Oil in a Week - The Repercussions of the Gas Agreement between Iraq and Shell

Oil in a Week - The Repercussions of the Gas Agreement between Iraq and Shell

On July 12, the Iraqi Oil Ministry signed an initial agreement with Shell and its partner Mitsubishi, to put a final framework in place for the development of several southern gas fields. However, the agreement still needs the ratification of both the government and the parliament.

Here, we need to reiterate some basic facts, such as Iraq’s urgent need for natural gas, and the need to rush to exploit associated gas instead of flaring it, as is the case at present. Iraq produces about 1.5 billion cubic feet of associated natural gas per day, of which Iraq flares around 700 million cubic feet, for lack of appropriate plants and projects to process the gas. This is a terrible loss for the country, especially in this period, as Iraq suffers from a sharp lack of power capacity, because of the lack of adequate supplies of fuel for its power plants. Further, the Ministry of Electricity recently signed an agreement with Iran to import gas to avoid shortages. But why then, have there been objections to the agreement with the international company Shell?

Despite all these compelling reasons to collect and exploit the associated natural gas, we find that many objections have been voiced vis-à-vis the legality and feasibility of the Heads of Agreement signed by the Oil Ministry in September 2008 (renewed annually). Negotiations between the two parties also continued to amend some of its clauses, such as modifying Shell’s exclusive right to collect associated gas and restricting it to only the three giant fields of Zubair, West Qurna and Rumaila, in the Basra province, instead of all the fields in the south, subsequently limiting Shell’s scope of work to the province of Basra.

There were many objections voiced against the 12 billion dollar agreement then. First of all, there were objections about awarding a contract through direct bilateral negotiations between the Oil Ministry and Shell, rather than through a public tender, as the Iraqi laws in force require. The response to this was that the decision to award the contract, through such a channel, was made because of the unwillingness of other international oil companies at the time to operate in Iraq, due to poor security conditions. This is in addition to increased pressure on the Minister of Oil (Mr. Hussain al-Shahristani, who led the campaign to press forward with the project) and the Federal Ministry by the Kurdistan Regional Government, to sign contracts with international oil companies to develop large scale oil projects, instead of only objecting to the projects carried out by the KRG on the grounds that they violate rules and regulations.

But over time, other criticisms emerged, especially in regard to the project’s cost, and the reasons behind granting Shell exclusive concessions. The agreement was criticized by a number of Iraqi oil experts, who focused their criticisms on the price of gas that Shell will receive and the price at which it will be sold to Iraq, as well as the issue of exportation priorities. This in addition to the remarks by the adviser to Prime Minister Nouri al-Maliki for Legal Affairs, in a note dated November 27, 2010, in which he recorded significant violations of Iraqi regulations.

On June 13, 2001, the Iraqi daily Al-Dostour ran the text of the Legal Advisor’s remarks, from which we quote the following excerpts:

1 – The contracts to be signed with the companies (Shell, Mitsubishi and Basra Gas) are partnership agreements for the extraction, production and exportation of gas, something that is not permissible by law. Any terms or expressions used in the agreements to be signed with these companies, which may mean that these agreements are not gas investment, exploitation, production or extraction agreements, are null and void from a legal perspective, pursuant to the legal rule that says that what applies is intents and meanings, not terms or constructs.

2 – The drafts of the contracts intended to be signed require that the South Gas company assets be transferred to the Basra Gas company, which is intended to be established side by side with Shell Gas Iraq and Damon Gas Iraq. This effectively means the privatization of the South Gas Company.

3 – The transfer of South Gas’s assets over to the company to be established is against the law, since the transfer of assets means the privatization of South Gas while there isn’t any legislation to this effect. Moreover, the process will lead to reducing South Gas to an empty structure that exists only on paper, without assets, in contravention of the Company’s Articles of Incorporation.

4 – The company’s assets will be transferred to another with foreign shareholders, and which operates in the extraction and production of natural gas, rendering the privatization process more complicated.

5 – The value of assets to be transferred to the Basra Gas Company was not appraised. Furthermore, it appears that there are assets under construction which, according to the contract, must also be transferred to the company to be established.

6 – The capital of the Basra Gas Company, according to the draft agreement, is 20 million dollars, while the assets of the South Gas company, which are to be transferred to the above-mentioned company, are estimated at billions of dollars.

7 – The transfer of South Gas’s assets over to the Basra Gas Company, which is co-owned by Shell and Damon, involves thousands of acres of land. There is no legal justification that allows the transfer of such assets to the company, or even endorsing them to or allocating them to said company.

8 – The selection of shareholders in the Basra Gas Company: There is no mention in the special conditions of how Shell, alone, will select international companies to contract and contribute in the establishment of a mixed company along with the South Gas company, since no tender for the project was conducted to select international companies. Hence, how was Mitsubishi selected later by the South Gas Company and Shell, with the invitation the latter companies presented to Mitsubishi of all specialized gas companies to join the joint venture? By what capacity did Royal Dutch Shell have to invite a foreign company to enter a joint venture with South Gas, since Shell has had no such official capacity or any contractual relationship so far with the Ministry of Oil?

9 – The contracts to be signed between the shareholders and the Oil Ministry, between the shareholding companies and South Gas, and between the shareholding companies and Basra Gas, which is to be established,…as well as the pricing formulas and the calculation of volumes and other provisions mentioned in the documents above, are found by us to be complicated and we believe they would inevitably lead to problems and legal, financial, technical and administrative conflicts.

10 – The contracts did not clarify the mechanism of securing the needs of the people, the gas power plants, and the factories that use gas as raw material in their industries.

11 – The selling price for the gas produced will follow international prices, leading to high prices for the people and other sectors.

12 – There is no intention to give priority to exporting gas, in case concessions are granted for the gas fields of Mansouria, Akkas and Siba, especially as Shell has demanded a specific quota of export-ready gas for itself.

The rapid adoption of projects to stop flaring associated gas is crucial. However, it is also imperative that the billion-dollar agreements with international oil companies are transparent and fair for Iraq.

*. Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)

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