2 May 2008
Royal Dutch Shell has never been shy when considering Iraq’s huge potential. Even when the country was under UN sanctions, company officials quietly traveled to and from Baghdad, fostering relations with oil ministry officials. Since the US-led invasion of 2003, it has pursued opportunities more aggressively, with a three-pronged strategy targeting the upstream in the north and south, and the gas sector. Now, Shell is seeking to cash in with a deal making it the first exporter of Iraqi gas.
Shell secured a privileged position in Iraq’s gas sector after 2003 by offering to prepare a master plan for the sector free of charge. Under an agreement signed in 2005, with Japan’s Mitsubishi as junior partner, Shell built a huge database and created models for the gas industry. That exercise put Shell ahead of the pack and helped it forge a long-term vision of how best to position itself, as other major oil companies remained hesitant about engagement with Iraq until conditions were more secure.
Building on this advantage, Shell recently proposed putting some of the master plan’s recommendations into practice with a long-term agreement to capture associated gas across southern Iraq, process it for the domestic market and export the surplus as LNG. It is now negotiating with the oil ministry for a heads of agreement on a joint venture, which could be signed as early as this summer. If all goes to plan, a final commercial deal would follow within a year.
The proposal — dubbed the South Gas Utilization project — targets 600 million cubic feet per day of associated raw gas, currently flared due to a lack of adequate facilities. This would be processed and treated to produce dry gas for power generation, plus 3,500 tons per day of associated liquefied petroleum gas (LPG) and 5,000 barrels per day of condensate. Once domestic needs are satisfied, the project envisages processing 400 MMcf/d into 2.5 million tons per year of LNG for export from 2012-15. Shell would install a floating liquefaction plant in the Shatt al-Arab waterway, close to the existing oil export terminals. The cost is estimated at $2 billion-$5 billion in the first five years.
After 2003, Shell initially focused on northern Iraq, signing preliminary agreements with Turkey’s Botas and TPAO to cooperate on gas exports. That strategy sought to build on a prewar agreement by the two Turkish companies to develop nonassociated gas fields in Iraq, for export to Turkey and Europe. However, it quickly became apparent that the north was problematic in security and political terms, prompting Shell to switch its attention to the south.
For Iraq, the South Gas Utilization project appeals on several counts. First, reducing the waste of flared gas is a priority, especially when fuel is urgently needed for power generation. Second, it would build on Shell’s existing knowledge and experience, avoiding the time and cost involved in pursuing a competitive project from scratch. And third, the absence of an upstream component is convenient, given delays in launching such projects and divisions in Baghdad over a new hydrocarbon law. All this makes for an uncontroversial proposal that could secure quick approval. Executing it as a joint venture with state South Gas Co. adds further strength.
Shell’s aim is to secure a long-term contract for 20-25 years through direct negotiation, in the same manner that it clinched a deal with Libya in 2005 for gas exploration and LNG development separately from Tripoli’s competitive tenders of exploration acreage. It also wants exclusive rights to all associated gas in southern Iraq, which has the potential to supply up to 2 billion cubic feet per day for export if oil production capacity reaches a targeted 5 million b/d from the area’s current 2.2 million b/d.
Shell employed a similar strategy for its upstream targets, namely the northern Kirkuk field and southern Missan fields. After losing a contest for a Kirkuk reservoir study to UK-based Exploration Consultants Ltd. (ECL) in 2005, Shell stepped in with an offer to provide technical and financial assistance for the work. Now, it is negotiating a short-term technical support contract to increase Kirkuk’s 350,000 b/d production by 100,000 b/d over two years, and is regarded as the front-runner for a long-term contract there. For talks on Missan, it has teamed up with Australia’s BHP Billiton, which has been targeting the fields since the late 1990s. Since 2004, Shell has been actively supporting state South Oil Co. at Missan with equipment, know-how and training, and helped boost production by 40,000 b/d to 120,000 b/d.
Compass Points
• SIGNIFICANCE: Shell’s proposed Iraq LNG deal would give it a head start in the country and open a new opportunity for Mideast gas development. The Anglo-Dutch major could do with some success in that sector, after losing a major sour gas development in Abu Dhabi to ConocoPhillips and failing to find commercial reserves after five years of exploration in Saudi Arabia.
• CONTEXT: Years of war and sanctions prevented Iraq from developing as a gas exporter, despite holding 112 trillion cubic feet of reserves. If Shell’s project materializes, it could produce billions in revenue, while sending a message that Iraq is finally open for business. The main challenge remains Baghdad’s transitional state, particularly its ability to sign and guarantee long-term contracts when legislation governing the sector is still pending.
• NEXT: The signing of a heads of agreement would allow the start of initial engineering and project management work, with actual construction following a definitive deal. Iraqi sources expect Shell’s proposal to be approved swiftly by the cabinet, although its long term might prompt some dissent. The oil ministry could decide to tender the project for appearance’s sake, but even then, Shell is unlikely to face serious competition given its obvious advantages.
By Ruba Husari, Dubai
(Published in Energy Compass May 2, 2008)