In an attempt to boost the oil sector, mutilated by years of neglect and military violence, Iraq government approved a multibillion joint venture with Royal Dutch Shell (RDS.A) and Japan’s Mitsubishi Corporation. The proposed deal targets to capture a huge amount of untapped natural gas from four super-giant oil fields in the southern part of Iraq that is currently being wasted.
As per the government, the joint venture worth $20 billion includes $5 billion of existing infrastructure assets. Royal Dutch Shell will be contributing $17 billion to the project, with the rest coming from the Japanese counterpart.
Consequently, the joint venture, named Basra Gas Company, will have Iraq’s state-owned South Gas Company holding 51% stake with the remaining 49% being divided between Royal Dutch Shell (44%) and Mitsubishi (5%). However, the government did not divulge the final date of agreement signing.
Iraq, despite having an estimated 112 trillion cubic feet of natural gas reserves, is only able to produce approximately 1.5 billion cubic feet per day of gas due to poor and outdated infrastructure. To make matters worse, almost half of the daily production is burned off at the wells. However, things are likely to change with the Shell joint venture, which is expected to provide electricity from natural gas currently being wastefully burned off. Therefore, this deal is expected modernize and improve the country’s power generation facilities.
As per Iraq’s latest five-year plan, the country plans to generate approximately 2.75 billion cubic feet a day of gas by 2014.
This is Shell’s second venture with Iraq in 2010, following the 20-year contract to provide technological support for the development of the Majnoon oilfield. We believe that with signs of an improving economy and well performing upstream business segment, the company is focusing on new project deals and start-ups.
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 the company’s portfolio and competitiveness. However, the tough macro environment and a weak energy demand dampen these positive outlooks.
We retain our Neutral rating on Royal Dutch Shell with a Zacks #3 Rank (Hold), implying that the company will perform in line with its peers over the short term.
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