Contract model will reap rewards in Iraq

26 September 2008
Baghdad can offer incentives to attract enough firms to push ahead with the overhaul of its energy sector.

The signing of the UK/Dutch Shell Group’s long-awaited gas deal with Iraq marks an important step in the rehabilitation of the country’s energy industry.

Although relatively modest by international standards, the deal covering 700 million cubic feet a day of flared gas is the first between an international oil company and Baghdad since the US invasion of 2003.

It also provides a strong indicator to other oil majors about the type of contracts on offer in the country, in the continued absence of an oil law.

When Baghdad re-signed a deal with China for the development of the Al-Ahdab oil field in August, it was for a 20-year period at an initial price of $6 a barrel, which will fall to $3 a barrel as investments are recouped.

The Shell deal is an equally significant signpost for oil majors in that the firm’s joint venture with the state-run South Oil Company does not include ownership of reserves or actual production assets. Crucially, however, Shell has retained the right to develop a liquefied natural gas facility to export natural gas not needed domestically.

While oil majors that expect to bid for long-term oil field deals later this year are almost certainly going to be subject to the same service-deal constraints, the export deal shows there is room for manoeuvre.

More importantly, with the country’s oil law still in deadlock, the Shell contract is likely to hold firm regardless of regional squabbles over how oil revenues should be divided.

The Shell deal shows that while oil majors are unlikely to be offered everything they want, Baghdad can offer sufficient incentives to attract enough firms to push ahead with the overhaul of the country’s energy sector.

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