Royal Dutch Shell has pulled out of oil development talks with the Kurdistan regional government in an effort to protect lucrative investments in southern Iraq, including a potential $17bn natural gas deal.
Over recent days Iraqi government officials have threatened to cancel an oilfield contract with ExxonMobil, after the Financial Times reported that the US company had become the first supermajor to conclude exploration contracts with the Kurdistan regional government. Big oil groups are racing to secure supplies in Iraq, which has some of the largest reserves.
The central government in Baghdad is seeking to impose a de facto ban on companies operating in Kurdistan, a semi-autonomous region in northern Iraq. Like Exxon, Shell has oil contracts in the south but had even more to lose as it had also been in talks over a $17bn natural gas deal, according to people familiar with the discussions.
Baghdads real power lies in denying future contracts and Shell still had something else on the table. They still had not signed the southern gas field deal, said one person familiar with the talks, adding that the long-awaited deal with Baghdad cleared its last big hurdle on Tuesday after it was approved by Iraqs council of ministries.
Daily production in Iraq has only just returned to 2.8m barrels - the level it was at before the US-led invasion in 2003. Development has been hampered by bureaucracy, security fears and logistical bottlenecks.
Under the terms of the 25-year natural gas deal, Shell and Mitsubishi agreed to capture gas from the Rumaila, Zubair and West Qurna fields around the southern city of Basra that is now being burnt off, or flared. Shell and its partner are expected to sign the gas contract as early as next week.
The venture will enable Iraq to capture over 700m cubic feet of gas each day for power generation. Unlike Kurdistan, which enjoys electricity 22 hours per day, Baghdad only has an average of four hours of power.
The contract also foresees construction of a liquefaction natural gas export facility, where gas would be supercooled for sea transport. Qatar is the only Middle East country with a big LNG export capacity.
In Kurdistan, the regional government wants to boost production to 1m barrels per day by 2015, up from about 150,000 bpd, with the help of oil companies.
The Financial Times Limited 2011