Shell's $4bn Iraq Breakthrough Could Boost Britain's Natural Gas Supplies

Shell has become the first western oil company to win significant access to the energy sector in Iraq since the 1970s, in a $4bn move which could bring liquefied natural gas (LNG) to Britain.

The deal has angered anti-war campaigners and senior Iraqi figures who complained yesterday that there was no competitive tendering for the contract.

The Anglo-Dutch company said it had signed an agreement with the oil ministry in Baghdad to establish a joint venture with the South Gas Company in the Basra district of southern Iraq to process and market natural gas extracted on 19,000 sq km (7,300 sq miles) of land.

"Iraq has one of the world's largest natural gas resource bases and I am delighted that the Iraqi government, including the ministry of oil, have supported Shell as the partner for joint venture with the South Gas Company," said Linda Cook, executive director of Shell.

The company will own 49% of the new Iraqi business which will collect some of the 700m cubic feet a day of gas produced by oil suppliers and "flared off" into the atmosphere - a practice condemned by environmentalists as contributing to global warming.

Shell said its actions in Iraq would reduce greenhouse gas emissions and create value for the economy by providing the gas as a domestic power source.

The combined operation, which will make use of the South Gas Company's 3,500 staff, would initially focus on local markets but Shell added that "in the future the [joint venture] could develop a liquefied natural gas facility to export natural gas not needed for local domestic use".

LNG would be shipped to markets in the Mediterranean and further west, possibly Britain, according to well placed sources. Shell will not put a value on the deal but industry experts believe it could be worth $4bn in the short term at least.

The first big contract signed by a western oil company since the invasion of Iraq was condemned by Platform, a British-based organization which monitors oil companies and Iraq in particular.

"The big issue here is that the whole thing has been done in secret. We are not being told what the terms of the deal are - such as are there extension rights [for Shell to gain Iraqi reserves] and why has there been no competitive bidding process," said Greg Muttitt of Platform.

"What has definitely happened here is that a country under occupation has introduced an oil policy that is favorable to western oil companies. The [US] state department has already admitted that it has advisers working on oil policy and there is a likelihood they may have drafted the Shell contract."

His views were reinforced by Issam al-Chalabi, Iraq's oil minister between 1987 and 1990, who questioned the lack of competitive tendering for the gas gathering contract and claimed it had gone to Shell as the spoils of war.

"Why choose Shell when you could have chosen ExxonMobil, Chevron, BG or Gazprom? Shell appears to be paying $4bn to get hold of assets that in 20 years could be worth $40bn. Iraq is giving away half its gas wealth and yet this work could have been done by Iraq itself," Chalabi said.

He claims that his country spent $2bn in the 1980s putting a South Gas gathering project in place which was fully operational by 1990. A British vessel was loaded with LPG, he said, but the infrastructure was damaged in the first Gulf war and sanctions made it difficult to mend.

"Since 2003 nothing has been done to repair or replace compressor stations that were damaged. There were studies financed by Japan that showed how it could be done for a few hundred million dollars," Chalabi argued.

Shell, BP and other oil majors are lining up for other big deals in Iraq with the oil ministry holding a meeting in London on October 13.