Last week I discussed the announcement of the Iraq-Shell petrochemical project in Basra and estimated to cost $11 billion (Dh40.3 billion). I surmised that the feed for the project would be ethane, methane, LPG and natural gasoline, all products of gas processing and for which Iraq needs to increase capacity sharply.

But what is the gas situation in the south of Iraq, where Shell is the major player since its famous $17.2 billion deal in November 2011 to gather and process gas from the three southern oilfields of Rumaila, West Qurna 1, and Zubair? The joint venture to establish the Basra Gas Company (BGC) was between the Iraqi South Gas Company, Shell and Mitsubishi with 51, 44 and 5 per cent stakes respectively. The initial goal was to process up to 2 billion cubic feet a day of gas.

At the time, more than 700 million cubic feet a day (mcfd) of gas was flared in the south and Shell announced that “at current prices, the gas is valued about $1.8 billion per year”.

Much was said about the deal especially with respect to the fact that it was made behind closed doors without any of the competition being called in to provide their bids. Also, Shell’s insistence to export gas as LNG was much criticised when liquid fuels were — and continue to be burnt in large quantities — in power stations.

Although the agreement eventually contained a statement to direct BGC to first meet local demand for gas, it did also say that gas can be exported if not used by Iraq. Such wording leaves the door open to have a LNG facility that may never be used due to the rising need for gas in Iraq.

Before all this, Shell conducted a plan for Iraq gas and it did foresee exporting 600 mcfd while at the same time Iraq would be using 280000 barrels a day of liquid fuels, such as crude and fuel oil, a situation that is incredible to say the least.

In comparison, liquid fuels are easy to export and bring much higher revenue due to the depressed prices of natural gas. To be honest, a highly placed source did tell me that it is not just Shell’s preference to export gas but that Sharistani, the oil minister at the time, wanted it that way.

But all of the above is the history of what looks like an irreversible process. What is important now is to record the impact of this agreement on the gas situation in the south of Iraq.

Crude oil production in the south has been increasing as a result of the licensing agreements with international oil companies. Therefore, associated natural gas in the south has also increased. The November 2011 gas production was 1,138 mcfd and averaged 1,629 mcfd in the third quarter of 2014.

But the utilised gas was only 317 mcfd in November 2011 and averaged 494 mcfd in the third quarter of 2014. This means that the wastefully flared gas went up from 821- to 1,135 mcfd and dry gas production — meant for consumers — was up from 278- to 449 mcfd. LPG production as a result of the processing went from 1,543 to 1,866 tonnes a day.

New facilities

The figures tell a story of slow progress, and compared to the design production capacity in the south, gas utilisation is probably not more than 40 per cent of the capacity of the two processing plants of North Rumaila and Khor Zubair of about 1,050 mcfd. This suggest that BGC is very slow in rehabilitating and maintaining these plants while billions are lost in gas flaring.

At the same time BGC was slow to initiate new gas processing facilities to cope with the increase in gas production. Only in April 2014 did the company award the technical studies of a new gas plant in Ratawi of 500 mcfd capacity, which would cost $2 billion. But it is too little compared with gas production now assuming current facilities are completely rehabilitated.

By the time the plant is ready, it will probably be five years from now and gas flaring would continue. Iraq probably needs four of such plants if flaring is to be avoided and electricity demand is satisfied.

This is what prompted the IEA in June 2012 to say that the implied value of the gas flared to 2020 would be $70 to $100 billion and that ‘This lost value provides a compelling reason for Iraq to move as quickly as it can to make early additions to gas processing capacity’.

If Iraq needs this money and is concerned about the quality of life of its people, it should work day and night to provide additional gas processing and infrastructure to make the gas available to all power stations and other industries.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.