?” argued one. “All other alternatives, and there were plenty have been blocked.” But the public mood has shifted since the HOA was first signed and any move that shows tangible progress as fast as possible is likely to be welcomed. And whatever its critics say, the consensus view is that the Shell initiative is the best and least risky option for achieving this. In addition to being highly regarded in gas, Shell has studied Iraq’s gas development for years and would have a significant head start on any rival plan, its supporters say. “People accuse Shell of acting to get a monopoly, but when the Iraq gas masterplan went out to tender, Shell was the only company to bid for it,” one argued.

Downstream Drive

Late last month, Iraq’s Ministry of Oil organized a conference in Baghdad to promote its refinery expansion drive. Baghdad has ambitious plans for building four new refineries, totaling 740,000 b/d of new capacity. These are the 300,000 b/d Nasiriya project, the 140,000 b/d Kerbala refinery project, the 150,000 b/d Misan refinery project, and the 150,000 b/d Kirkuk project. Foster Wheeler has been awarded the front end engineering and design (FEED) contract for Nasiriya, France’s Technip for Kerbala and US’s Shaw Group has won the FEEDs for Kirkuk and Misan. Internal working investment numbers are $8bn for Nasiriya and $5bn apiece for each of the others, Mr Sham'a says, but these figures will likely change once the FEEDs are finished. “Essentially we are talking of $20-25bn,” says Mr Jihad. Iraq will provide feedstock at a 5% discount to investors. Plans to boost runs on current refineries from around 450,000 b/d to 710,000 b/d have been somewhat delayed, with an already lagging construction of a new 70,000 b/d crude distillation unit now pushed back to the end of this year, Mr Sham'a said (MEES, 6 July, 2009).

Copyright MEES 2010.