Developing Iraq's gas reserves would also go a long way to alleviating the country's chronic shortage of electricity generation that has in recent weeks triggered violent protests, particularly in the energy-rich south.
Power generation will be a vital component in Iraq's ambitious postwar reconstruction program.
Under the new contract, Shell will collect large amounts of gas from Iraq's southern oil fields. Output is expected to exceed domestic requirements and Shell may be able to start exporting gas in liquefied form as early as 2015 or 2016.
That would fit in well with a time frame outlined by Prime Minister Nouri al-Maliki in mid-2009.
He offered to supply Nabucco, the European Union's flagship project for the development of the southern corridor energy route bypassing Russia, with 15 billion cubic meters of gas a year from 2015.
In January, his government signed a strategic energy agreement with the EU to develop Iraq's gas fields.
The EU said it was ready to help Iraq produce a national gas development plan, develop its electricity grid and "identify sources and supply routes for gas from Iraq to the European Union."
The Europeans are desperate to break their dependence on Russia for their gas supplies, which Moscow has in the past turned off during the winter.
Iraq has been discussing with Turkey, its northern neighbor, about joining the planned 2,000-mile Nabucco pipeline that would funnel gas westward from Central Asia and the Middle East through Turkey to Austria.
That would forge a strong energy link between Europe and Iraq.
"Iraq represents a vital link for the EU's security of supply," EU Energy Commissioner Andris Piebalgs declared when the energy agreement was signed in Baghdad.
Iraq has an estimated 111 trillion cubic feet of natural gas, with much, much more yet to be tapped, industry analysts said. But as with the country's oil fields, these have never been fully explored or exploited.
Only 20 percent of Iraq's oil fields have been developed. These contain the equivalent of 115 billion barrels of crude, the third largest reserves of conventional oil after Saudi Arabia and Iran, and could hold as much again.
An even smaller percentage of Iraq's gas reserves has been developed. But the infrastructure has been so neglected that half of the 1.1 billion cubic feet of associated gas currently produced in the oil fields, is flared off rather than stored or utilized through domestic consumption.
Under the new contract, Shell and Mitsubishi will form the Basra Gas Co, a joint venture with the state-owned South Gas Co.
It will hold a 51 percent stake, with Shell, which is involved with two 20-year oil production contracts with Baghdad, holding 44 percent and Mitsubishi 5 percent.
The gas will be collected from the Basra fields -- as agreed by Shell as far back as 2008 -- as well as four other oil fields that were awarded to foreign companies in two bidding rounds in June and December 2009.
All told this would involve around 700 million cubic feet a day in southern Iraq, utilizing much of the gas that is now being burned off.
Shell officials say that the south's associated-gas supplies may double within three years as oil production increases.
Iraq seeks to boost its current oil output of around 2.3 million barrels per day to 10 million-12 million bpd within the next 6-7 years, rivaling Saudi Arabia as the world's leading oil producer.
The Oil Ministry has invited international energy companies to bid for production deals at three natural gas fields at a gas auction scheduled for Sept. 1 in Baghdad.
The fields are Akkas near the Syrian border, Mansouriya in Diyala province north of Baghdad, and Siba, near the southern border with Kuwait. Their combined reserves total 11.2 trillion cubic feet.
Oil Minister Hussein al-Shahristani has said that some 45 foreign companies that qualified for the two 2009 oil field auctions will be eligible.