Is the Iraqi Government Taking Gas from Oil Companies?

Iraq’s government may pass a $17 billion gas deal that would have the world’s biggest energy companies surrendering most of the gas from Iraq’s southern oil fields to a processing and export project led by Royal Dutch Shell (NYSE:RDSA).

BP (NYSE:BP), Exxon Mobil (NYSE:XOM), China’s CNPC, Italy’s ENI (NYSE:E), and Shell all signed technical service contracts to develop three oil fields — Zubair, Rumaila, and West Qurna 1 — in southern Iraq between 2009 and 2010. Those contracts obliged the oil companies to surrender any gas they did not use to Iraq’s state-run South Gas Company.

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Under the new $17 billion deal, still to be ratified by the Iraqi cabinet, Baghdad has pledged that it will do whatever it takes to ensure the fields supply the Shell-led Basra Gas Company joint venture with all the raw gas and natural gas liquids it needs. “SGC shall procure that all raw gas produced from the dedicated fields (other than utilized gas but including all NGLs) … shall, on and from commencement of operations, be dedicated solely to the venture,” the contract reads.

In a letter of confirmation from the energy ministry attached to the contract, the ministry vows to “ensure that SGC fulfils its obligation to supply and make available to BGC all committed volumes and planned volumes of raw gas, including by making available deficit volumes as needed.”

The contract gives ownership of all gas not used for oil recovery or power generation at the oil fields to the SGC, which will then deliver the raw unprocessed gas to the BGC. The deal requires that 2,000 million standard cubic feet of raw gas be made available to the BGC project each day as part of a plan to boost electricity and domestic industry output. Under the terms of the contract, SGC will be legally required to supply at least 85% of the agreed upon volumes, while BGC will be required to pay for 90% of that volume, whether it chooses to take it or not.

After Iraq’s own gas needs are met, the contract allows the BGC to build and operate a 4-million-tonne per year (mtpa) liquefied natural gas terminal with the remaining stores and, with government approval, another LNG export facility later. If BGC decides to build the LNG terminal, the SGC has to supply it with enough raw gas to produce a minimum of 600 million cubic feet per day of LNG feedstock gas. In turn, an affiliate of Shell (NYSE:RDSA) will buy all the LNG produced at market prices, and would then be able to turn around and sell it anywhere it chooses for at least 20 years, provided it is not to a country embargoed by Iraq.