30 April 2008
The Iraqi oil ministry and Royal Dutch Shell aim to sign a preliminary agreement this summer to establish a joint venture to exploit associated gas and channel it for domestic use and export for at least 20 years, Iraqi and industry sources told International Oil Daily this week. Plans include building LNG export facilities.
Industry sources estimate investment of $2 billion-$5 billion would be required over the first five years to gather flared gas and build offshore floating LNG plants that could start exporting 400 million cubic feet per day of gas as early as 2012.
The Anglo-Dutch supermajor submitted proposals to the ministry in January and March for a southern gas utilization scheme. This would involve gathering some 600 MMcf/d of currently flared gas from most of Iraq’s southern oil producing fields, developing infrastructure for future associated gas production, and marketing the gas — as well as associated liquefied petroleum gas (LPG) and condensate — inside Iraq and abroad.
Shell also gave Iraq a choice of commercial options for investment and sharing returns. Iraqi sources said the ministry has opted for the establishment of a joint venture with state South Gas Co., details of which are under discussion with Shell, with the aim of signing a heads of agreement by July.
The preliminary deal would define the area to be included in the long-term agreement, the nature of the joint venture, the length of the agreement and key principles for revenue-sharing.
Once signed, the heads of agreement would kick-start the engineering and project management work. Construction would begin once a final deal is inked. Finalization is expected to take at least a year, but the Iraqi cabinet is likely to approve the deal quickly, as it is not controversial.
“Reducing the amount of gas flared in the south and using it for badly needed power generation capacity is a priority of the government,” one Iraqi official told International Oil Daily from Baghdad.
“Shell’s proposed deal has no upstream element or oil-field development, which makes it more likely to be approved by the cabinet once the minister submits it.”
Under the constitution, gas resources, like oil, are state property.
The south gas utilization agreement would follow on from the master gas plan that Shell drew up for Iraq in 2006, which provided a blueprint for gas industry development.
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 its chance to become a gas exporter in the 1990s because of the damage caused to its infrastructure after wars with Iran and Kuwait and ensuing international sanctions.
Iraqi sources say about 600 MMcf/d of gas is currently flared, most from the West Qurna and North Rumaila oil fields. Gas processing is put at just 400 MMcf/d, limited by the damage caused to degassing and compressor stations and processing plants since the 2003 US-led invasion, and lack of investment before that.
Industry sources estimate that 600 MMcf/d of flared raw gas could yield about 480 MMcf/d of dry gas, 3,420 tons per day of LPG and about 660 tons, or nearly 5,000 barrels, of condensate daily. Those volumes could turn Iraq from an importer to a net exporter of LPG, meeting about 60% of current domestic LPG demand, and provide gas for about 60% of current power generation demand. Revenues from exports of 400 MMcf/d of LNG could yield at least $1 billion per year at current prices, the sources said.
Short term, Shell would focus on reducing flaring and gathering gas at treatment plants in three phases by 2014, with a view to launching modest gas exports in 2012-15. 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, 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.
The ministry plans to tender long-term oil development contracts to international companies this year. These would cover the major southern producing fields, as well as the giant Kirkuk oil field in the north and the western Akkas gas field. It is also renegotiating deals signed with Indian and Indonesian companies before the war that could lead to exploration in the Western Desert.
By Ruba Husari, Dubai
(Published in International Oil Daily April 30, 2008)