Iraq, Shell Resolve Last Obstacle to $12B Gas Deal -Official

BASRA (Dow Jones Newswires), March 29, 2011

The Iraqi Oil Ministry and Shell have removed the last obstacle preventing them from signing a long-awaited $12 billion joint-venture deal, a senior Iraqi oil official said Tuesday.

The main dispute was over the rights of export. Shell, along with its partner Japan's Mitsubishi, wanted to handle exports, while under current Iraqi hydrocarbon laws the Iraqi State Oil Marketing Organization should do so.

"The issue is nearly resolved," Ali H. Khudhier, head of the state-run South Gas Company told Dow Jones Newswires in an interview in his office in Zubair, south of Basra.

"Shell wanted to handle exports, but now it is agreed that SOMO would handle export," he said. Shell, however, has asked for further discussions as it needs to install an export mechanism, he said.

Last week, the energy committee at the Iraqi council of ministers asked the Oil Ministry to review the Shell draft deal which aims to capture and exploit millions of cubic feet a day of gas flared from four super-giant oil fields near Basra.

The gas project is crucial to Baghdad's ambitious oil expansion that will also boost much-needed power generation in Iraq.

"Once the energy committee approves the recent changes, we need to sit with Shell to adjust these changes in the draft contract," Khudhier said. He preferred not to give a specific date for signing the deal, but he said it could happen in a matter of weeks.

The joint venture--Basrah Gas Co, or BGC--will process associated gas produced from three supergiant Iraqi fields--Rumaila, West Qurna 1 and Zubair--all located in Basra. The three fields are being developed by international oil companies.

"We are expecting these three fields to produce up to 3 billion cubic feet a day in the coming six to seven years," Khudhier said.

In total, the three fields are currently producing some 1.05 billion cubic feet a day, but only 450 million cubic feet a day are utilized while the rest is flared, he said.

The project is vital to Shell's strategy of positioning itself as a leading gas supplier and producer in the Middle East. After domestic needs are met, an LNG terminal will be built in the Gulf to handle the export of 600 million cubic feet a day.

"The extra gas will be exported to East Asia and Gulf states including Kuwait and the United Arab Emirates," Khudhier said.

He also said Iraq could revive a disused pipeline to export gas to Kuwait. "If the Kuwaitis want to import gas from us, we are ready to supply them," he said. Iraq used to export an average of 200 million cubic feet a day gas to neighboring Kuwait, but sales were suspended when Iraq invaded its neighbor in 1990.

Iraq is home to 126 trillion cubic feet of gas, but produces only around 1.5 billion cubic feet a day--of which 700 million cubic feet a day are burned for lack of infrastructure.

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