Iraq sets final deadline for Shell gas deal

01 June 2011

Deal to capture flared gas first signed in 2008

Iraq’s oil ministry has given oil major UK-Dutch Shell until 5 June to finalise negotiations for a $12bn-plus deal to utilise flared gas in the south of the country, or face losing the scheme entirely.

Deputy Oil Minister Ahmed al-Shamma warned that Shell’s South Gas Project, which was first signed in 2008, would be cancelled, Reuters news agency reports.

The deal, which involves the collection of associated gas from oilfields in the south of the country, would then be referred to the Iraqi cabinet for approval.

The oil major has been waiting for approval from the Oil Ministry since July last year. Since then, negotiations between the Oil Ministry, state-run South Oil Company and a consortium of Shell and Japan’s Mitsubishi have continued without resolution (MEED 9:7:10).

“The problem is not with Mitsubishi, they are ready to go. And it is not with the ministry, at this point. The problem is coming [from] Shell. They really have chased their tails every time an issue comes up,” says one Baghdad source close to the scheme.

One of the sticking points is Shell’s desire for guarantees on the amount of gas it would receive from the three fields covered by the deal. It will, in effect, have to compete with the fields’ developers, who may use the gas for power generation or reinjection to boost crude production.

“Shell is worried that the project might get small quantities of associated gas from the three contracted fields and, in future, this might affect the economics of the project,” said Al-Shamma.

Movement on the scheme would be a major achievement for the Oil Ministry, which has been roundly criticised for the way the deal was awarded and over the extent of the concession available to Shell, with more than 700 million cubic feet a day of gas produced across the south of the country while it continues to suffer from power shortages.  

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