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Tuesday, August 16, 2011

Iraq Oil Ministry: Shell, Iraq Gas JV to Produce 2 Bcfpd

- Iraq Oil Ministry: Shell, Iraq Gas JV to Produce 2 Bcfpd

Tuesday, August 16, 2011
Dow Jones Newswires
by Hassan Hafidh

Iraq's gas deal with Shell to capture and exploit associated gas from its giant southern oil fields is expected to produce two billion cubic feet a day, according to an official agreement summary obtained by Dow Jones Newswires Tuesday.

The Iraqi oil ministry signed in July a final draft deal with Shell and Japan's Mitsubishi to develop gas production in southern Iraq. However, in order to become valid the deal still needs approval from the Baghdad government.

The two sides disclosed few details about the agreement when they signed it in July.

The investment required for the 25-year venture--in which Baghdad has 51%, Shell 44% and Mitsubishi 5%--is $17.2 billion instead of the previously announced $12 billion, the document said.

It said some $12.8 billion would be spent on rehabilitation of existing infrastructure and building new ones, while an additional $4.4 billion is required for an liquefied natural gas facility to be built by Shell and Mitsubishi.

The joint venture, called the Basra Gas Company, or BGC, initially would deliver gas to Iraq's domestic market to fuel-starved Iraqi power plants, but would then export the extra gas after meeting local need. The planned LNG terminal would handle the export of 600 million cubic feet a day.

Baghdad needs to contribute $5.236 billion in the venture, some $1.524 billion of which is existing infrastructure. While Shell and Mitsubishi need to contribute nearly $7 billion, and the remaining money will be financed through the venture's returns, according to the summary submitted by Iraq's oil ministry to the country's parliament.

Shell and Mitsubishi are also offering an optional loan of $1 billion to the Iraqi side in the venture, it added.

The joint venture would sell produced gas to Iraq's state South Gas Company, or SGC, at international standard pricing. The crude and gas linked pricing formula in the agreement summary implies that, at Brent price of $75 a barrel, the BGC joint venture would get $3.22 per million British thermal units of dry gas sold to SGC.

But the SGC would have to sell the gas it buys back from the joint venture at just $1.04/mmbtu to Iraqi power plants and industry, meaning the SGC would pay huge subsidies, which would further increase if world's gas prices rise.

Iraq estimates, however, it should still make around $31.1 billion over the 25 years of the project from taxes, fees and the raw gas sales to the joint venture, the document said.

The BGC would use Shell technology to gather and process gas from the giant southern oil fields of Rumaila, West Qurna Phase 1 and Zubair.

Iraq, which has natural gas reserves totaling 112.6 trillion cubic feet, the tenth largest in the world, produces only around 1.5 billion cubic feet a day, with half of that amount is being flared daily, because of lack of infrastructure to produce and market the gas.

Copyright (c) 2011 Dow Jones & Company, Inc.

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