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Analysis: Shell-Iraq gas deal a monopoly

Energy News

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by Ben Lando
Washington DC (UPI) Nov 05, 2008

A secret agreement obtained by United Press International reveals a planned joint venture company between Royal Dutch Shell and the Iraqi Oil Ministry would give the company a 25-year monopoly on the gas industry of southern Iraq.

Shell and the ministry are currently negotiating the terms of the joint venture company. On Sept. 22 the two signed what’s known as a “Heads of Agreement,” basically a rough draft of the contract, a legal framework establishing the management team and the scope, purpose and other details of the company.

Though it’s non-binding, the confidential document is telling.

If the joint venture company is finalized as outlined in the HOA, it would give Shell the largest role in Iraq’s oil and gas sector since the 1960s, when the world’s Big Oil firms were kicked out after 40 years of virtual control of exploration, production, exports, and payments to the government.

The joint venture will be the “sole gas company engaged in business,” as outlined in the HOA, “and providing gas for domestic and export markets and generating revenues from gas marketing activities.”

At the time of the HOA signing, Shell and ministry officials pitched the future joint venture company’s role as utilizing for domestic needs the natural gas currently being wasted in Basra province. Iraq would own 51 percent and Shell 49 percent.

Developing Iraq’s gas resources is important for delivering basic services like electricity and fuel to citizens and business. Iraq’s once top-shelf state-run oil and gas industry was devastated by Saddam Hussein’s misuse, sanctions and nearly three decades of war. Infrastructure and equipment were harmed, and new technology and training were shut out.

More than 60 percent of Iraq’s natural gas production is burned or released into the air or reinjected into the ground because of insufficient infrastructure to transport and utilize the gas. The gas would be helpful for Iraq’s power and otherindustries currently, and more so as the economy grows. Electricity last week supplied only 58 percent of demand, according to the U.S. State Department’s Iraq Weekly Status Report.

The oil and gas sector is in need of new and modern investment, though there’s a dispute over how to proceed: rebuild the once prominent domestic oil and gas industry or allow foreign companies to re-enter the sector.

A new oil and gas law is supposed to set post-Saddam guidelines and regulations for developing the oil and gas industry, but a draft of the law has been stalled for nearly two years. A top roadblock: to what extent foreign companies should be allowed to invest. The oil unions say it should be limited to contracts to help rebuild the Iraqi sector. Others, a decidedly smaller group, favor an all-out reversal of the nationalism that saw Shell and others booted out of the country 40 years ago.

The Shell joint venture is an attempt by the Oil Ministry to walk the fine line, relying on remaining Saddam-era laws, though some have complained the Parliament should have more of a say and the contract should not have been a private negotiation with one company.

According to the previously unseen HOA, “the joint venture will off-take and purchase all Raw Gas produced in the South of Iraq by either the South Oil Co. or any other producer.” The HOA defines “South of Iraq” as the southernmost province — and oil and gas capital — of Basra, though a map appendix to the HOA shows the contract territory extending for an unknown distance into the Persian Gulf “and any other areas as may be agreed by (Shell and the Oil Ministry).”

The joint venture would not focus solely on gas currently being produced in the agreed upon area. As oil production increases, as expected by the ministry, so will the gas; most of Iraq’s gas production is what’s called “associated gas,” found during oil production.

Iraq has the world’s 10th-largest proven gas reserves, according to the U.S. Energy Information Administration, most of it located in southern Iraq. Two to three times more reserves could be found when it is fully explored, and much more expected to be “non-associated” gas, reservoirs independent of the oil.

“The Parties acknowledge that access to non-associated gas is essential to ensure that the aims of the Joint Venture are met,” the HOA states, adding one of the objectives of the company is to “pursue development of non-associated gas fields in southern Iraq according to respective rules and regulations for field development in Iraq.”

According to the HOA, the joint venture will purchase the raw gas from producers — mostly state-owned companies — and process it into products used in domestic and foreign markets.

The agreement does not stipulate whether Iraq’s residents and industries would have first dibs on the gas.

Shell, which has proposed to the Iraqi government a nationwide gas master plan, will create a “high-level evaluation of dry gas export schemes.”

Shell would have the rights to all liquefied natural gas. Although Iraq currently does not have LNG facilities, the HOA tasks Shell with assessing the “feasibility of an early LNG export project.”

All other products, such as fuel for cooking and heating, would be sold to the Oil Ministry, directly to domestic consumers and bypassing the ministry, or exported.

“The products will be sold at prices linked to international market prices,” the HOA states, and the joint venture would pay for the raw Iraqi gas with “a fixed percentage of the revenues received by the Joint Venture for selling products.”

While the HOA does not bind the ministry and Shell to create the joint venture, it is a legal contract for 12 months — with a six-month automatic extension — during which it restricts the Iraqi Oil Ministry from negotiating with any other company or carrying out any work that could be interpreted as competing with the Shell joint venture.

“The ministry shall not pursue any discussions with the intention of entering into a project with a similar scope to that set out in this HOA with any third parties,” the HOA states.

The joint venture would be “of a long term (25 years extendable),” according to the HOA. Iraq and Shell would split the revenue dividends and required investment 51/49 percent, respectively. The joint venture would owe the state a 15 percent tax as well.

Both sides, however, have equal representation on the six-member Joint Management Committee, which was to begin work Oct. 22. All of the JMC decisions must be unanimous, though only one person each from the ministry and Shell is required for quorum.

The JMC will determine “activities” of the joint venture, and Shell and the Oil Ministry will work together “in good faith with each other and shall not participate in any similar activities with any third parties.”

Shell has the option of offering a part of its stake to a third party, and UPI understands Shell is in talks with Chevron. All equipment and “technical and operational support” will be purchased by Shell, which “has developed a strategic alliance with General Electric for the benefit of the Joint Venture.” Mitsubishi Corp. and other companies are negotiating “strategic alliances” as well.

(e-mail: [email protected])


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