Leaked U.S. Embassy cables and candid interviews reveal the story behind Shell's quest to export Iraqi natural gas.
Iraqi Southern Oil Company engineers look towards the natural gas flares in the Zubair oil field in southern Iraq on January 21, 2010. (ESSAM AL-SUDANI/AFP/Getty Images)
By Ben Lando and Ben Van Heuvelen of Iraq Oil Report
Published September 23, 2011 BAGHDAD - Eight months after Iraq committed exclusively to Shell for a controversial multi-billion-dollar natural gas venture, the company's top deal-maker had a frank discussion with American diplomats. Mounir Bouaziz told them that, in his assessment, the Iraqis didn't have the capacity to sit at the negotiating table.
"Bouaziz wryly remarked that Iraqis are still novices with regard to international business deals, but are learning how to deal with international oil companies such as his own," U.S. Embassy officials wrote in a cable on April 2, 2009, which was recently made public by the anti-secrecy group Wikileaks.
In order to avoid a deal that was "too lopsided in its favor," Bouaziz told the diplomats, Shell had found it necessary to provide key Oil Ministry officials with rudimentary economics training "to learn such concepts as net present value and internal rate of return, which had been unknown to them."
That cable — along with three others that have just been released, as well as interviews with Shell officials and people involved with the gas deal — paint an extraordinary portrait of Shell's controversial re-entry into Iraq. Even as the company was pursuing a project that would represent a massive economic and environmental boon to Iraq, it was doing so in secret, amidst the institutional disrepair of a post-conflict state that offered Shell an apparent opening to win lucrative export rights.
The contract is now awaiting the approval of the Iraqi Cabinet. If it passes, Shell and junior partner Mitsubishi will team up with Iraq's state-run South Gas Company (SGC) to form the Basra Gas Company (BGC), which would aim to capture massive volumes of natural gas that are still wastefully flared from Iraq's southern oil fields.
The joint venture would benefit Iraq enormously. It would help stop the environmentally disastrous practice of flaring — and in the process generate billions of dollars in revenue and help alleviate the country's shortage of natural gas, which is the primary feedstock for the underperforming electricity sector.
Shell's head of Iraq operations, Hans Nijkamp, contends that all parties profit under the current draft contract, and says Shell would have been foolish to strike an unfair deal.
"I think everyone would agree it is a very sustainable deal for both sides. And that’s what you need to have. There's no point in thinking you can do an unbalanced deal that will last," Nijkamp said. "We won't work like that, but just as a principle that is not going to work."
But in contrast to the transparent and competitive bidding rounds that the Iraqi Oil Ministry held in 2009 and 2010 for oil and gas contracts, the Shell deal has been brokered behind closed doors. Critics have charged that the noncompetitive and secret process has put Shell's prerogatives — particularly its desire to export gas — ahead of Iraq's interests. And although the draft contract that now stands before the Cabinet is substantially different than the agreement that first drew widespread opposition, the deal remains haunted by its shadowy history.
"We needed quickly to utilize the gas. We needed the technology and the operational and financial instruments a joint venture would bring," said Abduljabbar al-Waggaa, senior deputy oil minister from 2004 to 2007, who was the ministry's point person with foreign companies. "But we did not need to enter the joint venture in the way the Ministry of Oil and Shell cooked up."
Shell's foothold in Iraq
Shell first entered Iraq before it was a sovereign country, as part of the Turkish Petroleum Co. (later the Iraq Petroleum Co.). The company enjoyed monopoly rights to the country's oil fields and dictated the terms of production and development until 1972, when Iraq fully nationalized its oil sector and kicked out the foreign oil companies.
After the U.S.-led invasion in 2003, Shell was among the many oil firms that sought a piece of the world's third-largest proven conventional oil reserves. Most notably, Shell participated in two contract licensing rounds in 2009, winning two deals for super-giant fields in Basra — a majority stake to develop Majnoon, and a minority stake along with ExxonMobil to develop West Qurna 1.
Like other companies, Shell also pursued smaller initiatives to help a fledgling Iraqi oil industry get back on its feet — and to reestablish a foothold in the country. Since 2003, the company has trained hundreds of Iraqi Oil Ministry personnel, conducted studies, donated equipment, and invested $100 million in evaluating and fixing existing gas infrastructure in Basra, which has reduced gas waste by 20 percent.
"Shell was among the early companies who signed an MoU (memorandum of understanding) with the Ministry of Oil. They invested a lot of money in financing projects under that MoU," said Waggaa. "Shell, like a lot of other (international and national oil companies) was hoping that, being a reputed oil company and generous in implementing MoU projects — that the Iraqi government will call on them to develop a major oil field on bilateral negotiations."
As Shell built relationships with Iraqi oil officials, one of its goals was a major southern gas deal.
“Shell has carried on quiet negotiations with Iraqi officials outside Iraq for five years,” American diplomats wrote in a cable on Sept. 9, 2008, after a briefing from Shell officials in Basra. That timeline, which was confirmed by numerous officials involved in the negotiations, indicates that Shell began discussing a gas deal with Iraqi leaders in 2003, long before the country had ratified a constitution or elected a government, while it was formally under U.S. control.
The gas master plan
According to a former Shell official, who spoke with Iraq Oil Report on the condition of anonymity, the company's first key maneuver came in 2004. Shell convinced ministry officials to give it rights to produce a massive study of the country's gas sector and a master plan for its development.
All crude oil production generates some natural gas as a byproduct. In the modern oil industry, this so-called "associated gas" is typically captured and processed. In Iraq, however, where the oil sector has been ravaged by decades of underinvestment, huge volumes of associated gas are simply burned off as waste.
Iraq enlisted Shell to do a comprehensive survey of its gas sector, and then come up with a plan to modernize it.
"With the gas master plan, that was a piece of work done for the Iraqi government at the time because it was very much needed, and indeed Shell as a company has a lot of gas expertise," said Hans Nijkamp, Shell's current vice president and country chairman for Iraq.
After Shell presented its master plan, Iraq "asked a number of companies to come with complete project proposals" to capture the associated gas in Basra that was being flared, Nijkamp said.
But to the extent there was competition for the deal to capture Basra's associated gas, Shell had one enormous advantage: its master plan remained secret. Shell had spent thousands of man-hours studying Iraq's gas sector, while other companies were relatively blind. According to the former Shell official, this was part of the company's strategy.
"That's why Shell was in a unique position and pushed for that agreement — because they knew all about Iraq's gas needs," said one U.S. official familiar with the deal. "It would be a bit unfair, because who else could bid? And if you're not going to publish the results of the gas master plan, who else can study it and offer a counter-proposal?"
Other foreign oil companies were unhappy.
"I think it's fair to say the way in which the contract was negotiated raised some eyebrows," said one person who attended meetings in Basra between Shell officials and American diplomats. "As far as I am aware, Shell does have a good track record in this particular field so it did make sense that the Iraqis would hire them. But as the (southern oil) fields were going up for tender, I think people viewed (the Shell deal) in a less than great light."
The heart of the problem, according to the U.S. official, was the shroud of secrecy that covered the gas master plan.
"If Shell was contracted to do a gas master plan and the results were published — or at least (made available) for companies to purchase to do the analysis — that levels the playing field," said the U.S. official. "What happened was the playing field was never leveled and Shell continued to push for a gas deal."
Nijkamp, who began leading Shell's Iraq operations in March of this year, defended his company's conduct. Any final contract would depend on a detailed evaluation of Iraq's existing infrastructure. And after its gas master plan, Shell was well positioned to undertake such a study.
"The scope of this contract was not easily tenderable from the outset. We spent a lot of money to understand what the scope was, what the project was," Nijkamp said. "Now once we did the assessment of the facilities, then you could really put the contract together in a way that would work for the international investors, Shell and Mitsubishi, as well as the South Gas Co. as the Iraqi partner in there."
Iraqi officials, for their part, were persuaded that the company was highly qualified; indeed, even the deal's critics agree that, if Iraq was looking for outside help with gas development, Shell would be at or near the top of the list.
Waggaa, the former deputy oil minister who oversaw the international oil industry's training program of Iraqi oil staff, recalled meetings beginning in 2003, in which the company touted its industry-leading technology, detailed knowledge of the Iraqi gas sector, and experience developing gas for Oman, Iran, Syria, Saudi Arabia, and Kuwait.
"(They were) pressing hard to have a big slice of the cake in the gas market of Iraq. We knew they were qualified to gain that slice," said Waggaa. But he also criticized Shell for pressing for bilateral negotiations. "They should have encouraged the country towards competitive bidding."
The urgency of the situation trumped any Iraqi misgivings. From the Oil Ministry's perspective, time was of the essence. Iraq was losing 700 million standard cubic feet per day (scf/d); every day, by Shell's estimate, Iraq was watching $5 million go up in flames.
The play for exports
Shell's early maneuvers served one overarching strategic goal, according to the former Shell official: the company wanted to secure the rights for natural gas exports.
"We wanted to cater to a conclusion — to get the Iraqi government to come to a conclusion — that was up front before even finishing phase one of the gas master plan: that Iraq needed no more than 1.8 billion cubic feet per day of gas for local use, and the rest of it will be available for export," the official said.
