Iraq's Oil Ministry has inked an initial agreement with Royal Dutch Shell to establish a company aimed at utilizing natural gas currently being burned off in Basra province.

The Heads of Agreement, as Shell officials describe it, is a preliminary legal step to an eventual joint venture with the South Gas Co., one of the state-owned oil and gas firms controlled by the Oil Ministry.

"We've in the very, very early days at this stage," said Shell spokeswoman Kirsten Smart. She said the prospective venture is looking solely at gas being flared in Basra province, not increasing gas production via upstream exploration or development of gas reserves not associated with oil. The venture would handle an increase in associated gas as oil production increases.

"Currently there's enough there that we believe in time it could supply the domestic market and over time supply exports," Smart said. "The domestic power supply is the initial focus." The lack of fuel is blamed in part for a lack of electricity in the country.

Iraq has the world's 10th-largest gas reserves, at 112 trillion cubic feet, according to Oil & Gas Journal. But the gas that could feed power plants, petrochemical plants and other domestic sectors, as well as be sent to the global market, is mostly left underground.

Iraq produces 1.1 billion cubic feet of natural gas per day, according to the Energy Information Administration, the data arm of the U.S. Energy Department. Nearly 65 percent is burned, which is called flaring.

The ministry estimates 700 million cubic feet per day is flared from the south of Iraq, most of it in Basra.

Iraq's Kurdistan Regional Government in the northern three provinces is establishing a center to produce gas for domestic uses. Meanwhile, Baghdad is going to allow bidders to develop the Akkas gas field near the Syrian border and is tempting European consumers by pledging gas to the Arab Gas Pipeline and the prospective Nabucco Pipeline through Turkey.

Aside from developing its gas industry, Iraq is also struggling to work out how international oil companies will be allowed into the domestic oil and gas sectors. Iraq nationalized in the 1960s, which is still popular with its citizens. The debate over the role of the international oil industry is partly the reason a draft new oil and gas law is being held up in Parliament.

Without a new law, the ministry is operating under the Saddam Hussein-era rules that gave the ministry a large say in oil policy. It has just renegotiated a development deal with the China National Petroleum Corp. and next month will unveil a list of oil and gas fields it will allow international oil companies to bid on to develop.

Abdul-Hadi al-Hasani, the deputy chairman of Parliament's Oil & Gas Committee, said neither the CNPC nor Shell deal requires Parliament approval.

"There is no law that forbids this agreement," he said.

Very few details of the Shell deal have been released, which doesn't bode well for Iraq's pledge of transparency in the oil and gas sectors.

But the ministry still has time.

"The focus will now be on reaching a final agreement and begin to establish a plan to develop Iraq's future infrastructure and to develop markets, both domestic and for future export," said Shell's Smart. "The preliminary development activities such as engineering studies and asset surveys will commence shortly, and carry on until and after the joint venture company is formed.

"Various Iraqi and international contractors are already on the ground in Iraq working for other companies. We have an agreement with a contractor to complete the asset survey work for us. Other contractors, local and international, will be employed as we progress."

A timeline for this process has not been announced.

Smart played down reports this will cost Shell upwards of $4 billion annually.

"It's too early to talk about figures at this stage," she said. "In terms of next step is preliminary development activities, feasibility studies and asset surveys, and that will commence shortly."

She said it's envisioned that "South Gas Co. will provide assets and Shell injects equity."

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