Iraq signs gas deal with Shell, Mitsubishi

BAGHDAD -- Iraq on Sunday signed a multibillion-dollar deal with Royal Dutch Shell PLC and Japan's Mitsubishi Corp. to tap natural gas in the south, one of the biggest agreements by the OPEC member to develop an energy sector battered by years of neglect and war.

The $17 billion deal forms a joint venture to gather, process and market gas from three oil fields in the oil-rich province of Basra. That gas, pumped in conjunction with crude oil, is currently burned off -- or flared -- due to lack of infrastructure.

The 25-year joint venture is called Basra Gas Company. Iraq will hold a 51 percent stake, to Royal Dutch Shell's 44 percent and Mitsubishi's 5 percent shares. The gas will be used mainly for domestic energy needs, but there is also an option for exports.

Iraq's oil minister, Abdul-Karim Elaibi hailed the signing as a "historic turn in Iraq's oil industry."

Shell CEO Peter Voser told reporters that Iraq is now a "... substantial part of Royal Dutch Shell's portfolio in the Middle East."

For Iraq, the deal is a key part of its strategy to alleviate power generation woes. Despite billions of dollars spent since the 1990s to rebuild Iraq's dilapidated electrical grid, Iraqis still suffer through chronic power outages that have led to sometimes violent protests.

The deal is Shell's third in Iraq since the 2003 U.S.-led invasion, and it will bolster the company's presence in a country which sits atop 143.1 billion barrels of crude oil and 126.7 trillion cubic feet of gas reserves.

A memorandum of understanding on the Shell gas deal was signed in September 2008, but the venture has been bogged down ever since. Some lawmakers argued that the deal should have been approved by parliament and officials in Basra wanted more benefits for their province.

Iraq burns off almost half of the 1.5 billion cubic feet per day of gas that it produces. The deal will help the country capture more than 700 million cubic feet per day of gas from three fields.

They are the 17.8 billion-barrel Rumaila field being developed by a BP-CNPC consortium, the 4.1 billion barrel Zubair field, handled by an Eni-led consortium and partners Occidental Petroleum Corp. and KOGAS, as well as the 8.6 billion barrel West Qurna Stage 1, which is being developed by ExxonMobil-Shell consortium.

ExxonMobil has recently been embroiled in controversy after it became known that the company had signed a contract with the Kurdish regional government -- and not the Oil Ministry in Baghdad -- to develop oil fields in northern Iraq.

The Kurdistan Regional Government has clashed with Baghdad over who has the right to sign deals with international oil companies to develop Iraq's vast energy resources.

The Kurds, who control three provinces in northern Iraq, want to be able to sign contracts with international oil companies to develop their own fields, while Baghdad maintains it has final authority.

On Sunday the oil minister said the ministry sent letters to ExxonMobil asking for an explanation of the reports that they signed these deals, but has not yet heard a response. He declined to comment on what penalties the Texas-based company might face.