Shell’s Iraq south gas deal back on the table

17 June 2010

Deal could unlock Iraq’s petrochemicals potential

Baghdad’s controversial plan with a Shell-led consortium to develop gas resources in southern Iraq could be back on the table, sources close to the deal tell MEED.

Negotiations between Iraq’s Oil Ministry, state-run South Oil Company and a consortium of UK/Dutch Shell and Japan’s Mitsubishi came to a standstill in March more than a year and a half of talks failed resolve a number of discrepancies over the main terms and points of the complex deal.

But industry sources close to the company now suggest it is nearing a final agreement.

“Shell EPM [Exploration & Production Middle East] is now focusing more on Iraq. The Majnoon field is kicking-off and the South Gas gathering project is back on the table”, says a source close to the company. Shell was not available to comment on the scheme.

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 (MEED 22:9:08).

The gas deal will help develop Iraq’s petrochemicals industry. With international oil companies commencing work on the development of eleven major oil fields, the amount of associated gas that will be produced in Iraq will increase dramatically.

The Oil Ministry reports that approximately 60 per cent of Iraq’s associated natural gas production is flared due to a lack of sufficient infrastructure to use it. Estimates of how much gas is lost to flaring range are up to 700 million cubic feet a day (cf/d). The figure is set to increase as Iraq’s oil production rises.

This is equivalent to 300,000 bottles of liquefied petroleum gas (LPG) a day and 20 million tonnes of carbon dioxide a year, or more than $1bn in lost revenues to the government each year.

Iraqi gas is estimated to contain some 10 to 15 per cent ethane, depending on its field of origin making its use as a petrochemicals feedstock extremely attractive.

“Cheap feedstock will always be used”, says Andy Allen, vice president of global chemicals at Foster Wheeler, speaking at MEED’s Middle East Petrochemicals 2010 conference in Abu Dhabi. “What will they do with all that ethane? They are not going to flare it all”.

It will be difficult for a new entrant to petrochemicals sector competing with the regional incumbents, Saudi Arabia, Iran, Qatar and the UAE.

But analysts in the region are downbeat on Saudi Arabia’s ability to bring online another wave of ethane cracker projects. By 2012 the Kingdom’s ethylene capacity is expected to grow to 18 million tonnes a year (t/y), from 8 million t/y in 2008. Another massive wave of additions over the next decade is unlikely.

According to one source, there may only be five new ethane crackers from the Gulf, “two from Saudi, one from Kuwait, two from Qatar. This will probably leave space for one Iraqi and maybe three Iranian crackers”.

Hassan Ahmed, a New York based consultant at Alembic Global agrees. “Frankly with Iran considering privatising the National Petrochemical Company (NPC) and with the dearth of natural gas in Saudi Arabia - meaning no new crackers coming on-line after the current wave - I think it makes complete sense for Iraq to jump into the petchem game”.

If Iraq moves ahead with its petrochemicals schemes, ethane prices will be critical. “I still think it is difficult, but if they price the ethane really low like the Saudis, around $2 a million BTU [British Thermal Units] or less, then why not go for it?”, asks one executive at a Middle East energy firm.

“If Iraq is getting gas for power, making good money on LNG [liquefied natural gas] and LPG - it may be willing to price ethane at a distressed price”, the source adds.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications