The government of Iraq has given its nod to the natural gas exploration deal signed between Royal Dutch Shell (RDS.A) and Japan’s Mitsubishi Corporation. The project, which requires investment of around $17.2 billion, was initially signed in 2008.
The joint venture –– Basra Gas Company –– will aim to upgrade and modernize infrastructural facilities of the oil fields at a cost of some $12.8 billion, thereby increasing output. This 25-year deal will work closely to capture more than 700 million cubic feet per day of gas from three of the most fertile southern acreages namely Rumaila, Zubair and West Qurna Phase 1.
As per the Iraqi officials, the venture will also set up a liquefied natural gas facility, with a maximum capacity of 600 million cubic feet of gas per day, for approximately $4.4 billion.
Under the present scenario, a large volume of natural gas, estimated at $1.8 billion per annum, is being burnt off due to the lack of a proper processing plant. With this venture, the Iraqi authority targets to boost domestic natural gas production as well as utilize the produce to satisfy the rapidly growing demand for electricity within the country, with any excess amount to be exported.
While the state controlled South Gas Company controls the majority stake (51%) of Basra Gas, Shell holds a lump sum 44% interest. The remaining 5% interest is with Mitsubishi.
The Hague-based Royal Dutch Shell will extend technological know-how and managerial support to this project. The company has a long-standing association with Iraq that aims at developing the country’s energy sector. Shell is also the operator and technical assistance provider of the giant oil field – Majnoon.
Iraqis currently the new destination for many oil and gas companies looking for investment opportunities. The country houses a massive reserve of natural gas but is unable to process it due to poor and outdated infrastructure. Recently, Eni SpA (E) has agreed to participate in the upcoming bidding round for the development of the Nassiriya oilfield in Iraq.
We remain optimistic about Shell’s prospects in the near term 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, the tough macro environment and a weak energy demand dampen these positive outlooks. We retain our Neutral rating on Shell, supported by a Zacks #3 Rank (Hold), implying that the company will perform in line with its peers over the short term.
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