Iraq’s cabinet has signed an initial agreement with a consortium led by UK/Dutch oil major Shell to develop associated gas resources in the country’s southern oil fields.

The consortium is now waiting for a date for the signing ceremony, says a source close to the deal.

Negotiations between Iraq’s Oil Ministry, state-run South Oil Company (SOC) and a consortium of Shell and Japan’s Mitsubishi came to a standstill in March. More than a year and a half of talks failed to resolve a number of discrepancies over the main terms and points of the complex deal. The agreement also came in for criticism from other international oil companies over the apparent monopoly it gave Shell on gas produced across the south of the country.

Shell signed a heads-of-agreement deal with the Oil Ministry in September 2008 and was expected to form a joint venture with South Gas Company (SGC). A number of officials in Baghdad had been quoted in recent months as saying the deal was off, but MEED reported on 18 June that the project was back on the table and nearing a final agreement (MEED 18:6:10).

The deal covers collecting associated gas from four fields, Rumaila, Majnoon, Zubair and West Qurna-1. The Oil Ministry says it expects the fields to produce 2.5 billion cubic feet a day (cf/d).

Shell is well placed for the project. In 2005 the company developed a countrywide gas masterplan along with Japan’s Mitsubishi on behalf of the Oil Ministry. The deal is a crucial step in meeting Iraq’s increasing power generation needs. The Oil Ministry estimates that 60 per cent of Iraq’s associated natural gas production, around 700 million cf/d, is flared due to a lack of sufficient infrastructure to use it.

The cost of the project is estimated at more than $12bn and Iraq will be required to contribute a significant share of the funding. Iraq does not have large financial reserves for funding new projects. It faces a budget deficit of 19 per cent for 2010.