However, questions of transparency over the agreement raised over lack of national policy.
Shell deal boosts hope for Iraq
With a preliminary agreement under its belt to market Iraqi gas and a decision this week to open a Baghdad office in a secret location, Royal Dutch Shell has become the first major international oil company to return to Iraq since the country's oil industry was nationalised in 1972.
Yet the European company's potentially lucrative gas deal, hailed by some analysts as "groundbreaking", is already raising eyebrows among sceptics who question whether it will help to solve Iraq's political deadlock over development of its vast untapped oil and gas reserves. The accord Shell signed on Monday is no ironclad commercial agreement. Instead, it sets ground rules for the eventual formation of a joint venture with South Gas Company, one of the state-owned oil and gas entities that Iraq's oil ministry controls.
"It was made abundantly clear that nothing would happen for at least a year," said an Iraqi oil industry source. The agreement calls for South Gas, which would hold a controlling 51 per cent stake in the proposed venture, and Shell to gather, process and market all the gas pumped along with crude from oil fields in southern Iraq's Basra province. At present, this amounts to 700 cubic feet a day of gas, which is currently being burnt or "flared" because Iraq has no infrastructure to bring it to market. According to analysts, there is considerable upside to the deal, as progressively larger volumes of associated gas should be produced if and when Iraq succeeds in boosting oil production from the Basra region, which is well endowed with giant oil fields.
"By capturing and processing this natural gas, the joint venture 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 will be focused initially on creating reliable sources of domestic energy, including liquefied petroleum gas, natural gas liquids, natural gas supply for power generators and deliveries to local distribution networks."
So far, so good. But the company's overriding hope for profitability rests on potential gas exports. This, in a country with huge unfulfilled domestic gas requirements, could create a serious conflict of interest that the critics fear might not be resolved in a manner favourable to the Iraqi people. Indeed, the agreement signed on Monday posits development of "a liquefied natural gas (LNG) facility to export natural gas not needed for local domestic use". The question is, who would decide how much gas was not needed? And how soon would Shell seek to develop an export stream?
"Exporting gas through LNG would net back US$2 (Dh7.3) to $3 (per thousand cubic feet) to Iraq while it is still importing liquid fuels at 10 times that price and most Iraqis have only a few hours of electricity per day," said Majid Jafar, an Iraqi who is the executive director of Crescent Petroleum, a Sharjah company developing a gas and electricity project in Iraq's autonomous Kurdistan province.
In an ideal world, keeping foreign investors' activities in line with the public interest should be just a matter of routine regulatory oversight. The trouble is, effective and efficient regulatory bodies are among the many crucial pieces of infrastructure that Iraq sorely lacks. Indeed, with its draft federal oil law bogged down amid interminable political wrangling, the country's lawmakers recently seem to have been making up the rules of the game for the oil and gas industry as they go along - or worse, leaving this to bureaucrats.
Shell's gas deal could be a case in point. "What is surprising is that it seems no one outside the oil ministry has ever seen it, and there was no transparency or competition," the Iraqi oil source said. Why has access to a staggering amount of Iraqi gas been hastily granted to a single western company, without the competitive bidding that is standard for large international energy deals? Critics suggest the country's oil minister, Hussain al Shahristani, was under intense political pressure to announce a deal to advance refurbishment of Iraq's battered energy sector.
Nicknamed "Mr Next Month" - an Arabic-language play on his name - the oil minister has yet to announce-technical service contracts for oilfield development with a number of international oil companies that he promised to deliver last year. The companies have shied away from signing the deals, as they have perceived their chances of eventually being allowed to compete for coveted production sharing agreements (PSAs) in Iraq's oil sector diminishing amid growing popular and political opposition to passing the stalled oil law that would allow them.
PSAs, which give foreign companies a share of profits from oil production, are the best way to align the interests of oil producers with those of host countries, analysts say. Yet they are proving contentious in Iraq due to populist fears that they would "give away" too much of the country's oil resources to rapacious foreign interests. Now Mr Shahristani is holding up a $3 billion oil development agreement with China National Petroleum Corporation (CNPC) as a model of how future Iraqi oil deals will be structured. The 20-year deal, to be finalised next week, would pay China's biggest oil company a fixed fee to develop Iraq's Adhab oil field.
"The seemingly very low profit margin given to the company for its work will be regarded as unattractive by many international oil companies," said Samuel Ciszuk, the Middle East energy analyst with Global Insight, a business intelligence firm. "Indeed, if CNPC's contract is to be used as a blueprint for the industry, many might regard Iraq's investment opportunities for oil companies as having evaporated."
But for Shell, everything is coming up roses. Its deal would shield the company from resource nationalistic policies, Mr Ciszuk predicted. In time, it could allow Shell to market gas internationally with "a healthy profit margin", he said. @Email:firstname.lastname@example.org