Iraq seeks to harness vast gas reserves

Sept. 9, 2011 at 12:41 PM
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BAGHDAD, Sept. 9 (UPI) -- Iraq is moving toward harnessing its vast natural gas reserves to fuel its power stations and export the surplus, ending the wasteful process of flaring off 70 percent of the gas recovered from oil fields.

Spearheading this effort is a $12 billion deal with Royal Dutch Shell and Japan's Mitsubishi Corp. to capture the huge volumes of gas -- more than 874 million cubic feet a day -- flared off in the giant southern oil fields of Rumaila, Zubair and West Qurna Phase 1.

The two companies will form the Basra Gas Co. with the state-owned South Gas Co.

In addition to proven oil reserves of 144 billion barrels, Iraq has known natural gas reserves of 110 trillion cubic feet, plus another 150 trillion in probable reserves.

The landmark deal, which Baghdad hopes will open up new joint ventures to utilize natural gas in other oil zones, was proposed in 2008 but three years later it's still not been finalized.

Many aspects of the deal remain dogged by uncertainty and controversy. That underlines the tortuous process for such ground-breaking ventures in post-war Iraq, where political fighting between rival political and ethnic groups paralyze the decision-making process on vital projects.

Oil Ministry officials said in July that Shell, Mitsubishi and Iraqi authorities had settled legal issues that delayed the deal for two years, along with political opposition and haggling over gas pricing.

Shell will hold a 44 percent stake in the venture and Mitsubishi 5 percent, with the South Gas Co. owning 51 percent.

The deal now awaits the approval of Parliament and Prime Minister Nouri al-Maliki's government.

Industry analysts say, given the political squabbling in Baghdad, there's nothing to suggest the venture will get the green light any time soon despite its importance in the government's declared drive to modernize and upgrade its energy industry and boost electricity generation in a country plagued by blackouts.

"This is one step in a long process and the next step could be as long as a piece of string," one Western official told the Financial Times.

"A deal is in the government's interests, so it should be earlier rather than later, but at the moment we just don't know."

Several key elements remain unclear, including costs and intended level of gas production.

In a recent presentation to lawmakers, the Oil Ministry listed a production level of 2 billion cubic feet per day. But it's not known whether this is the initial or average production.

The Middle East Economic Digest, published in Dubai, quoted consultant Ahmed Mousa Jiyad, as saying, "There seems to be some ambiguity about what this production capacity means and how realistic its suggested scale is."

That, he said, "would lead to more uncertainty regarding the feasibility."

MEED observed: "The parliamentary oil, gas and natural resources committee held a number of hearings in July and August, with expert testimony on what the deal means for Iraq.

"Questions have been raised on the transparency of the agreement, its feasibility and crucially its cost. The Oil Ministry will have to present a credible response for the project to move forward."

There's another hiccup: security.

A senior security official in Basra warned recently that Iraqi authorities right now are hardly able to ensure the protection of vital energy infrastructure in the south, where 65 percent of the country's oil reserves lie because of a lack of manpower and advanced security equipment.

Developing the infrastructure to handle the planned gas projects, considered so vital to rebuilding the economy after decades of wars, rebellions and international sanctions, will only add to the security problem in the south.

The energy industry suffered heavily during the insurgency that followed the U.S. invasion of March 2003 and the toppling of Saddam Hussein's brutal regime.

It remains a vulnerable target, a danger that will heighten as U.S. forces move toward completing a military withdrawal by Dec. 31.

In June, the Zubair 1 oil storage facility in the south was set on fire in a spate of bombings. Soon after, four bombs were planted -- but found and defuse -- at the Doura refinery south of Baghdad, with a capacity of 240,000 barrels per day

Earlier, Iraq's largest refinery at Baji was bombed and put out of action for several days.

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