6 March 2008
Royal Dutch Shell has submitted a proposal to the Iraqi oil ministry to produce about 500 million cubic feet per day of gas from major southern oil fields where most associated gas is now flared, Iraqi and industry sources told International Oil Daily this week.
The proposal is independent of the two-year technical support contract Shell is negotiating with the ministry to boost output by 100,000 barrels per day from the Missan fields in the south and by the same amount at Kirkuk in the north. Shell — along with BP, Exxon Mobil and Chevron with partner Total — is set to conduct a new round of negotiations in Jordan in mid-March over technical support contracts for five producing oil fields.
Shell has been eyeing a long-term gas deal with Iraq since the fall of Saddam Hussein. It developed a gas master plan in 2006 that looked at Iraq’s gas potential and made recommendations to the oil ministry on how best to use the gas both long and short term.
The latest proposal, submitted to the ministry in recent weeks, is aimed at signing a commercial contract under which Shell would put some of its recommendations into practice over a period of up to five years. These include reducing the amount of flared gas from the southern fields and increasing supply to the domestic grid for use by power and industry.
The ministry has yet to respond with its favored options for the timing and structure under which a gas project could be carried out.
An industry source said the preferred option from a corporate point of view is a joint venture between the foreign investor and a national gas company with jurisdiction over all gas reserves in southern Iraq. Under the Iraqi constitution, gas resources, like oil, are the property of the state. While seeking to make a return on its investment in such a project, Shell would also be positioning itself at the head of the queue to export gas from Iraq longer term, when gas supplies exceed domestic needs.
As majors launch work to increase oil output at producing fields by 500,000 b/d under the technical service contracts now being negotiated, more associated gas would be available for processing.
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 for decades.
Baghdad missed out on becoming one of the region’s first gas exporters in the 1990s due to the damage caused to its infrastructure after wars with Iran and Kuwait and the international sanctions that followed. Iraqi sources say that, right now, about 800 MMcf/d of gas is flared, most from the giant North and South Rumaila fields, as well as West Qurna and Zubair, while gas processing is put at some 400 MMcf/d.
The Shell proposal involves upgrading and repairing existing gas facilities in southern Iraq, and building new gas processing plants. It envisages incorporating greenfield projects to be developed in the future, where it would carry out the oil ministry’s strategy to supply the domestic market and export any surplus. The long-term export options presented to the ministry include pipeline exports and LNG.
Iraqi sources said the ministry is analyzing the Shell proposal before launching detailed negotiations. While desperate to stop gas flaring in southern Iraq, the type of contract under which the project could be launched presents problems, as the Anglo-Dutch supermajor is seeking to invest in Iraq’s gas sector under a joint venture with an Iraqi entity at a time when the country still lacks a federal hydrocarbons law.
Shell is also seeking to build on the success it had last year in the Missan fields, where it has managed to raise production from 80,000 b/d to 120,000 b/d under a memorandum of understanding signed in 2004 to offer free cooperation and advice to South Oil Co. Following two study phases in 2005 and 2006, Shell employees worked remotely with Iraqi staff they had trained in the Netherlands — in addition to weekly operational meetings — to carry out on-site work, including installing equipment provided by Shell and debottlenecking existing infrastructure.
Shell has also expressed interest in developing the Akkas gas field, near the Syrian border, which Baghdad and Damascus agreed last year to exploit to export gas to Syria. Industry sources said the nonassociated gas field has an upside potential of some 500 MMcf/d, but difficult reservoirs make it challenging. Four wells were drilled in Akkas before the US invasion in 2003.
By Ruba Husari, Dubai
(Published in International Oil Daily March 6, 2008)