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Thu 23 Oct 2008 04:00 AM

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Iraq flared gas is lucrative opportunity

Shell VP speaks exclusively to Oil and Gas Middle East in the wake of Iraq agreement.

Shell VP speaks exclusively to Oil and Gas Middle East in the wake of Iraq agreement.Iraq's Ministry of Oil and Royal Dutch Shell have signed a landmark Heads of Agreement (HOA) to establish a joint venture between South Gas Company and Shell, for the processing and marketing of natural gas produced in the Governorate of Basra in southern Iraq.

In an area covering some 19 000 km2, the JV will purchase roughly 700 million ft3 of natural gas from upstream operations that is currently being flared. It will also own and operate existing gas gathering, treating and processing facilities, repair non-functioning assets and develop new facilities.

"This deal was the result of many years of work with Iraq and the Ministry of Oil. We started with a joint plan with the Ministry in 2005, creating a large database of resource prospects for gas, the domestic demand and current infrastructure. We then built an idea of the potential gas sector in Iraq, and decided it could be a major player in the region," said Mounir Bouaziz, vice president for gas and power MENA, Shell.

The JV structure is the model chosen by the Ministry of Oil as the vehicle to create a world-class natural gas industry in Iraq. South Gas Company will be the 51% majority shareholder in the JV, with Shell holding 49%.

The deal follows the approval of the Iraq Council of Ministers on 7th September 2008.

"Initially the Iraq government came to us and said we are flaring a lot of gas in the south, so we would like Shell to focus on coming up with a proposal," said Bouaziz. "Our proposal was based on dealing with the gas in specific locations and creating specific projects. They then came back and said they wanted Shell to look into JV with the South Gas Company, to look after all the gas and infrastructure in the province."

When asked whether now was a good time to be entering into a politically unstable Iraq which has yet to finalise a legal framework allowing IOCs to develop the upstream sector, Bouaziz explained that months of assessment and planning were done before making the decision, and that the deal structure meant that it could be based on existing legislation.

"We did not need the new petroleum law which still has not been approved, as the agreement is based on existing legislation. There is particular law 22 in Iraq 1997, which gives the right to public companies to enter into a JV provided it continues the same line of business. The Iraqis were the ones who came to us saying the gas industry was not looked after in the same way as oil, and that they wanted to bring the gas operations to international standard and play a key role in the sector, both regionally and internationally," explained Bouaziz.

While the decision to be operational in a country with escalating violence in recent months seems unwise, Bouaziz states that the decision was not made lightly and that mitigation plans have been put in place.

"There has been months of assessment, planning, and devising mitigation plans. So far the situation is reasonable, and our belief is that investments and the improvement of the business environment will contribute to stability and bring security to Iraq," said Bouaziz.

"The benefit of this deal and similar deals in the region would be an improved business environment - creating more jobs and creating smaller companies. Today we have an office in Basra and we have crews visiting the sites and doing initial engineering assessments. I haven't seen another IOC that advanced in terms of their execution in Iraq," he concluded.

Shell has now been given one year to 18 months to work on implementation agreements.

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