Royal Dutch Shell PLC (RDS.A) is progressing well on its agreement with the Iraqi Government for developing a domestic gas infrastructure in the southern part of the country. Yesterday, the Iraqi oil ministry mentioned that it will be submitting a feasibility report on the project to the Government.
Due to a lack of infrastructural facility, nearly 800 MMcf of natural gas is burned off every day from the Basra oil field in Iraq. The Government wants to utilize this gas for domestic electricity production and export the balance, if any.
In September 2008, Shell and Iraq’s South Gas Company had signed an agreement to produce gas from key oil fields in southern Basra province. For this, they will form a joint venture with Shell holding 49% interest and South Gas Company owning the rest. Both companies are expecting the final deal to be signed within a year.
Royal Dutch Shell – the second-largest natural gas producer in the world – was awarded the deal from amongst many other international players. In terms of assets, Shell owns a strong and diversified portfolio of global energy businesses offering attractive long-term growth opportunities.
However, Shell does not compare favorably with its super-major peers, Exxon (XOM) and Chevron (CVX), in terms of reserve lives, upstream growth, costs and financial returns.
While Shell has decided to invest liberally in several integrated projects by divesting non-core assets, it remains to be seen how this can become fruitful for the company. Until then, we prefer to stay on the sidelines and maintain our Hold recommendation.
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