23 September 2008
Royal Dutch Shell and Iraq on Monday inked a heads of agreement (HOA) to establish a joint venture to gather, process and market associated natural gas from southern Iraq, and plan to sign a definitive multibillion-dollar deal within a year, Iraqi and industry sources said.
Officials from Shell’s gas and power division, headed by Executive Director Linda Cook, traveled to Baghdad on Monday for the signing ceremony, the first to be held in the Iraqi capital between the oil ministry and an oil major since the fall of the previous regime in 2003.
The gas agreement — albeit a preliminary deal that has still to be turned into a long-term commercial contract — is the second major accord finalized by the ministry after the Al-Ahdab deal with China National Petroleum Corp. last month. The cabinet of Iraqi Prime Minister Nouri al-Maliki approved the Shell deal earlier this month.
The HOA was signed by Mounir Bouaziz, Shell’s gas and power vice president for new business development for the Middle East, North Africa and the Levant, and Iraq’s South Gas Co. (SGC) Director-General Ali Hussein Khudair, the sources said. SGC will hold 51% of the joint venture.
The joint venture’s work will be confined to fields in the Basrah region. It will exclude provinces such as Missan and Thi Qar, opening the way for other international oil companies to undertake similar projects in these areas. 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. The HOA includes a clause that would allow the venture to develop nonassociated gas from the Basrah area in the future.
In a statement after the signing, Shell said the joint venture would buy associated gas from upstream operations; own and operate existing gas gathering, treating and processing facilities; and invest to repair nonfunctioning assets and develop new facilities. The joint venture “will be focused initially on creating reliable sources of domestic energy, including liquefied petroleum gas [LPG], natural gas liquids, natural gas supply for power generators, and deliveries to local distribution networks,” Shell said. The deal includes a provision to develop an LNG facility to export surplus gas in the future.
“This joint-venture company will stop the burning of gas as quickly as possible and will start to produce dry gas. Iraq will become one of the world’s key LNG-exporting countries,” Oil Minister Hussein al-Shahristani told reporters after the ceremony.
Under the HOA, Shell will survey produced and flared gas volumes — currently estimated at 700 million cubic feet per day — and the composition of the gas, and look at the state of infrastructure, including wellheads, compression stations, gas oil separation plants, pipelines and processing plants, to determine the capacity of existing infrastructure and plan new plants and pipelines. It will also draw up a plan to refurbish gas facilities.
The sides are expected to appoint a joint management committee to negotiate the definitive agreement and, later, to manage the project.
Iraqi sources told International Oil Daily that the final commercial agreement will detail the terms and conditions for delivering dry gas and LPG to the domestic market and for exporting surplus gas, LPG and condensate. Payments to Shell will be linked to an offtake of some of the products and surpluses to be exported. 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 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. 23, 2008)