BAGHDAD (Reuters) - Repeated delays in talks between Iraq and Royal Dutch Shell (RDSa.L) to try to seal a $12 billion (7 billion pounds) deal may force Iraq to seek other solutions to avoid flaring huge volumes of gas produced as new oil comes on-stream.
Iraq has been working to finalise a joint venture between its South Gas Co, Shell and Mitsubishi (8058.T) since an initial agreement was signed in 2008.
As natural gas builds up in association with rising oil output from Iraq’s southern fields, pressure is mounting on the new Iraqi cabinet to find a solution.
For now, the gas has to be burnt off, or flared, because there is no infrastructure to capture it, but if a deal could be reached, more than 700 million cubic feet per day could be captured at southern fields to help deal with crippling power shortages.
The mooted deal between Shell and Mitsubishi has faced some political opposition in the past.
If the deal is shelved, Iraq may choose to invite other firms to build new gas facilities for each field or consider asking each of the firms developing its southern oilfields to develop their own gas infrastructure, industry sources said.
The latter option would require new contracts to be signed with the contracting companies such as BP (BP.L), Italy’s ENI (ENI.MI) and U.S. major ExxonMobil (XOM.N), because existing deals only cover oil development.
Companies developing the southern oilfields auctioned in the first bidding round in 2009 — Rumaila, Zubair and West Qurna Phase One — are not required to deal with associated gas.
But they are allowed to use the gas for power needed at the field for oil operations and reinjection to maintain pressure in the reservoirs and help to boost crude production.
“There are some pending issues that we need to solve with Shell,” said an official at state-run South Gas Co, who asked not to be named.
“All options are open, but until now nothing has been decided. Our first priority is Shell’s contract, but if it does not work, we can go to the contracting companies. It will not be difficult for us or for the oil firms,” he said.
Iraq has struggled for years with power blackouts and the risk is they will continue for years to come.
Using associated gas is a centrepiece in Iraq’s master plan to boost electricity production to keep up with demand that is double the rate of supply.
Talks between the future partners have dragged on because of legal issues, but they have not collapsed. Shell has been willing to accommodate Baghdad’s requests for amendments to the draft contract and is still enthusiastic about the deal.
Both sides plan to meet in the coming days for another round of discussions, officials said.
“There are different points of view between the two sides on some issues in the agreement... The deal cannot be delayed any longer,” said an Iraqi oil official. “The decision would be taken to either to go ahead with it or halt it completely.”
Baghdad signed a series of oil deals with international companies in 2009 which have the potential to boost its output capacity to 12 million barrels per day by 2017. Most analysts see 6 million to 7 million bpd as a more realistic target.
Iraq plans to increase output to 2.75 million bpd this year from around 2.7 million bpd now.
“As oil production goes up, gas production comes up and you are just starting to see the gas infrastructure falling apart,” said an industry source. “You cannot just ignore the flares, it is just bad business,” he said.
“Companies don’t have to (deal with the gas) but actually it makes a huge amount of sense. You deal with all three things, gas, water and oil, at the same time. The most efficient way to do it is to sort it out by field.”
Revamping existing gas compression facilities, many of which are crumbling, and building plants to treat the gas, are some of the options companies are considering.
Some work by the oil ministry is under way in Zubair and West Qurna, which are being developed by ENI and ExxonMobil, for building new gas compression facilities.
“There are two projects to use the gas from West Qurna and Zubair, and also requires new compression facilities to utilise the gas in Rumaila,” said the Iraqi oil official. “We are moving ahead with our projects to utilise the gas, we haven’t stopped.”
Shell’s project has its critics among some contracting firms and politicians who wanted the joint venture to be the subject of a public tender as were the other oil development contracts.
“It might be quite a tough challenge to coordinate project speed and progress between Shell’s associated gas venture and the international oil companies on their respective fields,” said analyst Samuel Ciszuk of IHS Energy.
“This is likely one reason why it is proving so complex to negotiate the fine print in the deal. Where do you draw the line between the contracts, when the associated gas and oil production infrastructures are so intertwined? Chances are companies will just be stepping on each others’ toes.”