In effect, the official said, Shell used its position as the author of Iraq's gas study and master plan to shape the Oil Ministry's understanding of its own gas sector.
The master plan and the BGC deal composed a tactical two-step: Shell's study clarified the upper limit of potential Iraqi demand, while simultaneously outlining a development plan that aimed for a much higher production level. The logical conclusion was that Iraq should plan for massive exports.
In 2006, after the completion of the master plan, Shell "started suggesting options" to the ministry, according to Waggaa. The lines blurred between Shell's negotiations and its training initiatives.
Bouaziz told American diplomats that his company had needed to teach its Iraqi counterparts how to use the tools required for such negotiations. Shell had provided six ministry employees with free laptops "and taught them to operate analytical software to be used to assess the financial impact of differing terms and pricing," according to a cable.
Others at Shell gave a higher assessment of Iraqi capacity. Nijkamp emphasized that the ministry had many resources at its disposal.
"The Iraqi government had very capable advisers working with them to put this deal together, including a number of U.S. law firms, some very reputable companies, to look at the economic model, and so I think on the whole the Ministry of Oil was very well equipped to participate in putting this deal together," Nijkamp said. "There is no point in having the illusion that you can be cleverer than the other guy on the other side of the table. The Iraqis know what they're doing."
Shell's negotiations and training sessions led to a meeting in Lebanon in late Aug. 2008, at which Shell reached a framework agreement with Iraqi officials.
Shortly after that meeting, Shell officials told American diplomats that they had won a key provision: half of the gas would serve the domestic market, and half would be exported.
"Over the 25-years of the project, Shell expects to set up an entire natural gas production system, starting from a single base and spreading out, all the way to gas liquefaction plants and port facilities," a U.S. Embassy cable reported. "They cited their 40-year contract for natural gas production with Oman, which has recently been renewed for an additional 40 years, as an example of the successfully proven investment model they hope to use in Iraq."
In another conversation with American diplomats later that September, described in another cable, Bouaziz characterized the export plan as a necessary aspect of the BGC project: "A floating LNG (liquefied natural gas export) facility would allow excess gas to be sold that would otherwise need to be flared or require shut-down of oil-producing wells."
If Iraq developed its gas production as rapidly as Shell's projections suggested, then the country did indeed have to start planning for exports right away. The question was whether the optimism of the gas master plan reflected an unbiased assessment of Iraq's likely trajectory, or whether it described the path of development that would most benefit Shell.
Public opposition
On Sept. 22, 2008, the deal went public as Shell signed a Heads of Agreement (HoA) with the Oil Ministry. The terms of the agreement, however, remained secret — sparking protests about the opacity of the deal, especially in contrast to the open and competitive contract licensing rounds, which the ministry was promoting as a symbol of transparency in the new Iraq.
Iraq Oil Report obtained a copy of the HoA and published it in November 2008. While the document was only a starting point of a final deal that would likely be substantially altered, it did contain several controversial terms.
For one thing, the HoA essentially committed Iraq to moving forward on the joint venture and banned it from discussing associated gas capture or LNG exports with any of Shell's competitors. Other foreign companies were not enthused.
"I think some of the other IOCs were unhappy about Shell taking their flared gas," said one person who attended meetings between Shell and U.S. officials in Basra in 2008.
Moreover, beyond the capture of associated gas in Basra, certain clauses in the HoA seemed to grant Shell the possibility of gaining exclusive rights to the country's entire natural gas reserves, the 11th-largest in the world. According to the HoA, the BGC would be the "sole gas company engaged in business… and providing gas for domestic and export markets and generating revenues from gas marketing activities."
A vocal opposition began to arise. Nationalists disputed the deal outright; Basrawi officials demanded a seat at the negotiating table; and citizens protested that any development should serve the domestic market first. Political opponents of Prime Minister Nouri al-Maliki and his top energy deputy, Hussain al-Shahristani, have rallied against the Shell deal.
The Parliament, led by Oil and Energy Committee Chairman Adnan Janabi, is a leading critic. Janabi has suggested Parliament should officially ban all new oil and gas deals until Iraq can approve new oil legislation, specifically naming the Shell joint venture.
The issue of exports proved to be an especially acute point of controversy. At the time the HoA was signed, Iraq's electricity supply was about 4,200 megawatts, which met 53 percent of estimated demand — a gulf of more than 4,000 megawatts, according to the U.S. State Department's Iraq Weekly Status Report dated Sept. 24, 2008.
By Shell's estimates, the gas then flared from the southern oil fields could produce 3,500 megawatts of electricity, nearly the same as the supply-demand gap. Iraqis largely opposed the notion of allowing a foreign company to lift a key electricity feedstock and sell it abroad when they were spending more than half of each day without power.
In response to the outcry, the Maliki administration repeatedly pledged that Iraq would begin selling gas abroad only after meeting local demand.
But that guarantee did not assuage the Shell deal's critics. They pointed out that Iraq had several options for the potential export of natural gas – most promisingly, through northern pipelines towards European markets – and the BGC deal threatened to prematurely lock Iraq into a method of export it might come to regret.
Still, Bouaziz told American diplomats on April 2, 2009, that there were "no real hurdles to forming the joint venture by year's end." In a July 9, 2009 meeting, Bouaziz was even more optimistic, projecting that the Cabinet might approve the deal by the end of that month.
By the end of 2009, however, the parties remained at an impasse. Shell wanted guarantees that it could export gas as a core method of compensation, but Iraqi law and government policy — not to mention the political climate — dictated that the State Oil Marketing Organization (SOMO) should have sole rights to export hydrocarbons.
A deal takes shape
The HoA had sketched the outlines of the deal, but the two sides did not yet agree on financial and technical terms, nor on the export issue. Shell and Iraqi officials met periodically to push forward the negotiations.
After months of incremental progress, on July 12, 2011, officials from Shell and Mitsubishi met with Iraqi leaders to finalize a draft contract that would be sent to the Cabinet for approval. In contrast to the signing ceremonies that had celebrated deals awarded in Iraq's competitive bidding rounds, this meeting was not public.
The draft contract has not been published, either, though Iraq Oil Report has obtained a copy. In that document, Shell's export ambitions remain alive, but Iraq has limited the scope of the project and gained considerable control.
If the deal is passed as it is currently drafted, the BGC would build a massive offshore facility in the Arabian Gulf to export LNG, which Shell will have sole rights to purchase. Such exports would begin between four and seven years after the start of the project.
The contract does not stipulate that domestic demand must be met first, though it does give Iraq the power to adjust the export timetable.
"The focus of the company in the first instance is to satisfy the domestic market," said Nijkamp. "The process has indeed the provision to put LNG projects into being as well. But the decision to do that is essentially a decision between the international investor and the Iraqi government – the South Gas Company as a shareholder – and they have a veto on whether or not they want to go that way."
Iraq's state-run South Gas Company holds a controlling 51 percent stake in the joint venture, while Shell holds 44 percent and Mitsubishi five percent.
In a recent interview, Ali Khudhier, the director general of the South Gas Co. and signatory to the HoA, said "I would expect the export of invested gas will not begin before 2017."
The BGC would capture and process associated gas from the Rumaila, Zubair, and West Qurna 1 oil fields — a reduction in the project's scope, which originally covered all associated gas production in Basra. Still, the contract anticipates that those fields, whose crude oil production is set to skyrocket, will eventually reach a production plateau of 2 billion scf/d of associated gas.
Some of that supply will be used for reinjection and power generation at the field facilities; much of it will feed the domestic market. And, if exports are fully activated, Shell will have the rights to liquefy 600 million scf/d in feedstock gas and sell it abroad.
Ultimately, the terms of the draft contract give Iraq the option – if it so chooses – to forestall exports until domestic market is fully fed. In effect, Shell has doubled down on its own master plan, which projects that Iraq can boost its gas supply well above demand.
Shell has also made a bet on maintaining good relations with its Iraqi counterparts, who would retain significant authority to shape the project even after a contract is signed. In this sense, even if the terms of the final contract are favorable to Iraq, the controversial history of the deal could itself pose a risk.
"I think Shell should have been wiser to pave the way for a competitive bidding process," Waggaa said, "to gain the approval of the Iraqi oil industry and, importantly, the Iraqi public."
Nijkamp, for his part, was optimistic that skeptical Iraqis would warm to the project once it was under way and its benefits became clear.
"Yes, we run a business like every other oil company, so we need to do projects that have an economic return that works for us," Nijkamp said. "But I think it is the way you go about doing a project that in the end makes a difference."
Ben Van Heuvelen contributed from New York. Ali Abu Iraq contributed from Basra.
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Q&A: Shell's Iraq VP Hans Nijkamphttp://bit.ly/qVdDv7
By BEN LANDO of Iraq Oil Report
SATURDAY SEPTEMBER 24, 2011
BAGHDAD - Royal Dutch Shell might soon become the biggest hydrocarbons investor in Iraq. The company has signed two massive oil deals, and its venture to capture and export associated gas from three super-giant fields in Basra is awaiting final approval.
