9 September 2008
The Iraqi cabinet on Sunday approved a preliminary gas deal between Royal Dutch and South Gas Co. (SGC), giving the green light for detailed negotiations on a final deal expected next year, Iraqi and industry sources said.
The deal is a nonbinding heads of agreement (HOA) to establish a joint venture to gather and process associated gas now being flared from Basrah region oil fields in the south, as well as any gas produced in the future. But it could cause controversy as it has been reached through direct negotiations with Shell, not through a bid process. The final deal will include an option to export the gas once domestic needs have been met.
The HOA defines the key principles on which to base a final agreement on establishing a joint venture between Shell and SGC, in which the latter will have a majority stake of 51%, Iraqi sources told International Oil Daily from Baghdad Monday. The 20-year final agreement is expected within a year of the HOA signing. The joint venture will buy the raw gas from the government at international market prices. The resale price of processed gas to industries and power plants will be based on the cost of the raw gas, plus operating costs and a profit margin.
A third party will evaluate the Iraqi assets in the joint venture to determine the value of SGC’s share. The two sides will fund the venture based on their respective shares. It is estimated that up to $5 billion in investment will be required in the project’s first five years. The joint venture will pay a 15% tax to the government and split the remaining profit according to the two companies’ stakes.
The scope of the joint venture’s work will be restricted to fields in the Basrah region, excluding Missan and Thi Qar that were part of Shell’s initial proposal submitted to the ministry early this year, the sources said. The HOA includes a clause on developing nonassociated gas from the same area in the future. This includes the Siba gas field, which Kuwaiti companies have expressed interest in developing to export the gas to Kuwait by pipeline.
The Shell-SGC joint venture will be entitled to buy any additional gas produced in the future from Basrah region fields beyond the gas being flared now. This will include new oil fields to be developed, such as Majnoon and Bin Umar, which have a high gas-to-oil ratio of up to 2,000 cubic feet per barrel produced. Also included is new gas generated from any increase in oil production capacity in the Rumaila, West Qurna and Zubair fields, which are already producing.
International oil companies were invited to bid to develop the three producing fields under Iraq’s first bid round launched in June.
The scheme proposed by Shell aims to reduce flaring and gather gas at treatment plants in three phases by 2014, with a view to exporting any surplus. If Baghdad manages to boost oil capacity to at least 5 million barrels per day by 2020 from the current 2 million b/d in the south, it is estimated that associated gas production could reach at least 4 billion cubic feet per day, releasing some 2 Bcf/d for export after meeting long-term domestic demand.
According to Shell’s proposal, an offshore liquefaction, storage and offloading facility would be the ideal development option, given Iraq’s shallow coastal waters, security concerns and desire to monetize surplus gas as quickly as possible. Gas would be treated at an onshore treatment plant before being piped to the offshore vessel, to be located near oil export terminals, for eventual ship-to-ship offloading.
Iraqi government sources said the southern gas project is seen as vital to stopping flaring for economic and environmental reasons, and channeling the gas to power plants to generate much-needed electricity. Industry sources estimate that 600 million cubic feet per day of the raw gas now being flared could yield about 480 MMcf/d of dry gas, plus enough liquefied petroleum gas to turn the country into a net LPG exporter. Along with existing commercial gas flows, this would meet about 60% of power generation demand.
“Shell has been working hard on Iraq gas project ideas for years and its perseverance has paid off. It’s a serious and competent company and it has the technical and managerial skills and the financial capabilities to carry out such projects according to high standards,” the Iraqi government source said.
Shell has been in talks with Iraq over gas projects since 2001, when the previous regime was in power. It revived its interest in 2006 with a country-wide gas master plan carried out for the oil ministry.
In January, the Anglo-Dutch supermajor submitted a concrete proposal to gather and process flared gas in southern Iraq and has been in negotiations on a preliminary deal since March.
Iraqi Oil Minister Hussein al-Shahristani pre-empted any criticism of the deal in July by arguing in an interview with International Oil Daily in Baghdad that the South Gas Utilization project proposed by Shell has no “biddable parameters”.
The gas deal is less controversial than oil field development projects involving international companies because it has no upstream component and does not give Shell ownership of the gas. All the gas produced will be owned by Iraq and will be sold to the joint venture based on international market prices “so the national interest is safeguarded,” the government source said.
Iraq’s proven gas reserves are estimated at nearly 112 trillion cubic feet — making it the world’s fifth-largest gas resource holder — but gas development has trailed behind oil. Baghdad missed out on becoming a gas exporter in the 1990s because of the damage caused to its infrastructure after wars with Iran and Kuwait and ensuing international sanctions.
The south gas project is a cornerstone of Shell’s Iraq strategy, which also includes development of the Kirkuk oil field in the north and the Missan oil fields in the south.
By Ruba Husari, Dubai
(Published in International Oil Daily Sept. 9, 2008)