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In Gas Deal, Shell Gains Iraq Presence

Royal Dutch Shell PLC clinched a multibillion-dollar natural-gas deal with Iraq, marking only the second major foreign investment in Iraq’s energy resources since the 2003 U.S.-led invasion.

The agreement, signed Monday in Baghdad, gives Shell a crucial foot in the door of Iraq’s huge, but creaking, oil-and-gas industry. The only comparable deal was the $3 billion contract Iraq inked with China National Petroleum Co. last month to develop Iraq’s Al-Ahdab oil field, a contract that was initially signed in the 1990s under Saddam Hussein.

International oil companies have been jockeying for years to establish a presence in Iraq, which has some of the world’s largest oil and gas reserves, and help rebuild an industry battered by years of international sanctions and war.

But there has been fierce opposition from Iraqi nationalists to foreign investment in the industry, and a hydrocarbon law that would pave the way for big foreign deals is bogged down in the Iraqi Parliament. Even moves to ink less ambitious technical-service contracts, which were scheduled to be signed this summer, have faltered.

However, large oil companies, already encouraged by marked improvements in the country’s overall security, also see signs of a thaw in the investment climate. Iraqi authorities have announced a first licensing round, which would open up six of the country’s big oil fields and two gas fields to foreign companies. More than 40 energy firms have prequalified, and the oil ministry is holding a briefing session in London next month to explain the rules of the bidding process.

Oil-company officials say they understand the licensing round will go ahead even if Iraq’s hydrocarbon law is still languishing in Parliament, with the oil ministry assuring them each contract can be individually approved by the cabinet.

Iraqi Oil Minister Hussein al-Shahristani told reporters Monday the deal with Shell was worth “billions of dollars.” Shell declined to put a price on the investment, saying the agreement signed Monday merely set out the commercial principles of the joint venture, which will be 51% owned by Iraq’s state-run South Gas Company and 49% by Shell.

The joint venture will process and market natural gas that is released as a byproduct of oil production. Iraq burns off nearly 800 million cubic feet a day of this gas in its southern oil fields, because it lacks the infrastructure to utilize it. Capturing it “should create an important and reliable supply of domestic energy, reduce greenhouse-gas emissions, and create significant value for Iraq,” Shell said.

The joint venture initially would deliver gas to Iraq’s domestic market, mainly for electricity generation, but would later export some of it, possibly in the form of liquefied natural gas, which is gas that is cooled and shipped on tankers. Shell says one option is to create a floating LNG facility off Basra’s coast, which would be particularly attractive from a security standpoint. Iraq, which has estimated reserves of 110 trillion cubic feet of natural gas, has ambitions to become one of the world’s biggest LNG exporters.

Write to Guy Chazan at [email protected] and Hassan Hafidh at [email protected]

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