Shell is leading the development of the Majnoon field and is a junior partner to ExxonMobil on West Qurna 1. Combined, those two projects aim to produce 4.625 million barrels per day (bpd) within seven years – nearly two million bpd more than the entire country is producing now, and a full third of its planned output.
If the Cabinet approves a pending draft contract, Shell will also team up with Mitsubishi and Iraq's state-run South Gas Company to form the Basra Gas Company (BGC), which would capture associated gas from the West Qurna 1, Rumaila, and Zubair fields. According to the draft contract, Shell stands to gain exclusive rights to export 600 million standard cubic feet per day.
Shell is also evaluating the terms of Iraq's fourth contract licensing round, scheduled for January, in which companies will compete for 12 exploration blocks.
Hans Nijkamp, Shell International's Vice President and Country Chairman, sat down with Iraq Oil Report in the company's Baghdad office to discuss the status of its ongoing projects, the controversy surrounding its southern gas deal, and his company's strategy for long-term success in Iraq.
Ben Lando: Let's first talk about the fourth bidding round. Everyone is in the evaluation phase since the data just came out a week ago. What does Shell see right now as the pros and the cons of the fourth licensing round contract as we know about it so far?
Hans Nijkamp: The fourth licensing round is in principle interesting but the challenge will be: can we make this economical under the contracts? We were there as well (at the road show in Amman). We looked at the data and we will continue to evaluate before we make up our mind whether we're going to put a bid in.
BL: How excited is Shell about getting into exploration blocks in Iraq? That's been the big thing, everybody wants to see what is under the soil here.
HN: As a company we're very excited about Iraq in general. It's a big play and that's why we're here. The fields we are already developing like Majnoon and, together with Exxon, West Qurna, those are mega projects in their own right. But of course Iraq has a lot of exploration potential and we are very interested in that. At the end of the day, all these projects have to work on their own merit and I think that's the state where we're at.
BL: Can you do a service contract for exploration blocks? Is that something a company the size of Shell is comfortable risking?
HN: I would say that technical service contract for an exploration block is not ideal. But we are currently evaluating the contract to see if it could work.
BL: Getting to Majnoon, which is the big field that Shell is taking a lead on developing, run me through where it's at right now.
HN: On Majnoon we are in the first phase of the project to get it to first commercial production. When we took the field over it was producing about 45,000 barrels per day. Currently we are at about 75,000. And we're doing all the sort of engineering and construction work to realize first commercial production. We're bringing drilling rigs into the country and hopefully we'll spud the first well in the next couple of weeks.
What's also very good is we get lots of people working on Majnoon as well. We are currently at about 1,200 or so of which approximately 800 are Iraqi nationals from the local community, and that's a real focus area for Shell. At the end of the day, Shell in Iraq needs to become an Iraqi company as much as possible. The only way to get Iraq stable and prosperous again is to get Iraqis into jobs. So that's really where the focus is. We work with our contractors through the whole supply chain to see how we can help that whole process of Iraqization going forward.
But there's a lot of activity origin on in the fields. All the well pads are being made ready. There is construction going on.
Another quite exciting part of the project is the jetty for the Shat al-Arab river which is being built and almost ready. So we will use the river to actually get the equipment and subsets of facilities to the field, rather than the road transport, which in the end is a much better way of doing it than having to send numerous trucks through the existing roads and villages.
BL: What is the size of the jetty? What's the traffic going to be?
HN: I couldn't give you exact numbers in terms of capacity but the jetty will, we will put whole modules of facilities so it's almost like a Lego kit: you put the whole model of the facility on a barge, and then take it off at the jetty, put it on very big trucks who then take it to the fields where it will be offloaded by crane. The average load size is actually a lot bigger than what you would put on the truck. And that increases the efficiency again as well.
BL: What is the program through 2012 for this field?
HN: In the simplest form the program for 2012 is to build the production facilities, the new production facilities required for first commercial production – to drill approximately 15-20 wells. There's obviously the existing wells that need to be worked over.How many existing wells are there?
HN: There are 27 existing wells.BL: How many will you work over through 2012?
HN: The focus on 2012 is to drill the new wells. And the existing wells need to be worked over and assessed how good they are and how far they can contribute. But it’s the new wells that will deliver the majority of production. And the surface facilities that we put in place as well: the new in-field pipelines, flowlines, et cetera. There's a lot of activity.BL: What contracts are going to be let to facilitate this over the next year?
HN: It's the pipelines. The FCP (first commercial production) pipelines need to be built, the infield flow lines; it’s the module contracts. And everything of course is managed by Petrofac who is our EPC (Engineering, Procurement and Construction) contractor for this piece of work.
BL: What about the production goal for the end of 2012?
HN: We hope to hit FCP in 2012, so let's say that is the threshold level of 175 (thousand bpd), which will be sustained until the next base of production are added on.
BL: Do you have a target within the seven years before you hit the production plateau target (PPT), what are the benchmark targets until then?
HN: This is very difficult to predict exactly. It all depends on how efficient the project execution will go. You know that in the contract we are targeting 1.8 million barrels (per day) so that's what we're working toward.
BL: What about Corporate Social Responsibility? What are some of the projects you are engaged in?
HN: With the local community the focus is really to get people into jobs. With that we make use of the existing government structures in those communities like the elders, the local development committee which is comprised of SOC, a provincial council representative, a representative from each community, the Iraqi police and Shell, to divide those jobs. It’s a fair distribution across the three communities that are around Majnoon.
Separate from that we also do things like we've installed solar-powered street lighting. In the al-Nashwa we've opened a park in the village which was really very badly needed.
Another thing which I think is actually really important – given the amount of extra traffic that this project development will generate, not just in Majnoon but everywhere in south Iraq – is we've trained 5,000 schoolchildren on road safety, and hopefully the reason to target children is they will talk about this within the families, and hopefully it has a multiplier effect and reaches many more people. So that's a really important piece of work.
HN: The other thing – which you can argue whether it's Corporate Social Responsibility – but we've trained nurses and doctors in clinics, bought new equipment for them, and we do that together with an NGO (non-governmental organization), the Amar Foundation, which is a real specialist NGO in terms of running clinics and training local doctors and nurses. As a company we then underwrite certain usage of that clinic so it has an economic foundation. And at the same time you enable the clinic to be there for the communities as well. We think that is a better way of running clinics than setting up your own and pretending as an oil company we have lots of expertise in that.
BL: A lot of the oil companies in the south experience a little bit of push back from local communities, tribes, workers. Has that been resolved with Majnoon?
HN: Tension with the local communities, if there is any, it is all about, indeed, expectations. How fast can we deliver on expectations of job generation in particular? That's really what a lot of the protests are about, more so than any hands out or old fashioned ways of dealing with communities. I think as long as we can show that we are responsibly trying to generate jobs for the local communities and really make them benefit from our presence there, I think we have a manageable situation.
But the way to do that as well is to make sure we have people in the communities that on the one hand keep the communities informed of what's going on, but at the same time make the management of the project aware of what are the issues that are bubbling in that community so we can deal with things long before they become an issue that is a real problem.
And you know, we have a genuine interest in making it work. We don't do community stuff because we have to do it, we do it because in the end we think that's the only way to develop a big project like Majnoon in that area. It has to work for everyone. It has to work for us as a company, but it most certainly has to work for the Iraqis that live in that area.
BL: Moving on to your other project, West Qurna 1, what about payment for your work there? Since you hit IPT (improved production target) that triggered payment, in either oil or cash. Has Shell chosen either oil or cash, and has that first payment been made?
HN: I wouldn’t want to talk about oil or cash, but payments are coming in and they get split as per the equity percentage, so that works. The only thing we're all grappling with as an industry is just to get the whole bureaucracy set that you have around, getting payments working, to get that all sorted out and set up and working properly. That is early days there.
BL: The first contract in and first to hit IPT was BP. They announced when they actually lifted their first cargo, and CNPC (China National Petroleum Corp.) did as well. It was clear that it was moving, but the bureaucracy was slow and there is a few weeks' lag time in shipments. Is this the same that you're finding for West Qurna 1, that you still can lift but there is a lag time?
HN: Yeah, you can, as you know, you can choose whether you lift or whether you get cash, but the lag time has less to do with that and more to do with getting the whole bureaucracy around payments to work. And that's what we're working on together with Exxon.
BL: Have you received your first payment in oil or cash?
HN: Yes, we received our first payment.
BL: How much was that first payment?
HN: I wouldn't comment on that.
BL: What's the status of the Basra Gas Company?
HN: The status of the Basra Gas Company, I think there's enough in the press for you to be fairly well informed on it, and the status is it has been approved by the Higher Economic Council in the Council of Ministers, so the next step is really to get approval from the Council of Ministers (Cabinet), and we as a company of course are eagerly awaiting that because we really want to get to work.
If you drive around in south Iraq and see all this gas being flared, it is just such a waste of what is a really very valuable resource. If you're either in Basra or in Baghdad you know we only have power a few hours a day, and even now while we talk you can hear the generator outside the window buzzing because the power from the grid isn't available. So it's high time, for the sake of Iraq, that this project gets approved and we can really get to work and implement this.
