Burning ambition

The Middle East and North Africa currently holds in the region of 45% of the world’s proven gas reserves, a figure that is set to rise with increased exploration. Couple this with the rising importance of gas in the world energy market; it is expected to be just as important as the region’s oil in the near future.

Royal Dutch Shell recently signed a Heads of Agreement (HOA) with the Iraqi government for the establishment of a JV with the South Gas Company in the southern sector of the country, which will involve the processing and marketing of natural gas currently being flared in the troubled nation.

Oil and Gas Middle East took the opportunity to discuss the deal with Shell’s vice president for gas and power, MENA and the Levant, Mounir Bouaziz.

“The Iraq deal was the result of many years of work with Iraqis – the Ministry of Oil in particular. We started with a gas master-plan in 2005, creating a large database of all the resource prospects for gas, the domestic demand and the existing infrastructure. We then built an idea of the potential of Iraq in the gas sector, and we decided it could be a major player in the region,” says Bouaziz.

In an area covering some 19,000 km2, the JV will purchase roughly 700 million ft3 of natural gas from upstream operations that is currently being flared. It will also own and operate existing gas gathering, treating and processing facilities, repair non-functioning assets and develop new facilities.

“We were looking at opportunities when the Iraqis came to us and said we are flaring a lot of gas in the south – where most of the new production is going to come from. Our proposal was based on dealing with the gas in specific locations, creating specific projects. They came back and said they wanted Shell to look into a JV with the South Gas Company, to look after all the gas and infrastructure in the southern province” explains Bouaziz.

“Right now Iraq is flaring every day roughly 700-800 million ft3 of natural gas, a significant amount which could be turned into 300,000 LPG bottles for cooking, or could feed 4 GW of power generation capacity. The commercial value of this gas would equate to somewhere in the region of US$10 million,” he adds.

Despite having substantial oil and gas potential, IOCs have not been jumping at the chance to move to Iraq, due to continued civil unrest and the lack of contemporary hydrocarbon legislation.
 

However, Bouaziz is quick to state that the deal is based on existing legislation – thanks essentially to not being an upstream project – and that the necessary steps have been and are being taken by the company before setting up in Iraq.

“The agreement is based on existing legislations, there is particular law 22 in Iraq which gives the right to public companies to enter into a JV with another party, whether this is Iraqi or international, provided the JV continues the same line of business,” says Bouaziz.

“And importantly it was the Iraqis who came to us, and said our gas industry has not been looked after the same way as oil, and we would like to speed up bringing the gas operations to international standards and playing a major role in this sector both regionally and internationally.”

With sustained outbreaks of violence and continued military presence in the country, the question must be: is this really a good time to be moving into Iraq? Bouaziz thinks so.

“We did not take this decision lightly; it comes after months of assessment, planning and devising mitigation plans. In the long run we believe that such investments and the improvement of the business environment will bring stability and security to Iraq. For the moment the situation is deemed to be stable, but we are constantly monitoring the situation,” explains Bouaziz.

Iraq chose Shell, according to Bouaziz, as it is considered the leader for gas projects in the Middle East, which includes other joint ventures with regional NOCs and local governments.  The project will also require technological know-how and supporting infrastructure, which an IOC like Shell will be able to provide.

“Shell has an advanced the understanding of gas in Iraq, so we knew what needed to be done, but equally we were the most advanced in terms of executing planning and strategy. Today we have an office in Basra and we have crews visiting the sites and doing initial engineering assessments – I haven’t seen another IOC that advanced in terms of their execution,” says Bouaziz.

And this is not the end of the story for Shell. As Iraq looks to develop more oil, the associated gas will provide an increase in supply for the company. Shell has now been given a year to 18 months to work on the implementation agreements, Bouaziz adds.

“In the Middle East there is a much higher demand for gas than really anticipated a few years ago, and although there are large reserves in specific countries, there is still an unbalance in the demand supply in the region,” says Bouaziz.

“Sour gas should play a key role, and in fact a lot of the gas in South Iraq is sour, this is why there is value in bringing in someone like Shell, who have specialist technologies and processing facilities.”

When asked if he felt that the increasing power of the NOCs was something that concerned an IOC such as Shell, Bouaziz was adamant that the working relationship between the two was one of the major reasons for success in the region.

“If you look at the Middle East our footprint is very large, and it is done essentially through partnerships with NOCs and local governments. In fact, there is probably not one country in this region where we are not operating as a JV with the government or an NOC. It is a model we prefer, not one we are afraid of,” he concludes.

The Iraq gas project is an exciting development for all involved: Shell, the Iraqi government, the Iraqi nationals and the Middle East in general. So long as a safe and stable platform is provided for its implementation, it should be successful and a move in the right direction for the Iraqi state.