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Will Shell’s Gas Gamble Pay Off?

By Cyril Widdershoven – Sep 16, 2017, 6:00 PM CDT

Supermajor Royal Dutch Shell has decided to divest its Iraqi oil assets in a move to focus on its future in natural gas. The industry giant is seemingly breaking from its oil heritage to head full speed into the “Golden Age of Gas.” Shell’s decision to leave Iraq’s upstream oil assets is not without risk, however, as the market for natural gas is even more oversupplied than it is for crude oil.

Reuters reported the move first, based on a letter from the Iraqi ministry of oil, followed by a confirmation from Shell. The Dutch heavyweight indicated to the press that its oil asset divestment in Iraq is in line with its strategy to focus more on natural gas and downstream activities.

Shell’s current 45 percent stake in the Majnoon oil field will be relinquished in “due course,” officials stated. The company also indicated that the Iraqi Ministry of Oil formally endorsed the proposal. While a timeline for the divestment has yet to be agreed upon, Iraqi officials already indicated that Shell Iraq will now focus mainly on the Basrah Gas Company and the Nebras Petrochemicals Project.

For Iraq, Shell’s strategy change is a slap in the face. The decision will likely lead to a delay in production within the field, further constraining Iraq’s widely published production target of 5 million bpd by the end of 2017. Sources put current production at Majnoon at 235,000 bpd, with a target of 400,000 bpd in 2020.

While both sides have reiterated that the Shell decision isn’t based on a political conflict or increased risks in the country, analysts suggest that the ongoing disagreement on production specifics between the Iraqi government and IOCs may be partially to blame. Baghdad has yet to agree to establish Production Sharing Agreements, even though Iraq-Kurdish operations are already based on them.

An open disagreement on contract terms seems to be the official cause for Shell’s decision. Baghdad has placed harsh conditions on all of its contracts, seemingly targeting even higher revenues. This is in contrast to the IOCs, which target a quick return on their own investments.

Others have stated that Baghdad added performance penalties to the Majnoon remuneration fees in May, which could have sped up Shell’s decision. Also, some say that Shell wants to divest its West Qurna-1 field, which would be another blow for Iraq.

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