Every day is a day lost at the moment.
BL: A day lost – quantify that.
HN: A day lost in terms of revenues is like $5 million a day. Almost $2 billion a year. If you would look at the cost of substitution of gas for liquid fuel, then the numbers are becoming mind boggling. From a value point of view it's very important, but it's even more important for pure basic services to the people of Iraq.
We really need to get the whole power generation up and running and for that you need reliable gas as feedstock. The gas is there, but what needs to be done is the facilities need to be upgraded, the facilities need to be expanded to keep pace with the increased amount of associated gas that comes with the increase in the amount of oil production.
BL: As this project was negotiated since the announcement in 2008 with the HoA (Heads of Agreement), you've learned more about the facilities – and with Ernst and Young, catalogued the equipment – you've found out more bad news than good news in terms of the status and need for repair.
HN: Yeah, so what we did was we spent 250,000 man-hours working through the facilities. And these 250,000 man-hours were broadly used to assess the state of facilities and partly used to do sort of early work in terms of reducing the flaring. So easy repairs, et cetera, which already back then reduced the flaring by about 20 percent.
Now once we did the assessment of the facilities, then you could really put the contract together in a way that would work for the international investors, Shell and Mitsubishi, as well as the South Gas Co. as the Iraqi partner in there.
I wouldn't say it's much bad news, you just need to know with a complex setup like this, where you have a central gas-gathering facility with plants in Rumaila, Zubair and West Qurna, lots of pipeline infrastructure, lots of gas plants, you need to know what you're getting into, of course.
BL: What has Shell done to reduce flaring so far and how much does that cost?
HN: We spent about $100 million on engineering man-hours, and some of that was relatively easy work to fix a gas compressor, for example. Some of it was real assessment work of the technical state of facilities. So a lot of money was spent up front to really make an early impact already.
BL: There have been reports that the price tag for this project has gone up to $17 billion. Is that accurate, and why has it gone up?
HN: The price tag hasn't changed. At the end of the day you tender the work and you get the price back for what the market is at the time. This project runs over a period of 25 years. I won't comment on the numbers in the papers, but you can draw your own conclusions from what's out there.
BL: You're saying that you can't fix a price tag because it depends on…
HN: What I'm trying to say, you can today assess the work and what needs to be done and expansion projects and rehabilitation, and you can price that using cost-estimating methodologies over that period of 25 years. You will put these pieces of work out to tender and depending on where the contractor market is, that will determine what in the end everything is going to cost.
BL: The Basra Gas Co. will have the rights to all the flared gas in all the fields from the first bidding round?
HN: Exactly. The scope of the Basra Gas Co. as it's formed is for this associated gas coming from these three license round one fields, and nothing else. So that means also that this model could be replicated a number of times over by Iraq to create further efficiencies in their other gas industry. As you know, the license round two fields, they all have individual requirements to build gas plants. You can question whether that is the most efficient way of doing that or whether you should do a second project like the Basra Gas Co. where you also pool those facilities.
BL: And those contractors could contract with the Basra Gas Co.?
HN: No, so the commercial structure is actually quite straightforward. The license round one contracts hand their gas over to South Gas Comapny, just like today. And the South Gas Company sells the raw gas to Basra Gas Company, and Basra Gas Company sells the products. So in that sense the company works like a refinery: it buys raw gas and it turns it into product and sells the product.
The dry gas, for example, is sold back to South Gas Company to do with it what it wants, or basically puts it back in the gas grid and the majority will be used for electricity generation. But it could also feed a petrochemicals facility, or you can do many things with the gas and products coming out. LPG (liquid petroleum gas), for example – at the moment, Iraq is a net LPG importer. We think that within 12-18 months after we start the company we can turn Iraq into an LPG exporter.
BL: What is the relationship between the Basra Gas Company and those three fields? Does Basra Gas Company have the rights to all the gas?
HN: So the fields, as per the license round contracts, the fields of course have their own gas requirements as well for power generation, or whatever else you might need the gas for in the field. It's only the gas that is left and that is delivered to South Gas Company, who sells it to Basra Gas Company.
BL: The Basra Gas Company – aside from its main responsibility and core mission, which is to capture and utilize gas that is currently being wasted – the company can also expand as it sees fit and has rights to participate in tendering for gas fields, for exploration, et cetera, in Iraq.
HN: What's in the scope is quite clearly defined in the contract, and at the end of the day the Iraqi government decides, because they are 51 percent shareholder in the company and have a veto on every decision, including investment decisions. Similarly for the private shareholders, any project defined under the company, including everything that’s currently its scope, will still need to go back to shareholder approval for investment. But the important thing I think, especially for the people of Iraq as well, is that Iraq is the 51 percent shareholder in this company and has a veto on all decisions effectively, which I think is very important.
BL: In the big cable dump that Wikileaks did recently, it included conversations that Shell officials had with U.S. officials. The way that the U.S. Embassy framed reporting back to Washington in the cables, it seemed that Shell was negotiating with Iraqi officials on a complex deal, while at the same time believing that Iraq lacked the capacity to understand complex deals or to advocate for itself.
HN: First, we aren't going to comment directly on the Wikileaks. But also there is no point in having the illusion that you can be cleverer than the other guy on the other side of the table. The Iraqis know what they're doing, whether on the oil contracts or the gas contracts. They've done extremely well getting all the major IOCs (international oil companies) signing up to upstream development contracts, and it's no different with this gas contract, which is now out in the open.
I think everyone would agree it is a very sustainable deal for both sides. And that’s what you need to have. There's no point in thinking you can do an unbalanced deal that will last. We won't work like that, but just as a principle that is not going to work.
BL: There are, though, criticisms and allegations that Shell used its role in Iraq since 2003 to become the one and only company that could negotiate for the Basra Gas Company deal. Shell was working on the gas master plan, helping with training – some technical, and some to help Iraqis understand the basic modern formulas used for contracts – the kind of modernization that Iraq missed during years of sanctions and wars. And the criticism is that all this work was designed to create a situation where Iraq would take the gas master plan, cookie-cutter it out to create the Basra Gas Company, and Shell would be positioned to negotiate exclusively.
HN: With the gas master plan, that was a piece of work done for the Iraqi government at the time because it was very much needed, and indeed Shell as a company has a lot of gas expertise. You can argue we are the world leader in gas. And in a way it was logical to do that piece of work. There were no conditions attached to the work or anything.
After which the Iraqi government asked a number of companies to come with complete project proposals, and we were one of those companies. And since then, that proposal has been matured further and further into what now is the joint venture agreement for the Basra Gas Company.
I would also say the Iraqi government had very capable advisers working with them to put this deal together, including a number of U.S. law firms, some very reputable companies, to look at the economic model, and so I think on the whole the Ministry of Oil was very well equipped to participate in putting this deal together.
BL: There is one specific part of the cable, where one of your officials was paraphrased by a U.S. government official saying that Shell was conscious that any deal too lopsided in its favor would not survive for long, basically understanding the political situation. How did that come into play in evaluating the political risk of this deal.
HN: Again, we don't comment on Wikileaks. In terms of political risk of working in Iraq, we are dealing with a country which, on all sides, is developing its systems still, so at the same time a company like Shell can really contribute to that effort of getting Iraq back to work properly. And that's what we want to do. Yes, we run a business like every other oil company, so we need to do projects that have an economic return that works for us, but I think it is the way you go about doing a project that in the end makes a difference.
For example, the Bara Gas Company, right from day one, will have almost 5,000 Iraqis working for it, supplemented with a little bit of Shell expertise. In the end, it will result in a lot of Iraqis receiving accelerated training and development in modern gas technology and how you run a modern gas company, and that's exactly the expertise that Iraq needs for its future gas projects. Because there is much more gas already discovered and to be found yet, and over time no doubt Iraq will be a gas exporter to the region and to Europe.
I think however you look at it, this is a very good deal for Iraq as well. And a very sustainable deal.
BL: the project envisions quite quickly, after the contract is signed, the steps will start being taken that an LNG (liquefied natural gas) processing and export facility will be built. How do you decide how much money and effort to put into an export facility when you don't know exactly what the local demand is going to be for the gas?
HN: The focus of the company in the first instance is to satisfy the domestic market. And then any investment decisions thereafter that envisage an export program are – the Iraqi government has essentially the say in that, whether or not they want to do it. But the focus is absolutely to get the domestic market satisfied first, so we can work in sync with the electricity master plan, so we get the whole power generation in Iraq up and running as well.
BL: But the contract states that you will be working to put together the process to start the LNG processing and exports right away.
HN: The process has indeed the provision to put in LNG projects into being as well. But the decision to do that is essentially a decision between the international investor and the Iraqi government, South Gas Company as a shareholder, and they have a veto on whether or not they want to go that way.
BL: This contract and the project itself was discussed at a time when Iraq knew it had this massive need to stop flaring, to modernize its system, and was working with Shell and other companies to do that. But since then, after the HoA was signed, then Iraq changed, and started going for a tendering process, this transparent process – which you guy shave been involved with. Does that change now the political risk assessment for this deal, because it was negotiated bilaterally rather than tendered competitively?
