As per market sources, Anglo-Dutch behemoth Royal Dutch Shell plc (RDS.A) and Japan’s Mitsubishi Corporation have joined hands to explore and develop natural gas resources of southern Iraq. In this context, the companies have formed a preliminary $12 billion deal with the government of Iraq.
The joint venture –– Basra Gas Company –– will aim to upgrade and modernize infrastructural facilities of the oil fields, thereby leading to increased output. This 25-year deal will work closely to capture more than 700 million cubic feet per day of gas from three most fertile southern acreages: Rumaila, Zubair and West Qurna Phase 1.
While the Iraqi government will control the majority stake (51%) of Basra Gas, Shell will hold a lump sum 44% interest. The remaining 5% interest will be with Mitsubishi. Although the initial agreement was signed in 2008, it is yet to be approved by the higher cabinet of the country.
Following this deal, the Iraqi authority targets to boost domestic natural gas production to 2.5 billion cubic feet a day from the present level of 1.5 billion cubic feet per day. Government will utilize the gas produced under the venture to satisfy the rapidly growing demand for electricity within the country, with any excess amount to be exported.
The Hague-based Royal Dutch Shell owns one of the largest integrated oil and gas businesses in the world. The group has operations worldwide and is involved in various activities related to oil and natural gas, chemicals, power generation, renewable energy resources, and other energy related businesses.
We remain optimistic about the company’s prospects given its exposure to major projects with an emphasis on technological application to unconventional resources. Shell’s consistent financial and operational performance along with international market exposure enhances its portfolio and competitiveness.
However, Shell’s upside potential is restricted due to the volatile macro backdrop, weak demand for fuel and international business risks. The company also faces stiff competition from peers such as BP plc (BP) and Exxon Mobil Corp. (XOM).
We are maintaining our long-term Neutral recommendation on the stock. Shell currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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