Iraq accuses Shell of breach of contract

28 August 2013

UK/Dutch Shell Group yet to reach first commercial target at Majnoon oil field costing Iraq $4.6bn

Iraq’s Oil Ministry has threatened legal action against oil major UK/Dutch Shell Group for its failure to start up crude oil production at the Majnoon oil field in the south of the country, accusing it of costing Iraq more than $4.6bn in lost revenues.

In a letter dated 21 July to Hans Nijkamp, vice-president of Shell Iraq Petroleum Development, the Oil Ministry outlines its case against the company. 

According to the letter seen by MEED, crude oil production from the Majnoon oil field has been halted since July 2012 as Shell prepared to rehabilitate the field’s existing surface facilities. This was expected to be completed within four to six months, allowing production to resume in January 2013. However, production has still not resumed.

“Due to Shell’s failure to perform its contractual obligations, despite the best efforts of the Ministry of Oil to support it, the Ministry of Oil considers that Shell is in breach of its contract,” says Oil Minister Abdulkarim al-Luaibi in the letter.

A Shell spokesman says the company has responded to the Oil Ministry’s letter outlining its reasons for the delay, including the unique problem of clearing the field of land mines, along with other logistical challenges.

The date of Shell’s first commercial production target of 175,000 barrels a day (b/d) has shifted from its original January 2013 date. In March, Sharon Poulson, Shell’s finance director in Iraq told delegates at MEED’s Iraq Energy Projects 2013 conference that the target would be reached by the middle of the year. However, Shell has since informed the Oil Ministry it will not be able to reach the target before 1 October 2013.

Shell has been developing the Majnoon field since 2010, when it was awarded a technical service contract in consortium with Malaysia’s Petronas and state-owned Missan Oil Company. The consortium agreed to boost production from its 2009 level of less than 50,000 b/d to a plateau of 1.8 million b/d.

Shell awarded a $240m contract in April 2011 to the UK’s Petrofac for the construction of early production systems at the field, but two trains of 50,000 b/d along with the upgrade of existing brownfield facilities.

“The aggregated loss of production resulting from the field’s shutdown is about 44 million barrels of crude oil”.

“Of course, Iraq continues to suffer losses each day as a result of Shell’s failure to perform its contractual obligations”. The Oil Ministry calculates these at up to $4.6bn, based on oil production of 65,000 b/d from June 2012 up to January 2013, and 175,000 b/d to date.

The Oil Ministry also alleges that Shell has not taken any serious measures to handle associated gas produced at the field, including the construction of a gas processing plant at Majnoon. Shell associated gas plan covered the construction of two plants at Majnoon; a sweet gas compression and dehydration plant with a capacity of 155 million cubic feet a day (cf/d), followed by a 160 million cf/d sour gas treatment plant.

Shell also suggested the construction of a pipeline to transport the produced gas to the Khor al-Zubair processing plant, a plan the Oil Ministry rejected. No tenders have yet been released.

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