HN: Not really. This deal was negotiated because that's how it started off. It still received all the external scrutiny that was required to create the transparency specifically with the Iraqi decision makers, on whether or not they want to actually do this. So in that sense, I don't think it makes any difference whether it's tendered or negotiated.
What I would say, though, that the scope of the contract – and I already talked about $250 million in man-hours spent – the scope of this contract was not easily tenderable from the outset. We spent a lot of money to understand what the scope was, what the project was. Then to be able to put a deal together that works for everyone.
BL: Shell is looking at Iraq as one of the long plays, if not the major one, over the next 30 to 40 years. What are some of the other projects – what else does Shell want to do in Iraq?
HN: We're doing a lot of things already. We sell, for example, licensed technology to the four new refinery projects and with that comes, apart from the license, a lot of technical support. We sell lubricants on the market in Iraq here through distributors. At the end of the day we are an energy company involved in the full value chain, with specific expertise in integrated gas projects, but also in upstream oil projects in refining, in petrochemicals, so there's a lot of things we could do in the country.
But of course we also have to look at Iraq in the overall portfolio of projects and businesses that we're in on the global scale. I would say Shell is very committed to making things work in Iraq. We have a big position here. We put very good people on the ground here. And with our focus on Iraqization and getting Iraqis into jobs, I think we really can contribute here to getting Iraq back to work.
BL: About Iraqization, aren't you working to put yourself out of a job? Iraqization happened before, starting in the 1950s, and ended with nationalization.
HN: That's true, but you have to stay relevant as an IOC and if you're so irrelevant that you've been nationalized, that's what happens then. Being relevant as an IOC does not mean that you are present with a lot of expats. And particularly in Iraq, where you have very good work force, educated people, who also have kept things running through a long period without any foreign help, we can be relevant here by transfer of technology, training and development, and in the end making sure that Shell Iraq is an Iraqi company.
We already have a lot of Iraqis in the international system that we are now for instance bringing back to work on the Iraqi projects. We recently recruited six graduates in the system which went through the Shell assessment center, and they went through with flying colors and they're now being trained overseas and, in a few years time, will come back.
==================
Author minilots
Date posted today 17:03
Subject Multi-billion barrel Shaikan holds gas potential
Opinion Strong BUY
Votes for this Posting Voted 21 times.
Message
Sitting on top of the 4.9 billion-barrel Shaikan field in the Kurdish region of northern Iraq, Gulf Keystone Petroleum (GKP) is focused on oil exports rather than gas production. But the field is also estimated to hold 1 trillion cubic feet (28.3 billion cubic metres) of gas and, “as we drill deeper, it’s expected we might find an awful lot more”, the company’s finance director, Ewen Ainsworth, exclusively told Interfax.
The gas will be used primarily to fuel GKP’s facilities at the field, with additional volumes used for reinjection to boost oil recovery and “we’d look to sell the gas” as well, Ainsworth said.
GKP raised $200 million through a share placement last week and will use the funds to finance the development of Shaikan, as well as complete front end engineering and design work for a 400,000 barrels of oil per day pipeline to connect the field to the Kirkuk-Ceyhan export pipeline (see Gulf Keystone raises $200 million to prove up Kurdistan reserves).
“While building the oil pipeline we’d look to build a gas line at the same time, meaning we’d have a spine through Kurdistan to deliver gas to different locations,” he said. Another option is for a power developer to build a gas-fired power plant next to the field, while the company may even consider exporting the gas should gas reserves at the field prove sufficient and the Nabucco pipeline project tenable, “But we’ll let other people push on with that,” Ainsworth said, though adding that GKP would get involved “at the right time” if there is enough gas.
In the meantime, the company will prioritise proving up Shaikan’s oil reserves and putting together a development plan for the field. In mid-September it announced the sale of a 20% stake in the neighbouring Akri Bijeel block to concentrate resources on Shaikan and the company has already been approached by several interested buyers, Ainsworth said.
The company has a development team working on various ideas and concepts for developing Shaikan with the aim of finalising the development plan by 2013. “We’ve only got 25 years in which to produce the oil, so we’re looking to ramp up production as quickly and aggressively as possible,” Ainsworth said, adding that the target is to reach between 400,000 and 500,000 barrels per day.
Cushy position
Aside from funding this aggressive development, the Akri Bijeel asset sale and the $200 million fundraising, gives the independent a significant, and necessary, financial cushion. “We have, as part of moving to the main market on the London Stock Exchange, a requirement to show we have funds for at least 12 months,” said Ainsworth. Against the backdrop of today’s turbulent financial markets, it makes sense for the company to be “over financed rather than underfinanced”, he said. And with GKP’s share placement oversubscribed, investors have indicated they would be willing to invest further in the company.
This interest is not expected to falter even if the world economy falls back into recession. “Kurdistan and Iraq are so strategically important for oil that if people have to make budgetary decisions about where they should invest, they’re going to get rid of the marginal and difficult things first and concentrate on the strategically important things,” Ainsworth pointed out.
The region received former BP chief Tony Hayward’s seal of approval in early September. While announcing the $2.1 billion takeover of Turkey’s Genel Energy by his investment fund Vallares, Hayward described Kurdistan as “undoubtedly one of the last great oil and gas frontiers”. The Genel merger is expected to trigger a raft or merger and activity in the region (see M&A in Kurdistan to gather pace).
Attractive offers
Attracted by the growing size and number of deals in the region, a number of large banks have also stepped into the fray. UK-listed Afren’s acquisition of a 60% stake in the Barda Rash license and 20% of Ain Sifni was funded by a $200 million corporate credit facility from French bank BNP Paribas and Russia’s VTB Capital. GKP has already flown a couple of technical teams from banks providing reserve-based lending out to the Shaikan Block. “There hasn’t been a bigger discovery in the world in the last 10 or 20 years. These banks want to be involved in these sorts of assets because they know if there’s a hiccup or things are difficult they will still get their money back [because of the size of the resource in the ground]?,” Ainsworth said. “It provides a lot of financial and technical security for them. It’s an area they want to be involved with, so they have to look very hard for reasons why they shouldn’t.”
Although GKP is not actively looking to buy further assets in the area, it would consider acquisitions should they align with its business strategy. The company’s near-term focus is appraising and developing Shaikan, while waiting for the Kurdistan Regional Government (KRG) and the central government in Baghdad thrash out a final agreement on a federal hydrocarbons law. During this process, the company is likely to be an attractive takeover target, although again, selling out is not an option it is actively pursuing. “This is such a significant asset in terms of size and its strategic importance to the region that someone will likely come along and make an offer for that asset or the company,” Ainsworth suggests. “We see that as something that will happen as a natural course of events rather than something we’re directly engaged in trying to market.”
Although a takeover could happen “anytime”, the element of political risk “means people may think twice before they do something”, he added. However, it does buy time for the company to continue drilling, prove up the value of Shaikan and hike up the share price. Ainsworth, like Hayward at Vallares, is hopeful that a new federal hydrocarbons law will be passed soon.
“There’s no doubt either from the KRG or the companies operating there that these contracts are legal,” Anastasia Vvedenskaya, a consultant with GKP’s Investor Relations department, told Interfax. “The legal process that is taking place in Baghdad is supposed to bring about several pieces of legislation which, according to the KRG, will have to recognise the existing contracts in some way because they believe the right to sign those contracts is in the constitution.”
There are actually more areas of agreement than disagreement over the new law, Tony Peart, the company’s Legal & Commercial Director told Interfax. “It’s down to negotiations over this revision, and we’re talking about revisions [not an entirely draft of the law], so when anyone says we’re suddenly have to replace PSCs with oil field services contracts, I don’t think that’s realistic,” he said.
However, the Kurds are keen to protect their high level of autonomy and have reacted strongly against attempts by the federal government to centralise control. “Who has the final say in the event of conflict is obviously an issue that matters greatly to the KRG,” Peart added. “Is it going to be dealt with by the political parties or is it going to be dealt with by federally appointed independent assessors? That’s the fine detail that needs to be resolved. And there has been a lot of movement towards resolving this.”
http://interfaxenergy.com/natural-gas-news-analysis/middle-east/multi-billion-barrel-shaikan-holds-gas-potential/
====
Article updated: 9/27/2011 7:44 AM
Iraq to boost Majnoon field oil production by 2012, Shell says
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By bLOOMBERG nEWS
Oil output from the Iraqi Majnoon field will increase to 175,000 barrels a day by 2012 from 75,000 barrels a day currently, according to Hans Nijkamp, vice president and country chairman, Iraq, for Royal Dutch Shell Plc.
Ordnance clearance works have so far covered 9 million square meters in Majnoon, he said at the Iraq 2011: Future Energy conference organized by The Energy Exchange in Istanbul. More than 14,000 items, dating back to the Iraq-Iran war in the 1980s, were removed from the oilfield, Nijkamp said.
