Iraq's Southern Gas Company deal with Shell to capture and exploit associated gas from Basra's giant oil fields is expected to produce two billion cubic feet of gas a day, according to an official agreement summary obtained by Dow Jones Newswires late yesterday.
The Iraqi oil ministry signed in July a final draft deal with Shell and Japan's Mitsubishi to develop gas production in southern Iraq. In order to become valid the deal still needs approval from the Baghdad government, which is expected to be granted.
The investment required for the 25-year venture--in which Baghdad has 51%, Shell 44% and Mitsubishi 5%--is $17.2 billion instead of the previously announced $12 billion, the document said.
It said some $12.8 billion would be spent on rehabilitation of existing infrastructure and building new ones, while an additional $4.4 billion is required for an liquefied natural gas facility to be built by Shell and Mitsubishi.
The joint venture, called the Basra Gas Company, or BGC, initially would deliver gas to Iraq's domestic market to fuel-starved Iraqi power plants, but would then export the extra gas after meeting local need. The planned LNG terminal would handle the export of 600 million cubic feet per day.
Previous reports based on sources at Shell and the Iraq Oil Ministry had put the production capacity of the facility at 700 million cubic feet per day.
Baghdad needs to contribute $5.236 billion in the venture, some $1.524 billion of which is existing infrastructure. Shell and Mitsubishi need to contribute nearly $7 billion, and the remaining money will be financed through the venture's returns, according to the summary submitted by the Oil Ministry to parliament. Shell and Mitsubishi are also offering an optional loan of $1 billion to the Iraqi side in the venture, the report says.
The Dow report states the crude and gas linked pricing formula in the agreement summary implies that, at Brent price of $75 a barrel, the BGC joint venture would get $3.22 per million British thermal units of dry gas sold to the South Gas Company (SGC).
But the SGC would have to sell the gas it buys back from the joint venture at just $1.04/mmbtu to Iraqi power plants and industry, meaning the SGC would pay huge subsidies, which would further increase if spot gas prices rise.
Iraq estimates, however, it should still make around $31.1 billion over the 25 years of the project from taxes, fees and the raw gas sales to the joint venture, the document said.
The BGC would use Shell technology to gather and process gas from the giant southern oil fields of Rumaila, West Qurna Phase 1 and Zubair.
Iraq, which has natural gas reserves totaling 112.6 trillion cubic feet, the tenth largest in the world, produces only around 1.5 billion cubic feet a day, with half of that amount is being flared daily, because of lack of infrastructure to produce and market the gas.