ANALYSIS-Iraq seeks a plan B if Shell gas deal falters
March 2011
Reuters News
* Gas needed to deal with chronic power shortage
* Iraq flares 1 billion cubic feet per day
* Talks stalled after legal snags, political opposition
By Rania El Gamal
BAGHDAD, March 2 (Reuters) - Repeated delays in talks between Iraq and
Royal Dutch Shell to try to seal a $12 billion deal may force Iraq to seek
other solutions to avoid flaring huge volumes of gas produced as new oil
comes onstream.
Iraq has been working to finalise a joint venture between its South Gas Co,Shell and Mitsubishi since an initial agreement was signed in 2008.
As natural gas builds up in association with rising oil output from Iraq's
southern fields, pressure is mounting on the new Iraqi cabinet to find a
solution.
For now, the gas has to be burnt off, or flared, because there is no
infrastructure to capture it, but if a deal could be reached, more than 700million cubic feet per day could be captured at southern fields to help
deal with crippling power shortages.
The mooted deal between Shell and Mitsubishi has faced some political
opposition in the past.
If the deal is shelved, Iraq may choose to invite other firms to build new
gas facilities for each field or consider asking each of the firms
developing its southern oilfields to develop their own gas infrastructure,
industry sources said.
The latter option would require new contracts to be signed with the
contracting companies such as BP, Italy's ENI and U.S. major ExxonMobil,
because existing deals only cover oil development.
Companies developing the southern oilfields auctioned in the first bidding
round in 2009 -- Rumaila, Zubair and West Qurna Phase One -- are not
required to deal with associated gas.
But they are allowed to use the gas for power needed at the field for oil
operations and reinjection to maintain pressure in the reservoirs and help
to boost crude production.
"There are some pending issues that we need to solve with Shell," said an
official at state-run South Gas Co, who asked not to be named.
"All options are open, but until now nothing has been decided. Our first
priority is Shell's contract, but if it does not work, we can go to the
contracting companies. It will not be difficult for us or for the oil
firms," he said.
CHRONIC POWER PROBLEM
Iraq has struggled for years with power blackouts and the risk is they will continue for years to come.
Using associated gas is a centrepiece in Iraq's master plan to boost
electricity production to keep up with demand that is double the rate of
supply..
Talks between the future partners have dragged on because of legal issues,
but they have not collapsed. Shell has been willing to accommodate
Baghdad's requests for amendments to the draft contract and is still
enthusiastic about the deal.
Both sides plan to meet in the coming days for another round of
discussions, officials said.
"There are different points of view between the two sides on some issues inthe agreement... The deal cannot be delayed any longer," said an Iraqi oilofficial. "The decision would be taken to either to go ahead with it or
halt it completely."
Baghdad signed a series of oil deals with international companies in 2009
which have the potential to boost its output capacity to 12 million barrelsper day by 2017. Most analysts see 6 million to 7 million bpd as a more realistic target.
Iraq plans to increase output to 2.75 million bpd this year from around 2.7million bpd now.
"As oil production goes up, gas production comes up and you are just
starting to see the gas infrastructure falling apart," said an industry
source. "You cannot just ignore the flares, it is just bad business," he
said.
"Companies don't have to (deal with the gas) but actually it makes a huge
amount of sense. You deal with all three things, gas, water and oil, at the same time. The most efficient way to do it is to sort it out by field."
Revamping existing gas compression facilities, many of which are crumbling,and building plants to treat the gas, are some of the options companies are considering.
Some work by the oil ministry is under way in Zubair and West Qurna, which
are being developed by ENI and ExxonMobil, for building new gas compression facilities.
"There are two projects to use the gas from West Qurna and Zubair, and alsorequires new compression facilities to utilise the gas in Rumaila," said the Iraqi oil official. "We are moving ahead with our projects to utilise the gas, we haven't stopped."
Shell's project has its critics among some contracting firms and
politicians who wanted the joint venture to be the subject of a public
tender as were the other oil development contracts.
"It might be quite a tough challenge to coordinate project speed and
progress between Shell's associated gas venture and the international oil
companies on their respective fields," said analyst Samuel Ciszuk of IHS
Energy.
"This is likely one reason why it is proving so complex to negotiate the
fine print in the deal. Where do you draw the line between the contracts,
when the associated gas and oil production infrastructures are so
intertwined? Chances are companies will just be stepping on each others'
toes."