Read more: http://www.dailyherald.com/article/20110927/business/709279917/#ixzz1ZJMDR3aW
===
Date/Time Subject Author
Thu 22:15
Exclusive:the Shell gas deal contract
SpikeyDT
9
http://www.iraqoilreport.com/energy/natural-gas/exclusive-the-shell-gas-deal-contract-6267/
By BEN LANDO of Iraq Oil Report
Published September 29, 2011
Shell's massive deal to capture and sell natural gas in southern Iraq has sparked an evolving debate. When the joint venture was first announced in September 2008, critics complained of the secret and noncompetitive negotiations that led to the deal; now, the central question is whether Iraq is getting good enough terms.
http://www.iraqoilreport.com/energy/natural-gas/the-secret-history-of-the-shell-gas-deal-6221/
What is not debatable is the cost of doing nothing. Iraq's southern oil fields currently generate huge volumes of natural gas as a byproduct of crude production, and due to a historical lack of investment and infrastructure, the country currently flares 700 million standard cubic feet of this associated gas every day.
Setting this gas on fire is bad for the health of Iraqis and the country's environment, and it's also a waste of money. The gas itself is worth an estimated $5 million per day, and Shell estimates it could fuel 4.5 gigawatts of electricity generation – more than half of Iraq's current capacity and enough to save the country $4 billion that it currently spends on non-gas electricity feedstock.
As an alternative to flaring, Iraq's state-run South Gas Company (SGC) would team up with Shell and junior partner Mitsubishi to form the Basra Gas Company (BGC), which would be responsible for building up the infrastructure to capture, process and ultimately sell associated gas from three of Basra's biggest oil fields.
"Now we are importing gas from Iran and flaring gas in the south," Adnan Janabi, the chairperson of the Parliament Oil and Energy Committee, said at the Iraq 2011: Future Energy conference in Istanbul. "We have no excuse for it."
The draft contract that would form the BGC now stands before the Cabinet, which will soon decide whether to go ahead with the deal.
http://www.iraqoilreport.com/energy/natural-gas/shell-gas-deal-gets-initial-ok-including-exports-5958/
"It is really very necessary to get this project going," said Hans Nijkamp, Iraq country manager for Shell.
The joint venture has been delayed by disputes over both the deal's opaque history and its terms. Iraqi and Shell officials have butted heads over issues including the appropriate return on investment and the rights and prerogatives for natural gas exports.
"If you hold the deal up against the light and look at it, you'll find it’s a balanced deal," said Nijkamp. "It’s the quickest way to stop flaring and provide gas for power generation."
Until now, such a clear-sighted evaluation has been difficult because the details of the deal have remained secret. Public discussion has been based on statements characterizing the terms of the deal, rather than the contract itself.
Iraq Oil Report has obtained a copy of the draft contract. In service of transparency and an accurate dialogue, we now publish both the Basra Gas Development Agreement and the Basra Gas Company Shareholder's Agreement in full.
http://www.iraqoilreport.com/energy/natural-gas/exclusive-the-shell-gas-deal-contract-626
==
Iraq Oil & Gas Contracts 2011
SpikeyDT
Iraq Oil & Gas Contracts 2011
December 12 - 14, 2011
http://www.clocate.com/conference/Iraq-Oil-and-Gas-Contracts-2011/19821/
Dubai, United Arab Emirates
http://www.thecwcgroup.com/training/trainingproduct/index.aspx?id=163&pid=1794
Iraq Oil & Gas Contracts is a course that covers topics such as:
The license rounds petroleum contracts structures
Operator-contractor relationship
The Iraq oil & gas development plan
The necessary legal regime to implement your project
Assess how to implement the most successful strategies for Iraq’s projects
Management of the after contract signature challenges and tasks
Iraq Oil & Gas Contracts brings together Commercial managers, Business development managers, Legal counsels, Lawyers/attorneys, Financiers, Business planners, Country managers and Negotiators with project development or looking to invest in Iraq.
View all hotels in Dubai
VenueNot finalAddressDubai,
United Arab EmiratesMap data ©2011 Google - Terms of Use
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OrganizationCWC GroupEmail
vjolly@thecwcgroup.comWebsitewww.thecwcgroup.com/training/trainingproduct/index.aspx?id=163&pid=1794
==================
Author SpikeyDT View Profile | Add to favourites | Ignore
Date posted today 06:12
Subject Iraq Oil Report-
Votes for this Posting
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Wasted money, global concern over Iraq's persistent gas flaring
http://www.iraqoilreport.com/energy/natural-gas/wasted-money-global-concern-over-iraqs-persistent-gas-flaring-6442/
Girls in al-Sumoud, north of Basra city, stand outside their home and the flares of the Nahran Omar oil field. (ALI ABU IRAQ/Iraq Oil Report)
By ALI ABU IRAQ AND BEN LANDO of Iraq Oil Report
Published November 1, 2011
BASRA - In the 30 years that he's lived in al-Sumoud, near the flaming towers that burn off gas produced from Basra's Nahran Omar oil field, Jumhour Qadir Agha has suffered some of the worst effects of an oil-rich but underdeveloped nation: irritated and infected skin, allergies, asthma and other respiratory problems.
As hydrocarbons and chemicals are incinerated and dispersed into the atmosphere, the flares burn so close to homes here that the air is noticeably warmer than in Basra city, 25 miles to the south.
"When the east wind blows," said Agha, standing outside his house, "we wake up every time to find our homes, our clothes and our faces soaked with black rain."
The gas could be captured and turned into feedstock for power generation, exported to foreign markets, or put to use in industries such as fertilizers and other petrochemicals. The wasted gas itself is worth about $5 million per day, and the opportunity cost of failing to exploit it runs to billions of dollars every year, according to Fabrice Mosneron Dupin, who advises the World Bank on gas flaring.
But Iraq lacks the necessary infrastructure and has made little progress in bringing in equipment or foreign companies that would dim the toxic, metal candles that ring Basra's horizon.
Gas flaring is a global problem on the descent. Crude oil extraction yields natural gas as a byproduct, and produces countries are increasingly monetizing this so-called "associated gas" through a maturing market for the fuel.
But Iraq is the worst offender among those few countries whose flaring is actually on the rise, according to the Global Gas Flaring Reduction (GGFR) project, a World Bank affiliate that coordinates anti-flaring initiatives. By the end of 2011, Iraq will have flared more than 353 billion cubic feet of natural gas, according to Dupin, compared with more than 251 billion cubic feet three years ago. This year's emissions are equivalent to the pollution of 15 million cars, he said.
By contrast, Dupin said, the world, including massive flare violator Russia, has combined for a 22 percent decrease over the past three years.
Iraq's government says it is flaring 700 million standard cubic feet per day (scf/d) in the south and 100 million scf/d in the north, less than 300 billion cubic feet annually.
"We have not increased flaring," said Thamir Ghadhban, the chief adviser to the Iraqi prime minister. Royal Dutch Shell has said the preliminary work it has done in capturing associated gas in Basra has cut down flaring by about 20 percent.
"We reduced it a little bit," said Ghadhban, "but not enough."
The country plans a record-setting increase in oil production over the coming six years – and with it, a jump in the production of associated gas.
"If nothing is done, the increase in Iraq will offset all the gains in the rest of the world," Dupin said, referring to worldwide efforts to reduce gas flaring.
Ghadhban, a two-time oil minister since 2003, disputes the characterization of Iraq, which joined GGFR in 2009, as an egregious offender.
"We were the only country as far as the gas industry is concerned that was subjected to wars and sanctions. I know very well how much problems and difficulties we had in getting equipment and material for the gas industry," Ghadhban said.
He pointed out that, since the 2003 invasion, as Iraq has fought back from the brink of a civil war, the country has been desperate to increase oil production and revenues to rebuild the state. Despite continuous volatility, he said, using dated equipment, Iraq has been able to capture and utilize substantial volumes of gas that would have otherwise been burned away.
"I'm not justifying it to start with. But look at how much Russia and Saudi Arabia flare gas every year and compare it," Ghadhban said.
While Saudi Arabia flares a third as much of Iraq, Russia flares four times as much, according to satellite data by which GGFR bases its estimates of flaring from 2006 through 2010.
But from 2009 to 2010, Russia reduced its flaring by nearly 403 billion cubic feet, to 1.24 trillion cubic feet annually. Over that same time span, according to GGFR data, Iraq increased flaring from 286 billion cubic feet to 321 billion cubic feet. It is the biggest increase of any in the GGFR's list of top 20 flaring nations.
According the GGFR's preliminary 2011 statistics, Iraq will hit about 353 billion cubic feet flared associated gas this year, more than seven percent of the 4.8 trillion cubic feet the world flares each year, making it the fourth largest in quantity after Russia, Nigeria and Iran.
"By far it's the largest country in terms of percentage of gas flared," said Dupin. "They flare more than half the gas produced."
Iraq has increased its associated gas capture capacity in recent years through minor fixes to existing infrastructure, but won't be able to keep pace with oil production plans without spending billions of dollars immediately.
"We need $12 billion over a six year period in addition to the companies now operating within the licensing rounds, which are responsible for investments in the associated gas," said Ali Khudhier, director general of the state run South Gas Company (SGC).
Iraq has a goal of 13.5 million barrels per day (bpd) of oil production capacity by 2017, largely through 11 oil deals with the world's largest oil companies, which would constitute a nearly five-fold increase from today. The government is betting its success at rebuilding the country on the oil sector, which provides 95 percent of state revenues.
