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Shell Natural-Gas Deal in Iraq Totals $17.2 Billion

AMMAN—A development deal with Royal Dutch Shell PLC would more than double Iraq's natural-gas production, according to an official agreement summary reviewed by Dow Jones Newswires.

The deal, signed in July with Shell and Japan's Mitsubishi Corp., creates a joint venture that is expected to produce two billion cubic feet of gas a day, according to the document.

Few details about the agreement were released when it was signed. At the time, the deal was valued at $12 billion. The agreement summary puts the investment at $17.2 billion.

Iraq has the 10th-largest gas reserves in the world but produces about 1.5 billion cubic feet a day. Half of that amount is flared daily, because of a lack of infrastructure to produce and market the gas.

Baghdad will own 51% of the 25-year venture, Shell will hold 44%, and Mitsubishi has 5%, the document said.

It said $12.8 billion would be spent on the rehabilitation or construction of infrastructure, while an additional $4.4 billion is required for a liquefied-natural-gas facility to be built by Shell and Mitsubishi.

The joint venture, called the Basra Gas Co., initially would deliver gas to Iraq's domestic market to fuel-starved Iraqi power plants, but would then export the extra gas after meeting local need. The planned LNG terminal would handle the export of 600 million cubic feet a day.

Baghdad needs to contribute $5.236 billion to the venture, of which $1.524 billion would be existing infrastructure. Shell and Mitsubishi would provide nearly $7 billion, and the remaining money would be financed through the venture's returns, according to the summary submitted by Iraq's oil ministry to the country's parliament.

Shell and Mitsubishi are also offering an optional loan of $1 billion to the Iraqi side in the venture, the document said.

The joint venture would sell produced gas to Iraq's state-run South Gas Company at international standard pricing. The crude oil and gas linked pricing formula in the agreement summary implies that, at Brent price of $75 a barrel, the Basra Gas joint venture would get $3.22 per million British thermal units for dry gas sold to South Gas.

But South Gas would have to sell the gas it buys from the joint venture at just $1.04/mmbtu to Iraqi power plants and industry, meaning South Gas would pay huge subsidies, which would further increase if global gas prices rise.

Iraq estimates it should still make $31.1 billion over the duration of the project from taxes, fees and the raw gas sales to the joint venture, the document said.

Basra Gas would use Shell technology to gather and process gas from the giant southern oil fields of Rumaila, West Qurna Phase 1 and Zubair.

Shell Natural-Gas Deal in Iraq Totals $17.2 Billion . -  Source

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