Anatomy of a Deal

(Mr Asri Mousa was one of the main Iraqi negotiators of the south gas utilization project with Royal Dutch Shell and Mitsubishi Corp between 2008 and 2011)

Iraq has been, since 2008, negotiating with Royal Dutch Shell to establish a joint gas company to capture flared gas from three giant oil fields in the province of Basra. The joint venture is based on a proposal by Iraq to create a joint world class gas company with Iraq’s state‐owned South Gas Company (SGC) to hold 51% stake and Shell and another partner to hold the remaining 49%.

Initially, Shell was hesitant to accept three prerequisites in Iraq’s proposal: the first was the priority of meeting local demand for the products of the proposed company; the second was that the existing assets of SGC are to be evaluated and counted as part of its contribution towards its share in the joint venture; and the third was that all 4,000 employees of SGC would stay on the payroll of the new joint company.

But Shell soon changed its position and accepted the proposed terms. Then, the two sides entered in three rounds of talks over four months and concluded a heads of agreement (HOA) in September 2008.

After signing the HOA, a high level Joint Management Committee was set to negotiate detailed final terms of reference and to oversee several joint work teams that were established to develop the HOA into a final comprehensive agreement through defining detailed technical scope of work, negotiate commercial terms and conditions, work out the project year by year and overall investment over the 25 years of the venture, establish the economic model of the project, set up clear legal terms of reference for the lifetime of the venture, perform SGC’s existing assets valuation by a specialized international third party, and finally to produce the shareholders agreement to create the new joint company, named as Basra Gas Company (BGC).

The venture was joined, during negotiations, by Japan’s Mitsubishi Corporation as a third partner with a 5% stake, leaving 44% for Shell. Although all project legal and economic documents were examined by third parties agreed upon by both sides of the joint venture, the Iraqi side employed its own legal and economic advisers at the final stages of the negotiations.

The final documents of the project and the creation of BGC were approved by the energy committee at the Council of Ministers in early September 2011 and ratification by the entire Cabinet was given on 15 November.

The BGC project will be a historic landmark for Iraq’s gas industry in its size, its nature and in being unprecedented. It could be adopted as a template for other similar projects in the country.

The project capacity is 2.0bn cf/d of raw gas to be supplied from the southern oil fields of Rumaila, Zubair and West Qurna‐1. The investment over the lifetime of the venture is estimated at more than $17bn, from which Iraq is to contribute less than $5bn over a period of seven years plus the existing BGC assets.

In return the country’s benefit from the project is expected to be around $100bn, made up from raw gas payments, dividends, taxes, and substituting currently imported power generation fuels and cooking LPG by dry gas and LPG from BGC, in addition to upgrading the country’s gas sector to world class industry.

Obstacles To Gas Utilization In Iraq

Iraq’s gas sector faces major barriers and hurdles that are preventing the utilization of the country’s gas resources and causing the loss of billions of dollars over decades. Such obstacles include:

  • Shortage of capital investment.
  • Lack of long term gas sector planning.
  • Absence of dedicated legislations for efficient utilization of gas resources.
  • Ageing of gas infrastructure and deterioration of facilities and equipment.
  • Undefined domestic gas demand.
  • Low dry gas prices and unsecure payment.
  • Political wrangling and manipulating gas issues for other purposes.

Tasks And Solutions For Iraq To Emerge As A Major Gas Producer And Exporter

The monetizing of Iraq’s gas wealth is the responsibility and mandate of its government in both the executive and legislative branches and a quantum leap for the country’s gas utilization can be made through fast‐track actions such as:

  • Legislation of a dedicated ‘Gas Utilization Law’ to provide a clear and simple legal framework for gas processing, transportation and marketing with the objective of attracting investment, technology and global expertise to fast‐track building a world class gas industry.
  • Establishing a national ‘gas body’.
  • Adopting a comprehensive integrated national gas master plan with a firm commitment to implementation.
  • Defining long term domestic gas demand by taking into consideration seasonal variations and hourly fluctuations in consumption to avoid overestimating demand.
  • Avoiding the risk of flaring processed gas through allocating gas for baseload consumption and liquid fuels to make up for peak loads.
  • Correction of domestic gas price, applying the concept of ‘take‐or‐pay’ and securing payment by consumers.
  • Conducting in‐depth studies with regard to future export of gas.
  • Promoting ‘producer/consumer understanding’ to maximize gas utilization efficiency.
  • Abandoning using gas issues for political purposes.

Conclusion

Iraq’s huge gas reserves and its 50‐year of gas industry experience qualify the country to build a world class gas industry and prompt Iraq to emerge as a major gas producer and exporter within this decade. To achieve such a grand national goal, it is imperative for the top decision makers of the country to give the gas industry the priority it deserves and to try seriously to realize the great significance of gas to Iraq, and work hard to overcome the challenges related to its monetizing.

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