Iraq is counting on early rehabilitation work at southern oilfields to yield a 250,000-b/d export increment late this year, stretching its midstream capacity, while Shell and Mitsubishi's heads of agreement deal to discuss gathering and monetising associated gas in the prolific south is near expiry and—according to some sources—off. Negotiations between the Iraqi Oil Ministry, the state-owned South Oil Company/South Gas Company (SOC/SGC) and IOC partners Shell and Mitsubishi about the comprehensive South Gas Project joint venture (JV) appear to remain almost completely at a standstill, with Electricity Minister Karim Hasan telling Platts that "the deal is off the table, there are no more negotiations". Talks between the sides have failed to resolve discrepancies over the main terms and points of the complex deal, which formally only deals with the gathering, processing, and monetising of gas already produced in the prolific southern Basra region of Iraq. Infrastructure and facilities in the region today are far from adequate, resulting in the current flaring of about 700 mmcf/d of natural gas.
In late 2008 the associated gas output in the Basra region was estimated to stand at around 1.2 bcf/d, with only about 400 mmcf/d being gathered and sent on to regional power plants and the remainder being flared. Since then, early goodwill work and assistance by Shell and partner Mitsubishi for SOC is reported to have cut flaring by more than 15%, mostly through simple pipeline and facility repairs (see Iraq: 26 October 2009: Shell Improves Image in Iraq with Hard Work to Move South Gas Project Forward). The 2008 heads of agreement (HoA) signed with the Iraqi side sketched the framework of a JV in which SOC/SGC would hold a 51% stake and Shell the rest, though 5% of Shell’s share was soon farmed out to partner Mitsubishi, leaving the Anglo-Dutch supermajor with a 44% operating stake (see Iraq: 23 September 2008: Shell Signs Agreement with Iraq for Multi-Billion-Dollar Gas Deal and Iraq: 11 February 2009: Shell Picks Mitsubishi as Partner for Iraq’s Southern Associated Gas Initiative). From the beginning, however, the deal came under sharp political criticism for being too comprehensive and giving one supermajor too much of a monopolistic position with regard to the southern region’s gas resources.
There were also widespread fears that Shell and Mitsubishi would steer as much gas as possible into export projects, possibly neglecting less lucrative rising Iraqi domestic needs as its power sector is slowly rebuilt (see Iraq: 6 November 2008: Shell Faces Increasing Political Pressure in Iraq over Southern Gas Deal). The first of these fears was unfortunately fuelled by initial gaffes from Shell personnel, using the word "concession" as well as other words that are—in Iraq—exceptionally politically charged. Shell has worked hard to erase these from public memory, not least through its provision of large-scale pro bono technical assistance to SOC (see Iraq: 17 April 2009: Shell South Gas Deal Under Pressure as Political Manoeuvring Increases in Iraq and Iraq: 4 September 2009: Shell, Mitsubishi's South Gas Venture to Be Delayed by Politics—Deputy Oil Minister).
Other sources speaking to media since the electricity minister’s remarks have been less gloomy about Shell's HoA, with a senior Iraqi oil official—requesting anonymity—telling Reuters that the HoA "will be extended and the project will be presented to the next government". General elections in Iraq are due on 7 March, and there is little time or political force left in the current government to finalise a deal of such size and importance before then. Nevertheless, with work about to start at the 10 large and supergiant oilfields awarded to bidding oil companies in Iraq’s two 2009 licensing rounds—many of them in the south—the amount of associated gas produced is set to start rising concurrently. Gas reserves in Iraq’s southern Basra region are estimated to make up about 70% of Iraq’s approximate 105.9 tcf of gas reserves. It is believed that an increase of oil production in the south to some 5–6 million b/d (a figure that could theoretically could be reached just through BP and CNPC’s Rumaila field expansion, the Eni-led Zubair expansion and ExxonMobil’s and Shell’s expansion of the West Qurna-1 field) from today’s 2 million b/d would result in an associated gas output of at least 4–5 bcf/d.
Addressing such a vast expansion in associated gas production is therefore crucial for Iraq, but with its very limited supply of skilled personnel, and its poor technological and financial situation, it will have to rely on foreign partners. Hence, the interest in prolonging negotiations should be substantial, especially since the successful award of oil development contracts and their promise of relatively imminent increments and revenue increases appear to have weakened the resource-nationalist sentiment among Iraqi politicians significantly over recent months. Negotiations are stalled mainly because of deep disagreements between the two sides on two issues, Dow Jones was told by a senior Iraqi Oil official speaking on condition of anonymity. The SGC, which is more or less working out of SOC for the moment, does not have the financial muscle to carry its 51% share of investments required—approximately US$3–4 billion—during the first stages of the project. Shell and Mitsubishi are also seeking guarantees form the Iraqi government that their investment will be recovered within a set period of time. Such guarantees the Iraqi government is unwilling to give, given that the JV will not actually own any reserves, but will buy associated gas from the producing companies, treat it, and then monetise it—firstly on the domestic market and then, only if domestic need is saturated, through exports.
Crude production in the south of Iraq, however, is set to rise by at least 250,000 b/d before the end of 2010, SOC’s director-general Dhiaa Ja'afar told Dow Jones. He estimated that BP and CNPC’s Rumaila project would add about 150,000 b/d this year, while the Eni-led Zubair, ExxonMobil-led West Qurna-1, and Shell-led Majnoon should together be able to add a further 100,000 b/d at least. Ja’afar’s estimates of the increased Rumaila output have already been confirmed by the companies concerned, while hopes for the other projects (where initial deployment has yet to get under way) show how rapid early increases through easy repair and expansion could potentially be.
Nonetheless, these rapid increments put the onus on Iraq to start developing its midstream infrastructure and export facilities, where little to no spare capacity currently exists, quickly. As the midstream segment lies outside of the awarded contracts’ scope, the cost of those projects—as well as the administrative burden of scoping them out and tendering them to contractors—falls squarely on the Oil Ministry and its operational companies. While Iraq’s southern Basra export terminals should be able to handle increments of the size seen by late 2010, the pipelines in the south might well find it difficult to cope with increments above an additional 150,000–200,000 b/d, even after some initial simple repairs.
While quick increases in Iraq’s oil output are approaching, the pressure on the Iraqis to repair and expand midstream facilities is growing, as IHS Global Insight has previously reported. A long-depleted skills bank within the state industry means that the vast amount of large- and small-scale planning, design, and tendering processes required will represent a stiff challenge, especially given the tightening deadlines.
From that perspective, the associated gas deal is also becoming more and more urgent, as every incremental barrel produced in the south in theory is accompanied by an amount of associated gas which, in the absence of gathering, processing and monetisation facilities, will go directly to be flared, literally burning away vast and increasing amounts of Iraqi natural resources every month. Given that the Iraqi state industry will find it hard to meet the midstream development goals required of it, it will most certainly lack the resources to deal with associated gas for a good few years yet, placing Shell and Mitsubishi in a good position to hold out for a prolongation of the HoA and new negotiations following the early March elections.
