July 11, 2011 / 12:05 IST
Iraq will sign a final contract with Royal Dutch Shell on Tuesday for a USD 12-billion project to capture flared gas at southern oil-fields, two sources close to the deal said on Sunday.
Iraq's oil ministry, Shell, and Japanese project partner Mitsubishi have solved differences that had delayed the joint venture with Iraq's South Gas Co. since a draft agreement was struck in 2008.
"We have agreed on everything. The initial signing is on Tuesday," said an Iraqi oil source.
The final version of the contract, which has been held up by legal problems and political disagreement, will be sent to the cabinet for approval after it is initialled this week, another source close to the deal said.
The joint venture, named Basra Gas Co, would be at the forefront of Iraq's plans to modernise its energy facilities and boost oil exports that hover around levels seen before the US-led invasion in 2003. The Iraqi government will hold 51% of the venture.
Iraq has struggled for years with power blackouts and risks years of electricity shortages until associated gas from vast oil fields in the south is captured and fed to new power plants.
Iraq is losing 1 billion cubic feet per day of gas through flaring, mostly from the south. Iraq would use the gas produced under the agreement with Shell in the domestic market to help meet rapidly rising demand for electricity and could export the surplus.
Obstacles ahead?
The 25-year development deal would help Iraq capture more than 700 million cubic feet per day of gas currently being burnt off at three southern oil-fields -- Rumaila, Zubair and West Qurna Phase One, auctioned in the first bidding round in 2009.
Baghdad signed a series of deals with international oil companies in 2009 which have the potential to boost its crude output capacity to 12 million barrels per day.
As natural gas builds up in association with rising oil output, pressure is mounting on Iraq to find a solution.
But the three fields are being developed by different companies including, BP, Italy's ENI and US major ExxonMobil, which could create a stumbling block for the Shell gas deal in the future, analysts say.
The oil companies that won the first bidding round 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 re-injection to maintain pressure in the reservoirs to help to boost crude production.
"The oil companies developing these major fields are in charge of the development speed under a very tight deadline. Suddenly you are imposing on them a completely different consortium that somehow has to gather the associated gas," said analyst Samuel Ciszuk of IHS Energy.
"And the question, technically speaking is, how well defined is the boundary?" Ciszuk said.
"The second problem is the actual production of the gas. How much gas will the oil companies feel that they can hand over?" he said.
The Shell joint venture also includes setting up a liquefied natural gas project at a later stage to export any excess gas with a maximum capacity of 600 million cubic feet of gas per day, Iraqi officials had said.
LNG is gas chilled to liquid form for shipping on specially designed tankers.
Iraq's proven natural gas reserves are 112 trillion cubic feet. The OPEC member Iraq auctioned three major natural gas fields to foreign firms last October.
