6 June 2008
The Iraqi oil ministry and Royal Dutch Shell will launch a second round of talks in Damascus next week on establishing a joint venture in southern Iraq to exploit associated gas, a ministry source in Baghdad told International Oil Daily Thursday. The talks follow a first round of negotiations in late May aimed at concluding a heads of agreement this summer.
The Anglo-Dutch supermajor submitted proposals to the ministry in January and March for a South Gas Utilization scheme. This would involve gathering 600 million cubic feet per day of gas now flared from most of Iraq’s southern oil fields, developing infrastructure for future associated gas production, and marketing the gas — as well as associated liquefied petroleum gas and condensate — inside Iraq and abroad.
“Next week’s meeting should define better the shape of possible cooperation between us and Shell. Both sides are keen to reach an agreement,” the ministry source said.
In the first round — which also took place in Damascus, as it is relatively easy for Iraqi nationals to get to — the two sides set out initial principles for the structure of a joint venture between Shell and South Gas Co. (SGC). SGC would have a controlling stake of 51%, with Shell on 49%. SGC’s capital participation would be in the form of assets, while Shell would contribute cash equivalent to SGC’s holdings. The geographical territory would be defined as the provinces of Thi Qar, Missan and Basrah.
Industry sources estimate that the South Gas Utilization scheme would require investment of $5 billion over the first five years to capture about 1 billion cubic feet per day of raw gas and build LNG facilities with a capacity to produce 400 MMcf/d, or 2.5 million tons per year of LNG. It follows on from a master gas plan that Shell drew up for Iraq in 2006, which provided the blueprint for gas industry development.
“The heads of agreement under discussion will cover the structural and commercial key principles. If we agree in this round, we will fix a date for the signing,” the source said.
One commercial principle under discussion is to sell raw gas to the joint venture and repurchase processed gas. That would enable the joint venture to have direct access to revenues from gas sales, while the government gets its share from selling raw gas, taxes and SGC’s share of profits. The Iraqi source said these ideas are still under discussion and could be fine-tuned next week.
Once signed, the heads of agreement would kick-start engineering and project management while the two sides continue to work in parallel on a definitive agreement, which industry sources said could take up to a year to finalize. Construction would begin once the final deal was inked.
In the short term, the joint venture 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 Bcf/d, releasing some 2 Bcf/d for export after meeting long-term domestic demand.
Iraqi sources believe the South Gas Utilization project would get swift approval from the cabinet, as reducing gas flaring in southern oil fields and channeling the gas for power generation is a government priority. Furthermore, the project does not at this stage include an upstream element, making it uncontroversial. Under the Iraqi constitution, gas, like oil, is state property.
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, because of wars with Iran and Kuwait and international sanctions.
Iraqi sources say about 600 MMcf/d of gas is flared, most from the West Qurna and North Rumaila 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.
By Ruba Husari, Dubai
(Published in International Oil Daily June 6, 2008)