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Shell’s risk in Iraq is worth taking

Times Online
November 6, 2008

David Wighton: Business Editor’s commentary

Shell’s decision to move large numbers of expatriate staff into Iraq represents a long-awaited vote of confidence in the country. If its gas joint venture goes ahead, it will be the first time a leading Western company has committed significant resources to Iraq since the 2003 invasion.

For Shell, the risks are worth taking. With the world’s third-largest reserves of oil, Iraq is very attractive for Western oil companies eager to gain access to new reserves which are increasingly difficult to find and gain access to elsewhere.

While doing business in Basra will not be easy, Shell knows a bit about operating in hostile environments. One of its biggest operations is in Nigeria, where a rumbling civil conflict continues to target the oil industry.

Moreover, Iraq does appears to be gradually emerging from the turmoil. In the Kurdish north, significant foreign investments are flowing in with Damac, the Dubai property developer, planning a multibillion-dollar project in Erbil. New power stations and gas plants have also recently been built with private money. Further south, the situation remains more difficult but security is improving. Nevertheless, the narrow escape of the country’s Deputy Oil Minister from an assassination attempt last week highlights the continuing risks.

Meanwhile, wrangling over an oil law is another hurdle for the industry.

The law is needed to create a legal framework for the distribution of Iraq’s oil wealth, particularly from exports.

There is deadlock on the issue between the Kurdish Regional Government and Baghdad although most analysts believe that an agreement will eventually be reached that could pave the way for the arrival of other big oil companies such as BP, ExxonMobil, Total and others.

The oil law is a less immediate concern for Shell because the gas from its proposed project will be used, at least initially, to meet domestic Iraqi needs.

There remain many challenges in addition to the obvious security threat, not least the need to contend with widespread corruption.

But the slump in the oil price has only made Iraq more enticing.

The costs of extracting a barrel in Iraq could be as low as $10 compared with perhaps $90 in Canada.

 

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