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Iraq: Shell's $17 billion gas project 'a milestone'

May 3, 2013 at 2:53 PM   |   Comments

BAGHDAD, May 3 (UPI) -- Iraq has inaugurated a $17 billion natural gas project run by Royal Dutch Shell that the Financial Times hails as a "milestone" in the country's postwar recovery, even as the Oil Ministry is scaling back ambitious oil production targets.

At the same time, there's been a marked downturn in interest in Iraq by major international oil companies as the coalition government of Prime Minister Nouri al-Maliki founders amid never-ending political crises, worsening sectarian bloodshed, spillover from the civil war in neighboring Syria and defiance by independence-minded Kurds who have set up their own independent energy industry.

The total lack of interest by Big Oil at Iraq's fourth licensing round in May 2012 "epitomizes a general disenchantment with Iraq's oil sector," Iraq specialist Guy Chazan of the Financial Times observed in March.

"The country was once the hottest ticket in global energy. But the widely predicted bonanza for Western oil companies in postwar Iraq has failed to materialize.

"Political instability, poor contractual terms and infrastructure bottlenecks have sharply reduced the country's appeal," Chazan noted.

Add to this the failure of successive governments to push an oil law to regulate the industry through the fractious parliament, where it still languishes, or focus on developing an infrastructure to support its grandiose production plans.

Then throw in rampant official corruption, labor unrest and Maliki's efforts to create what many see as a new dictatorship and the reason for the oilmen's disillusionment becomes clearer.

But there are those, Chazan among them, who see Wednesday's start of operations at the $17 billion gas project in southern Iraq, the key zone in the country's fragile recovery, as a turning point, a pragmatic pointer to what might be.

The 25-year joint venture in Basra is a partnership between Shell, which has a 44 percent stake; the state-owned South Gas Co. which has 51 percent, and Japan's Mitsubishi Corp. with 5 percent.

The International Energy Agency, a Western watchdog body on the global energy industry, says total planned investment is $13 billion, with a possible $4 billion for a liquefied natural gas export plant to ship LNG through the Persian Gulf to the energy-hungry Asian market.

The new project, operated by the Basrah Gas Co., is designed to collect and process vast amounts of gas, released during the oil extraction process, from three of Iraq's dozen or so mega oil fields, Rumaila, West Qurna 1 and Zubair.

At present, this gas is burned off in large flares on the oil fields. Some 700 million cubic feet a day -- worth around $2 billion a year -- is thus being wasted.

Oil majors like Shell, ENI of Italy and BP operate the southern megafields but their contracts with the Oil Ministry make no provision for paying them fees to produce the gas they flare off.

These companies "have little commercial incentive to make gas readily available, the IAE observed.

Now, that gas will be captured and processed and used to fuel electricity power generation, which is desperately needed to upgrade and expand Iraq's power sector, battered by decades of war, under-investment and neglect.

The country is plagued by power blackouts and shortages, a major impediment to economic recovery and a cause of widespread discontent.

Amid Big Oil's disenchantment, the government's finally scaling back on the massive oil production target of 12 million barrels a day by 2017 set in 2009, when output was around 2 million bpd.

The aim was to challenge longtime rival Saudi Arabia's domination in oil production and establish Iraq as the global leader.

Iraq's production deals with foreign oil companies were based on boosting output to that level and played a major part in the decisions of Exxon Mobil and others to abandon southern Iraq and go drill in Kurdistan in defiance of Baghdad.

Industry experts had long warned that target was unreachable, a conclusion that became painfully clear with the government's failure to provide the infrastructure to make it possible.

The current target is around 8 million-9 million bpd over a 2017-20 timeframe.

Current output is around 3 million bpd, so there's still a long way to go.

"Reports that some majors are seeking to amend tough contract terms should surprise no one; there is a distinct cooling of oil company appetite for Iraqi risk," observed the Middle East Economic Digest.

© 2013 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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