Iraq's oil and gas riches

A NEW deal could lift some of the clouds hanging over Iraq. On November 27th, the country’s government, Shell and Mitsubishi signed a 25 year contract to create the Basra Gas Company, a joint venture in which the Dutch oil giant and the Japanese conglomerate will hold 49% between them. If things go as planned, the new firm could make a lot of money, but more importantly will help removing the black clouds currently hanging over southern Iraq because of the 700m cubic feet of gas which are currently flared there every day.

Yet for this to happen, important hurdles have to be overcome. The joint venture has been awarded rights to the gas from the Rumaila, Zubair and West Qurna fields. But the oil there is already controlled by an assorted group of rival oil and gas giants. The Rumaila field, for instance, is in the hands of BP and its partner, the Chinese National Petroleum Company.

How will these firms and Shell manage the oil and gas production from the reservoir? BP have been clear that they do not want Shell anywhere near their fields, one analyst points out. Rumaila is the most developed of the Iraqi fields and nicely productive for BP. It does not help that Shell beat BP to the gas rights.

Another problem for Shell is government supervision. “You literally can’t change a tap without having it signed off on from above,” notes one observer. This type of regulation is a hang over from the days of Saddam Hussein, when punishments were swift and conclusive. Even today, no one likes taking responsibility for decisions. “Everything has to go up to the top levels of government,” the observer explains.

As a result, increasing oil production is exceedingly hard. The official production target for oil is a staggering—and entirely implausible—12m barrels per day by 2017. Analysts say that Iraq would be lucky to add two million barrels to today’s average of 2.9m without significant extra investment.

On the positive side, the country is in desperate need for more power: intermittent supply has become a major political issue. And electricity generated by gas plants is the quickest solution. But strong domestic demand could keep Shell from exporting liquefied natural gas (LNG)—which is a big reason why it signed up to the joint venture. Shell may not be able to export LNG for at least a decade, experts reckon.

It will not be much consolation for Shell that rivals, too, have their share of problems trying to do business in Iraq. Kurdistan’s long-standing disputes with Iraq’s central government over territory and control of hydrocarbons have deterred big oil companies from moving into this promising region. But because it is pessimistic about the country's southern fields, Exxon Mobil recently signed contracts with the Kurdistan regional government in the north of the country. Predictably, the oil ministry in Baghdad is not pleased that it was bypassed and has threatened penalties, including booting out Exxon from the next round of bidding for oil licenses in 2012. Exxon may be gambling that Iraq’s government cannot afford to kick around a firm so crucial to its long-term pans to expand oil production.

As these examples show, operating in Iraq is risky—even before dealing with a creaking energy infrastructure and parlous security. Yet the rewards could be immense. The country has estimated reserves of around 143 billion barrels of crude oil and 126.7 trillion cubic feet of gas. The oil giants, running out of easy access to the stuff that keeps the world in motion, cannot afford to ignore this vast bounty.