Oil giants such as Royal Dutch Shell, BP, US-based Exxon, China's CNPC, and Italy's Eni signed technical service contracts to build up three oilfields in southern Iraq in 2009-2010.
But the oil deals to build up the Zubair, Rumaila and West Qurna 1 fields near Basra oblige the big oil contractors to surrender the gas they don't use for reinjection or power generation to Iraq's state-run South Gas Company (SGC).
Under the $17 billion gas deal to be ratified by the actual Iraqi cabinet, Baghdad has pledged to do what it takes to ensure these fields supply the Shell-led Basra Gas Company (BGC) joint venture with the raw gas and natural gas liquids (LNG) it needs, including for a good LNG export plant.
"SGC shall procure that all raw gas produced in the dedicated fields (other than utilised gas but including all NGLs)... shall, upon and from commencement of operations, be dedicated solely to the venture, inch the contract reads.
"The Ministry shall ensure that SGC fulfils its obligation to provide and make available to BGC all committed volumes and planned volumes associated with raw gas, including by making available deficit volumes as needed, " said a letter of confirmation in the energy ministry attached to the contract.
Under the terms of the essential oil contracts, SGC owns all the gas not used for oil recovery or power generation in the oil fields. With production from some of the world's largest underdeveloped oilfields likely to surge over the next decade as Iraq boosts capacity towards 12 million barrels daily, there is likely to be much more gas than the country needs in a short time.
The other big oil companies could propose alternatives for using some of it and some are thought as considering their own gas projects.
But the oil ministry's confirmation letter mounted on the deal said the government will make sure SGC meets its side from the supply deal and ensure that other parties do not prevent it from doing this, including "not permitting any other entity to do a specified thing. inch
Shell declined to comment.
The quantities of raw unprocessed gas SGC will deliver towards the Shell-led joint venture, backed by minority partner Japan's Mitsubishi, are not in the draft and you will be revised in line with output from the oilfields.
But the signatories expect dedicated volumes at plateau of a minimum of 2, 000 million standard cubic feet per day (mmcfd) of raw gas to become available to the BGC project -- a vital part of Iraq's master intend to boost electricity and domestic industry output.
SGC will be legally obliged to provide at least 85% of the agreed volumes, while BGC will be obliged to consider and pay for, or pay for even if not taken, 90% of this volume, the contract says.
LNG PLAN
Providing Iraq's own modest gas requirements are met first, the contract gives BGC the right to build and operate a 4 million-tonne each year (mtpa) LNG terminal and, subject to government approval, another LNG export service later.
If BGC decides to go ahead with the LNG part, SGC has pledged to supply it with enough raw gas to make a minimum of 600 million cubic feet per day of LNG feedstock gas within four to seven years from the start up of the gas processing unit.
A wholly owned affiliate of Shell will buy all the LNG produced at market prices and could sell it anywhere it chooses for at least 20 years, providing it's not to a country then embargoed by the government of Iraq.
PRICING
A simplified official agreement presented towards the Iraqi parliament and obtained by Reuters in early August indicated BGC would sell the dry gas to SGC under a fuel-oil linked pricing formula.
The full draft contract implies that, once investments by the private shareholders have matched the value of property transferred from state-owned SGC, BGC would sell dry gas back to SGC at a price in line with the average daily high and low quotations of spot High Sulphur Fuel Oil (HSFO) 180 FOB Arab Gulf in the earlier quarter from pricing agency Platts.
According to Reuters calculations based on a typical daily closing price for Platts' HSFO 180 CST FOB Arab Gulf within the second quarter of 2011 of $647. 77 per tonne, the reference price for gas sold to SGC will be $5. 78 per million British thermal units (mmbtu) for the present one fourth.
This compares to current US front month gas prices of around $4. 4/mmbtu as well as UK prices of around $9. 2/mmbtu.
The Iraqi government has decided SGC will sell the dry gas to Iraqi industry at just $1. 04/mmbtu, based on the summary presented to Baghdad lawmakers, to ensure Iraq has cheap fuel it must be competitive in a region of subsidised gas supplies.
The price of any condensate BGC sells to SGC would similarly cost off Platts' spot Dubai crude assessments, while LPG prices would be depending on Argus' Asia Far East indices for propane and butane.
The monthly pricing of raw gas in the dedicated fields that BGC will pay SGC is complicated. It would consider BGC fuel and any power sales in the previous month and incorporate a windfall adjustment for the difference between BGC's dry gas revenue and a dry gas base price associated with Brent crude.