South Gas Utilisation Project

In September 2008, international oil company Shell signed a Heads of Agreement (HOA) with the Iraqi Ministry of Oil to capture some of the surplus gas produced during oil extraction at Basra in the south, for a project which later came to be known as the South Gas Utilisation Project. The surplus gas was previously burnt off in a process known as 'flaring', which is estimated to cost US $5 million a day in lost fuel. Shell Chief Executive Peter Voser described the deal as heralding 'a new chapter in the gas industry in Iraq'.

The Joint Venture company established to manage the project was the Basra Gas Company (BGC), a collaboration between the state-run South Gas Company (SGC), Shell and Mitsubishi Corporation. The documents finalising the creation of the BGC were approved by the energy committee at the Council of Ministers in September 2011, and ratified by the Cabinet on the 15 November 2011. Under the agreement, gas was to be supplied from the southern oil fields of Rumaila, Zubair and West Qurna-1 and the lifetime investment was estimated at more than $17 billion. The SGC holds a 51% stake, Shell 44% and Mistubishi 5%. However when reacting to leaked diplomatic cables in 2011, the Iraq Oil Report suggests that in contrast to the transparent and competitive bidding rounds of 2009 and 2010 for oil and gas contracts, the Shell gas deal was brokered behind closed doors and may have put Shell's prerogatives ahead of Iraq's interests.

Operations are to be overseen by a management committee consisting of five representatives from the ministry, four from Shell and one from Mitsubishi. As majority shareholder, the SGC must approve any committee decision.

= Project goals =

Oil Minister Abdul Karim Luaibi has highlighted the important role the BGC was intended to play in Iraq's strategy to boost the country's "chronically underperforming electricity sector". A further goal of the project is to diminish the environmental and public health impact of gas flaring.

In the short-term, the objective is to rehabilitate 30 existing facilities and two major processing plants at North Rumaila and Khor al Zubair previously operated by the South Gas Company. But as oil production increases, there will be total investment of US $13 billion, with the possibility of an additional $4 billion for an LNG export plant if there were to be sufficient surplus gas after domestic needs had been met. The objective for throughput is 20 billion cubic metres (bcm) of gas per year.

= Obstacles =

Despite the deal finally being brought to a conclusion in 2011, the project continued to face opposition from key local stakeholders. The Basra provincial council has threatened to file a lawsuit against the deal, claiming that local officials were not involved in the negotiations and did not have the opportunity to secure guarantees of social investment. This is a claim denied by Shell management, however Iraq Oil Report suggests that the validity of the Council's objections was acknowledged by one of PM Nouri al-Maliki's top oil advisors.

The question of how to align the interests of the various parties involved present a further challenge. As of December 2011, the issue of the relationship between the BCG and the operators of the fields in question (including BP, ExxonMobil and Eni) still needed to be resolved. There was some disagreement on who has first rights to the associated gas produced at the fields. Analysis by the International Energy Agency (IEA) expands on this challenge, arguing that as the technical service contracts signed for fields supplying gas to the BGC do not include a remuneration fee for gas production, the contractors have little commercial incentive to make gas readily available. However they do have an incentive to use the project to promote a strong public image on the question of flaring.

In addition the project presents complex economic problems. Low domestic gas prices (fixed at just over $1 per million British thermal units, MBtu) do not offer sufficient value to underpin the investment required, according to the IEA, meaning that the BGC must rely on returns earned from the higher value of natural gas liquids extracted from the raw gas (condensate and LPG), which command a higher price than the domestic gas price.

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