Iraq signs $17 billion gas capture deal

Deal will bring electricity feedstock, LNG export revenue

Shell CEO Peter Voser congratulating Iraq Oil Minister Abdul Kareem al-Luaibi and Mitsubishi's Tetsuro Kuwabara on signing the deal on 27 November. AH
Shell CEO Peter Voser congratulating Iraq Oil Minister Abdul Kareem al-Luaibi and Mitsubishi's Tetsuro Kuwabara on signing the deal on 27 November. AH

After over three years of waiting, the Iraq gas capture deal – worth $17.2 billion – has been signed by Iraq, Shell and Mitsubishi.

Under one of the largest hydrocarbon deals signed by the post-Saddam government, Shell and Mitsubishi will now begin work on capturing the 700 million cubic feet of associated gas flared from Iraq’s West Qurna, Zubair, and Rumaila fields. If used optimally, the gas could almost double Iraq's power generation.

The contract will run for 25 years and is designed to created a giant facility that will eventually process up to 2 billion cu ft a day. It is the subject of a legal challenge by the Basra provincial council on the basis that it does not guarantee enough benefits for the province. Local politicians want to see social spending included as part of the deal.

The $17.2 billion project value with be spent on gas capture facilities, both new and old ($12.8 billion) and – if the option in the contract is exercised – a liquefied natural gas export terminal ($4.4 billion).

Shell and Mitsubishi expect a 15% rate of return from the deal. Iraq is currently thought to lose $5 million a day by flaring, instead of capturing and monetising, its abundant associated gas. The country is reckoned by the US Energy Information Administration to have 15 trillion cubic feet of non-associated gas, only 30% of total reserves.

Iraq will only export LNG once domestic needs are met; the lack of gas feedstock for power generation, despite the huge volumes of associated gas flared, has been a significant cause of antagonism in Iraq, where the population outside Kurdistan typically receives 5-6 hours of electricity a day.

Gas flaring also make Iraq a significant polluter, with flaring releasing, 14 million tonnes per year of carbon diozide into the atmosphere. Flaring is also reported to cause health problems amongst populations near flaring sites. 

The contract will also create the Basra Gas Company, in which the Iraqi government will have a 51% stake through the South Gas Company, Shell 44% and Mitsubishi 5%.

A draft deal was struck in 2008, but had been held up for year after year after disagreements between the parties on revenue sharing, and the inability to progress the deal through Iraq’s sclerotic political system.

The Iraq government negotiated with Shell – and later, Mitsubishi – directly, rather than after a competitive tender process, a move slammed by some Iraqi politicians. Ali Hussain Khudair, the director-general of Iraq's South Gas Company, says an external consultant was drafted in to help resolve the remaining points of difference.

The news that ExxonMobil has signed six production sharing agreements with the Kurdish Regional Government, a move Baghdad has slammed as illegal, is thought to have been the catalyst for getting the deal signed. Shell has honoured Baghdad’s blacklist policy towards Kurdistan despite the tempting terms on offer, walking away from talks with the KRG after the Exxon contracts were announced.

The deal is also yet another gas project for Shell, which this year produced more gas than oil for the first time. The company has expressed a preference for exporting gas from the project to Iraq’s regional neighbours, as demand for electricity feedstock in the Middle East soars.

This strategy would raise Iraq’s standing in the region, but would weaken the prospect of the trans-Caspian Nabucco pipeline, whose proponents are still looking to secure adequate feedstock commitments.

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Oil & Gas Middle East - December 2019

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