Iraq Wants Shell to Engage 3rd Party in Gas Deal

AMMAN (Dow Jones Newswires), November 6, 2008

A preliminary agreement between Royal Dutch Shell PLC and the Iraqi Oil Ministry calls on the oil major to bring in another international company to help develop the vast gas reserves in southern Iraq, according to a copy of the contract seen by Dow Jones Newswires.

The Heads of Agreement, signed Sept. 22 in Baghdad, which also shows the deal is much bigger then previously announced and may lead to earlier exports of liquified natural gas from Iraq, has triggered a chorus of dissent from Iraqi politicians and oil industry figures.

The final deal, to be known as the South Gas Development Agreement, "will be only finalized upon the introduction of a new partner," stated the HoA.

According to the Middle East Economic Survey newsletter, Chevron Corp. is believed to be seeking this role. Shell declined to comment on this, and Chevron couldn't immediately be reached for comment.

The HoA, which forbids Iraq from negotiating with anyone else on developing gas in the south for at least a year while terms are finalized, calls for the creation of a 25-year extendable 49%-51% joint venture company between Shell and the state-run South Gas Company.

The HoA also stated the joint venture would cover the governorate of Basra and "any other areas as may be agreed between the parties," contradicting a Shell statement after the signing which said it would cover only Basra.

When the agreement was signed, Iraqi oil officials said the joint venture was meant to utilize only the 800 million cubic feet of gas flared every day in southern Iraq as a byproduct of oil production. However, the HoA stipulates development of non-associated fields in Basra.

"The parties acknowledge that access to non-associated gas is essential," the HoA says.

Basra and surrounding areas contain more than 70% of Iraq's proven gas reserves of more than 3 trillion cubic meters, the world's tenth largest. That reserve can be doubled, or even tripled, if it is fully explored.

Possibility Of Early LNG Exports
Oil ministry officials have several times affirmed the aim of the Shell deal is to meet local needs first and then to export the extra gas, but the HoA calls for Shell to study the "feasibility of an early LNG exports."

Shell insisted part of the produced gas must be exported.

"Joint analysis with the Ministry of Oil shows that the volume of associated gas cannot be utilized fully by current or proposed domestic use," said Shell spokeswoman Kirsten Smart.

Iraq is in dire needs of gas to operate power stations which are currently generating only half of the country's electricity needs. Iraq's Electricity Minister Kareem Waheed said last week Iraq needs to construct at least 6,000 megawatts of capacity over the next two years to meet growing local consumption estimated at 11,000 megawatts a year.

International oil companies have been jockeying for years to establish a presence in Iraq, which has some of the world's largest oil and gas reserves, and help rebuild an industry battered by years of international sanctions and war.

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