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Wed 24 Sep 2008 01:15 PM

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Gas proving far less contentious than oil in Iraq

Shell’s latest gas deal may set a precedent for other IOCs.

Shell’s latest gas deal may set a precedent for other IOCs.

Development of the energy sector in Iraq has proven cumbersome and highly controversial. The lack of regulations and oil laws, and the dominance of energy nationalists within the country, has prevented the signing of any production agreements that would enable the country to ramp-up production of oil and gas and thus provide critically needed financial assistance in the war-torn country. Instead, Iraq witnessed a third consecutive drop in monthly oil export rates in August, with only 1.75 million bpd.

Still, the picture is not wholly bleak. News of Shell’s recent signing of a heads of agreement with Iraq’s Ministry of Oil, has raised the hopes of many IOCs. The agreement allows for the establishment of a JV between the South Gas Company of Iraq and Shell for the processing and marketing of all associated natural gas produced in Basra in Southern Iraq.

“I think this provisional agreement is very significant and Shell has been very intelligent in adopting a strategy of pursuing gas contracts, instead of concentrating solely on oil like most other IOCs,” said Samuel Ciszuk, energy analyst – MENA, Global Insight.

In line with the rest of the Middle East, the gas industry has remained very much under the radar in Iraq - this despite the push for energy nationalism in the country. It seems, therefore, that Shell has been wise in its decision to push for gas contracts and has in the process side-stepped many of the issues dominating the oil sector.

Given that Shell will not be involved in the production of gas itself, it is much more likely that it will be able to progress with the JV, despite the lack of a legal framework in Iraq. The JV will simply monetise the gas that someone else has already produced. Such a plan is surely far less politically tumultuous then any agreement pertaining to production and there is still huge financial potential for Shell given its 49% stake in the JV. Regardless, it will be interesting to see if figures promoting energy nationalism within Iraq will pick-up on the deal and wreak any havoc.

For a time, it did seem that developments were being made in developing the oil sector, most notably with Iraq’s Oil Ministry offering short-term one year contracts to IOCs in June. Talks were underway with Exxon Mobil, Chevron, Shell, Total, BP and several smaller companies, but progress was tiresome and the Oil Ministry decided to call off the signing of any deals at the start of September.

Whilst in relative terms, when compared to industry standards, the year long deals were not particularly lucrative, they were still noteworthy. The six deals on offer were for work to increase Iraqi oil production from existing oil fields by approximately half a million bpd and could be seen as an opportunity for IOCs to gain a foot-hold in the energy-rich country.

“It would have been very difficult, and highly contested, to give away such short-term contracts given domestic pressure and a certain amount from the US. Right now the Iraqi government seems content to look for technical service agreements with IOCs rather than production sharing agreements,” explained Ciszuk.

The Iraqi Government’s recent US$3 billion 20-year agreement with China’s CNPC provides evidence of its swerve away PSAs. CNPC had originally signed PSA, but agreed to convert it into a technical agreement and accept a rate of return that looks extremely low by industry standards.

Still, it is understandably, rather difficult to push-forward with any production deals when there are no oil laws in place to regulate and guide. Until they can be determined, the CNPC deal seems to have set the standard for IOCs in regards to what they can expect by way of oil deals. Given the relatively small amount of revenue that is up for grabs in such technical deals, it may well be that the majority of IOCs see too few incentives to enter Iraq’s energy scene.

“If technical agreements turn out to be the main opportunity being offered to IOCs in the energy sector, then it may well be that Shell has drawn one of the few winning lottery tickets in Iraq,” concluded Ciszuk.

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