Seven of the development contracts are for fields that have never had extensive development, and those deals includes a zero-flare policy.
But the four fields awarded out of the first bidding round place the responsibility on the government to take control of the associated gas. Three of those fields are in Basra – Rumaila, West Qurna 1, and Zubair – and are producing about 1.85 million bpd currently, with a combined plateau target of 6.87 million bpd.
The only full-scale option Iraq appears to be considering to end flaring in Basra province, which accounts for 80 percent of oil production and 90 percent of the country's flaring, is a joint venture between state-run SGC, Royal Dutch Shell and Mitsubishi.
The deal has been in the works since 2007, but opponents of the deal's no-bid process, secret negotiations and economic model have slowed down its approval. It's currently waiting for the Cabinet to give it a final authorization.
The joint venture, prospectively named the Basra Gas Company (BGC), would take associated gas from those three big producing fields – currently 700 million scf/d – and deliver it to domestic or international markets.
"If we finish this utilization contract for gas, when we sign a contract, this (BGC deal) will put an end to (flaring in the south)," Ghadhban said, adding that the resulting associated gas capture would begin "in a matter of a few months" from the signing of the contract.
If the Shell deal is rejected, Khudhier said the SGC is ready to purchase the necessary equipment on its own.
"There are plans to address gas flaring by ratifying the contract with Shell or otherwise," said Deputy Oil Minister Ahmad Shamaa, "and these plans have been in place before the collapse of former regime and had been delayed because of the sanctions."
The GGFR project helps host governments with regulation and monetization options and mechanisms for foreign investment in capturing and utilizing flared gas. Dupin said neither the Wold Bank nor the GGFR project officially supports or opposes the proposed the Shell deal, but generally favors "anything that stops flaring."
"If (the Shell deal) doesn't go ahead, we may lose two, three more years to find another solution," Dupin said.
The infrastructure needed to end flaring is expensive, but the technology involved is relatively simple to install and implement, regardless of the structure of the project, according to Dupin.
Dupin also warned of an additional planning challenge. Iraq will simultaneously need to develop a domestic delivery system to get the newly captured associated gas and related products to industry and end-consumers.
Iraq's hydrocarbons sector has historically been solely focused on oil, and its economy increasingly reliant on it. With a limited capital budget and urgent revenue needs, the government has prioritized crude oil development ahead of gas-flaring reduction.
"Since the (1960s) various governments gave serious considerations and implemented major projects to utilize gas," said Issam Chalabi, Iraqi oil minister from 1987-1990. "It is them who could have utilized south gas by 2005-2006, had they implemented projects included in the ministry's own plans."
Public health benefits aside, however, Iraq has strong economic reasons to make the capture of associated gas a priority. While the flared gas itself represents about $5 million lost every day, Dupin said that figure vastly understates the waste.
"The opportunity cost of not using the gas for petrochemicals or fertilizers or power – it could be much higher," Dupin said. The precise figure is difficult to pin down, but it is "billions of dollars per year."
One of many adverse effects is the impact on agriculture. In terms of revenue, farming comprises a small slice of Iraq's oil-dominated economy, yet it provides more than one in five Iraqi jobs, according to the CIA World Factbook.
In Basra, where families still make a living tilling the dry land, local farmers complain that smoke from the flares has helped kill crops of date palms, a signature product of Iraqi farms. In this losing battle for Iraq's environment and public health, ordinary citizens are suffering most acutely.
"We are living in the middle of hell," Jawad al-Taher, a farmer in the area of Nahran Omar said. "Because of the heat, and sounds like guns as oil pumping vibrates the walls of our homes, we are all losing sleep as a result of this."
Duraid Kadhem lives near the flares, and blames the soot that mixes with the air on killing his two year old daughter.
"She suffered blindness in the beginning, and then cerebral palsy. The doctor told me that the reason for her death was the pollution," Kadhem said. "Oil and gas in Iraq is a curse for all Iraqis. I do not see the wisdom of leaving the gas flaring and wasting millions and killing our children, leaving us with the hardship of life."
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Iraq oil exports 2.088m bpd in October: SOMO
http://arabnews.com/economy/article527269.ece
By REUTERS
Published: Nov 1, 2011 13:55 Updated: Nov 1, 2011 13:55
BAGHDAD: Iraq’s oil exports were 2.088 million barrels per day in October versus 2.101 million bpd in September, the head of the State Oil Marketing Organization said.
Exports were 1.628 million bpd from the southern oil hub of Basra and 460,000 bpd from the northern fields around Kirkuk, which included 8,000 bpd sent overland by truck to Jordan, SOMO chief Falah Alamri said.
“We were expecting a higher export level than the previous month but the bad weather around the Basra ports for the last six days lowered the exports,” Alamri said.
Exports from the Gulf terminals off Basra were 1.63 million bpd last Thursday but dropped sharply the next two days and were halted completely on Sunday before resuming on Monday at a rate of about 960,000 bpd.
The official selling price averaged around $104, he said.
Iraq is pumping about 2.9 million bpd as it pushes to revive the oil sector after years of war in a bid to become one of the world’s top producers.
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Re: Condensate-liquids
RKH.L
32
Condensate is the icing on the cake for a gas development. It is one of the differentiators that can turn an average LNG project into a much more lucrative one.
Dry gas might contain say 1-5 bbl condensate/MMCF of gas.
However a field with a decent condensate yield, like for example Everest or Lomond in the Nth Sea, might have 40 bbl/MMCF. That is 40MM bbl/TCF. So if it was say 3TCF and 50% of the condensate could be recovered then that is 60MM bbl of condensate that comes along with the gas.
Condensate is valuable so at $90/bbl that’s $5.4 Bn of additional income pre-tax/royalty at relatively little extra cost (additional topsides liquids handling and storage which is relatively cheap if the dev concept is ship based).
I haven’t researched what the possibility of this level of condensate yield is but evidently the possibility that it might be a decent yield has got some intrigue. Both PJ and David McManus appeared interested in drilling it if they could justify the high cost.
A major gas discovery would be a long term project but it would have strategic value to a gas player and the indication is that ideally they would like an answer to whether it is there in this drilling campaign.
Regards,
Gramacho
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In Iraq
Gas consumption is set to grow from 1.6bcm to 21.6bcm=763 BCF in 2011-2015, pending project progress at the Basra Gas joint venture and development of non-associated fields. Gas production will grow at a slightly higher rate, and we see pipeline gas exports from 2013. Gas production is set to grow to as much as 33bcm=1166 BCF by 2020, with consumption at around 28bcm by that year.
We forecast that Iraq will account for 10.23% of Middle East regional oil demand by 2015, while providing 20.81% of supply. Iraq's estimated share of regional gas consumption in 2010 will have been 1.44%, while its share of production is put at 1.08%. By 2015, its share of gas consumption is forecast to be 4.67%, with the country accounting for 4.3% of supply.
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Cabinet approves Shell gas deal
http://bit.ly/vcBvUZ
The flares of the Nahran Omar oil field in al-Sumoud, north of Basra city. Iraq approved a deal with Shell on Nov. 15 that aims to reduce the wasteful practice of gas flaring. (ALI ABU IRAQ/Iraq Oil Report)
By STAFF of Iraq Oil Report
Published November 15, 2011
BAGHDAD - Iraq's Cabinet has approved Shell's $17 billion deal to capture natural gas that is currently burned off as a waste byproduct from three of the country's largest oil fields.
"Now, after the approval of the Cabinet, we are going to do the final signing of the contract soon, most likely next week," said a senior Iraqi oil official.
Shell will lead the effort to capture and process 700 million standard cubic feet per day (scf/d) of associated gas from the Rumaila, West Qurna 1, and Zubair oil fields, which is presently lost to the economically wasteful and environmentally disastrous practice of flaring. With crude oil production set to boom, the production of associated gas from those fields could reach 2 billion scf/d.
The contract will create a joint venture called the Basra Gas Company (BGC), in which Shell will take a 44 percent stake, Mitsubishi 5 percent, and the state-run South Gas Company (SGC) 51 percent.
The controversial deal was first announced on Sept. 22, 2008, when Shell signed a Heads of Agreement with the Oil Ministry. Over the past three years, negotiations have stalled amidst political controversy.
Critics have objected to the non-competitive contracting process and secret negotiations that led to the deal, as well as Shell's ambitions to export gas. Under the terms of the contract sent to the Cabinet, Shell could eventually have rights to liquefy and export 600 million scf/d of feedstock gas.
In his statement announcing the deal's approval, government spokesman Ali al-Dabbagh did not say whether the Cabinet had amended any parts of the contract.
Despite the controversy, the deal promises enormous benefits for Iraq by putting an end to the majority of its flaring.
Gas flaring hurts Iraq's environment and the health of nearby residents, who have long complained of illnesses related to their constant exposure to vaporized chemicals.
Failing to capture the gas also costs Iraq huge amounts of money. The market value of the flared gas represents about $1.8 billion every year. Moreover, without those gas supplies, Iraq must import gas and use liquid fuels for power generation – another multi-billion dollar hit against the country's treasury.
