Cablegate: Shell Looks to Establish a Presence in Basra

DE RUEHGB #2891/01 2520717
R 080717Z SEP 08





E.O. 12958: N/A


1. This is a Regional Embassy Office Basra cable.

2. (SBU) Summary: A Shell International executive team visited
Basra between August 28 and September 1 as part of its negotiations
on a potential joint venture with the Iraqi government. Under the
multi-billion dollar, 25-year agreement, Shell would develop a
comprehensive natural gas production system that could end wasteful
and polluting flare offs in Basra oil fields, generate substantial
profits and make Iraq a self-sufficient exporter of natural gas.
The team met with personnel from MND-SE, South Oil Refinery, a
member of the Energy Fusion Cell, and the REO. They seemed
confident that the company can to meet the challenges of setting up
business in Iraq. (Note: Shell's efforts seemed to have been
successful. A September 7 AP story reports that the Iraqi cabinet
approved the Shell joint venture without providing other details.)
End Summary.

3. (SBU) A Shell International executive team visited Basra between
August 28 and September 1. The members of the team included: Tony
Nieman, Venture Manager for Southern Iraq, Shell; Elsine van Os,
Security Analyst, Shell; Katie Smith, Assistant Intelligence
Manager, Olive Group; Mark Courtnell, Shell Regional Security
Advisor; Bob Phillips, Mott MacDonald Program Manager (MMD); Peter
Ebb, Operations Support Manager, MMD. The REO met three times with
the team. First for an initial introduction meeting; then with
Barry Kountz, Project Engineer for USACE GRD, Energy Fusion Cell;
and finally with Qasim Ali Qadim, Technical Manager of South Oil

4. (SBU) Tony Nieman, Shell Venture Manager for Southern Iraq,
summarized the company's current efforts to reach an agreement on a
multi-billion dollar 25-year joint venture with the Iraqi
government. Nieman told REO that Iraqi wells flare off 800 million
standard cubic feet of gas daily, at an estimated annual value -- at
current market prices -- of more than $1.5 billion. (Note: Iraq's
domestic price for natural gas would be several times less than the
international price, and, unlike crude oil, gas is a less fungible
product and generally priced according to the specific contract
between supplier and consumer. The revenue from Shell's joint
venture would therefore be less than $1.5 billion.) Security
analyst Van Os added that environmentalists have condemned both the
wasted fuel and the needless contamination from gas flaring.

5. (SBU) The joint venture would be based on a 49-51 split of the
returns with the GOI from the capture of natural gas. 50% of the
capture would go to the domestic market and the other 50% would be
exported to the international market. Shell has carried on quiet
negotiations with Iraqi officials outside Iraq for five years and
just last week approved a framework agreement in Lebanon with
unnamed Iraqi officials. Nieman said Shell already maintains good
relations with South Oil Company (SOC) and expects to complete
negotiations with the Ministry of Oil by the end of the year,
signing a final contract in 14 to 16 months. MMD will start
gathering data for Shell in Basra this October. Preparations will
involve preliminary training for Iraqi staff and sufficient
intelligence to support safe operations.

6. (SBU) Nieman remarked on the irony that Iraq is an
electricity-starved gas importer when it could be an exporter,
especially since expected petroleum production increases will result
in even more natural gas by-product. He explained that as more gas
is captured, Shell expects to contribute more towards electricity
generation in Iraq. According to Nieman, Iraqis have plans to
increase their electricity generation capacity, but there is a gap
between their plans and actual projects initiated. An initial goal
of the Shell project would be to take the oil infrastructure off the
national power grid. The Iraqi oil industry should be able to
provide for all oil field-related electricity needs.

7. (SBU) Although Shell has publicly postponed any projects to help
Iraq boost oil production until the country's government finalizes a
hydrocarbons law, Nieman noted that Shell viewed this project as
falling outside the purview of that law since it involves midstream
treatment, which falls under laws that regulate joint ventures.
Shell lawyers are looking at the relevance of contract arbitration
laws which seem to apply to state-owned entities. With a long
track-record managing petroleum extraction in other countries, the
company is used to working with these kinds of contract arbitration
problems. In the meantime, the team plans to gather data, establish
relationships, and hopes to initially work out of the MMD compound
in Basra Airfield.

8. (SBU) Over the 25-years of the project, Shell expects to set up
an entire natural gas production system, starting from a single base

BAGHDAD 00002891 002 OF 002

and spreading out, all the way to gas liquefaction plants and port
facilities. They are confident their experience can guide them in
negotiating and implementing this project, while also building Iraqi
sustainability. Shell officials indicated that other private
companies, such as GE and Mitsubishi, would also be involved in the
project, although not initially. They cited their 40-year contract
for natural gas production with Oman, which has recently been
renewed for an additional 40 years, as an example of the
successfully proven investment model they hope to use in Iraq.

9. (SBU) In the face of dire warnings from Qasim Ali Qadim,
Technical Manager of South Oil Refinery, about rampant official and
private corruption in the Iraqi system, Shell representatives say
they are confident the company's wealth of experience in other
corrupt cultures, such as Nigeria, as well as the obvious benefits
to Iraqis, will give this project what it needs to succeed. Shell
sees this as a win-win situation coupling long-term sustainability
with benefits to the average Basrawi: employment, income and
reliable electric power. Getting this contract in place and
operational will also put Shell ahead of future competitors for even
more lucrative oil contracts.

10. (SBU) Comment: Nieman is well aware of the uneasy relationship
between MoO, SOC, and SGC (South Gas Company), commenting that,
whenever the Shell delegation left the room, they would inevitably
start arguing with each other. Having served previously in places
like Iran and Kazakhstan, Nieman did not seem concerned about the
bickering. He asked a lot of questions about corruption, however,
anxious to assess its extent. Additionally, having just learned
about the Chinese oil deal with Iraq, Nieman commented that upon his
return to his office in Dubai he would be anxious to get Shell's
analysis of it, as it seems to have somehow skirted the issues
revolving around the lack of a hydrocarbons law, especially for an
upstream deal. He also remarked that a 70-30% split in returns was
highly unusual. The Shell deal, once executed, should also draw in
smaller companies (Shell contractors and subcontractors) and induce
other investors to follow suit, convincing that Basra can support
profitable business.

11. (SBU) Comment cont'd.: A September 7 AP story reports that the
Iraqi Cabinet approved the Shell joint venture, suggesting that
Shell's hopes that Iraq's agreement with the China National
Petroleum Company would serve as a precedent were well placed.
(Initial details of the media reporting are consistent with the
information that Shell provided to REO Basra.) While Shell might
not be correct that its deal falls outside the scope of the
hydrocarbons law (Section Four of one of the drafts, for example,
covers exploitation of natural gas), the MoO seems determined to
invite foreign participation now rather than wait on the uncertain
prospect of hydrocarbons law passage. While there may still be
operational details to be worked out, e.g., clarity on a dispute
resolution mechanism and harmonization of its plan with existing MoO
facilities for capture of natural gas, such as the Zubair gas
collection plant, the Shell deal will be a welcome development for
both the Iraqi people and Iraq's environment. (The Zubair facility,
once operational, will capture 100 million cubic feet per day,
septel, of flare gas.).


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