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Basra leaders threaten lawsuit
Iraqi South Oil Company engineers look toward the natural gas flares in the Zubair oil field in southern Iraq on January 21, 2010. (ESSAM AL-SUDANI/AFP/Getty Images)
The Basra Provincial Council on Tuesday voted to file a lawsuit challenging the imminent, multi-billion-dollar joint venture between the Iraqi Oil Ministry, Royal Dutch Shell and Mitsubishi.
Officials said they wanted more local involvement in the contracting process, particularly in determining compensation policies – one of several key demands that delayed the deal's approval for more than three years, following a Sept. 22, 2008, signing of a Heads of Agreement in Baghdad.
Iraq's Cabin...
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Southern Iraq's Basra Energy Commission to raise case against Oil Ministry for Shell Contract
11/24/2011 11:16 AM
BASRA / Aswat al-Iraq: The Chairman of southern Iraq's Basra Council, Farid Khalid, has said on Thursday that his Council would raise
a judicial case against Iraq's Ministry of Oil for "its marginalization of the role of Basra's government," during its negotiations and signing
of a contract with the International Shell and Mitsubishi Companies to carry out some projects in Basra Province.
"It was supposed that the Gas Contract should have been signed with Shell in Basra and not in Baghdad, and we did not expect the
opposite," Khalid told Aswat al-Iraq news agency, adding: "Basra's Council was taken by surprise to notice the said act, as we wanted
to add a condition on both Shell and Mitsubishi Companies to carry out some projects for the interest of Basra.".
The Basra Official said that his Council "would raise a judicial case, demanding our constitutional right, due to what Basra is suffering,
due to pollution and absence of farms and the transformation of the soil," adding: "We must get some benefits from those 2 Companies,
such as health and social development projects, etc."
=================
| For info: Full article - Shell gets its Gas deal | |
| Votes for this Posting | Voted  3 times. |
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| Message | |
Signing away the clouds
Nov 30th 2011, 13:54 by H.G.
Yet for this to happen, important hurdles have to be overcome. The joint venture has been awarded rights to the gas from the Rumaila, Zubair and West Qurna fields. But the oil there is already controlled by an assorted group of rival oil and gas giants. The Rumaila field, for instance, is in the hands of BP and its partner, the Chinese National Petroleum Company.
How will these firms and Shell manage the oil and gas production from the reservoir? BP have been clear that they do not want Shell anywhere near their fields, one analyst points out. Rumaila is the most developed of the Iraqi fields and nicely productive for BP. It does not help that Shell beat BP to the gas rights.
Another problem for Shell is government supervision. “You literally can’t change a tap without having it signed off on from above,” notes one observer. This type of regulation is a hang over from the days of Saddam Hussein, when punishments were swift and conclusive. Even today, no one likes taking responsibility for decisions. “Everything has to go up to the top levels of government,” the observer explains.
As a result, increasing oil production is exceedingly hard. The official production target for oil is a staggering—and entirely implausible—12m barrels per day by 2017. Analysts say that Iraq would be lucky to add two million barrels to today’s average of 2.9m without significant extra investment.
On the positive side, the country is in desperate need for more power: intermittent supply has become a major political issue. And electricity generated by gas plants is the quickest solution. But strong domestic demand could keep Shell from exporting liquefied natural gas (LNG)—which is a big reason why it signed up to the joint venture. Shell may not be able to export LNG for at least a decade, experts reckon.
It will not be much consolation for Shell that rivals, too, have their share of problems trying to do business in Iraq. Kurdistan’s long-standing disputes with Iraq’s central government over territory and control of hydrocarbons have deterred big oil companies from moving into this promising region. But because it is pessimistic about the country's southern fields, Exxon Mobil recently signed contracts with the Kurdistan regional government in the north of the country. Predictably, the oil ministry in Baghdad is not pleased that it was bypassed and has threatened penalties, including booting out Exxon from the next round of bidding for oil licenses in 2012. Exxon may be gambling that Iraq’s government cannot afford to kick around a firm so crucial to its long-term pans to expand oil production.
As these examples show, operating in Iraq is risky—even before dealing with a creaking energy infrastructure and parlous security. Yet the rewards could be immense. The country has estimated reserves of around 143 billion barrels of crude oil and 126.7 trillion cubic feet of gas. The oil giants, running out of easy access to the stuff that keeps the world in motion, cannot afford to ignore this vast bounty.
===============
Iraq’s Basra says government blocking share of oil sales
By Raysan al-Fahad
Azzaman, November 2, 2011
Iraq’s oil-producing Province of Basra blames the government in Baghdad for blocking its share of oil sales and revenues.
Under a law issued in January 2010, each Iraqi province is entitled to $1 of each barrel of oil it produces and refines.
Basra stands to reap a substantial sum every year as the bulk of Iraqi oil sales and output, estimated at about 3 million barrels comes from Basra oil fields.
Basra refinery has a capacity of about 150,000 barrels a day.
Under current output and refining estimates, Basra should be entitled to about $90 million a month.
But Basra’s Governor Khalid Abdulsamad said the government has not implemented the 2010 law and his province has yet to enjoy its benefits.
Basra’s share is stashed away in Central Bank coffers because the Ministry of Finance has no instruction on how to release and spend the money, Abdulsamad said.
“Basra’s share of oil royalties is held up due to red-tape and absence of instructions on how to spend them,” he added.
The governor was speaking in a seminar organized by Basra University’s economists on developing a mechanism on how to invest the province’s oilresources once released.
http://www.azzaman.com/english/index.asp?fname=news\2011-12-02\kurd.htm
Reidar Visser | Tuesday, 14 February 2012 18:34 at 18:34 |:
first meeting of the Maliki government outside the capital Baghdad yesterday.
In what appeared to be direct quotes from normally reliable people like deputy PM Hussein al-Shahristani and government spokesman Ali al-Dabbagh, there were suggestions that not only had Basra been granted some kind of special status with minister rank for its governor and enhanced spending powers compared with other governorates. Some even suggested that contractual powers for the oil sector were also included:
Everyone talks about the “spending cap” for governorates, but where exactly has that been legislated? Is it in the provincial powers law of 2008 or in the annual budgets?? This problem in turn relates to the fact that the provincial powers law of 2008 did not really do much to demarcate responsibilities between governorates and ministries in so-called “shared” areas of government (articles 112 and 114 of the constitution). What it did, first and foremost, was to create a sack-and-appoint procedure whereby local politicians were given a say in the appointment of high-level officials of the central administration working in their governorate (health, police, education etc.)
Most commenters dismissed the story about Basra contracting rights as unrealistic, not least given the past record of centralism on the part of Shahristani in particular. What the episode actually highlighted was yet another fundamental contradiction between the Iraq outlined in the constitution of 2005 and the way the country actually works.
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Ruwais Industrial Complex, Shah Gas Field
The project will involve several gas gathering systems, construction of processing trains to handle one billion cubic feet per day gas at Shah to produce 504 million cubic feet per day of network gas, 4,400 tons per day of Natural Gas Liquids, 33,000 bpd of Condensates and 9,200 tons per day of Sulphur Granulation, storage and shipping facility near the plant, in addition to the construction of Sulphur exporting facilities at Ruwais Industrial Complex. Great attention was given during Front End Engineering and Design stages to select state of the art HSE systems and as a result of extensive risk assessment and recovery studies.
The Company aims to successfully develop and operate the Shah Field utilizing the highest engineering standards, optimal construction and maintenance practices, environmentally sustainable safe operating processes, premier technology and leading competitive strategies to fulfill the needs of its customers and ultimately bring increased value to its Owner.
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‘Pakistan will prop Iran against attack’
Fri, 17 Feb 2012 10:44:28 GMT
Amid the US-led publicity campaign on the prospect of an Israeli military strike on Iran, Pakistani President Asif Ali Zardari says his country will support Iran against any foreign aggression, Press TV reports.
Islamabad will also not provide any assistance to Washington over a conflict with Tehran, Zardari told reporters in a joint press conference with his Iranian and Afghan counterparts Mahmoud Ahmadinejad and Hamid Karzai in Islamabad on Friday.
Washington and Tel Aviv have repeatedly threatened Tehran with a ‘military option’ in their attempts to force the Islamic Republic to halt its peaceful nuclear program, which has been closely monitored by inspectors from the International Atomic Energy Agency (IAEA).
Tehran, however, maintains that as a signatory to the nuclear Non-Proliferation Treaty and an IAEA member, it has the right to develop and acquire nuclear technology for peaceful purposes.
The Pakistani president further stated that Islamabad would not permit foreign pressure to affect its ties with Tehran and stressed the importance of implementing a joint gas pipeline project with Iran.
The Iran-Pakistan gas pipeline project is meant to export a daily amount of 21.5 million cubic meters (8.7 billion cubic meters per year) of the Iranian natural gas to Pakistan.
The maximum daily gas transfer capacity of the 56-inch pipeline, which runs over 900 km on Iran's soil from Asalouyeh in Bushehr Province to the city of Iranshahr in Sistan and Baluchestan Province, is said to stand at 110 million cubic meters.
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