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RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2891/01 2520717
ZNR UUUUU ZZH
R 080717Z SEP 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 9287
INFO RUCNRAQ/IRAQ COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DOE WASHDC
RUEKJCS/DIA WASHDC

UNCLAS SECTION 01 OF 02 BAGHDAD 002891 
 
SENSITIVE 
 
SIPDIS 
 
STATE ALSO FOR EEB AND NEA/I; DOE FOR GEORGE PERSON 
 
E.O. 12958: N/A 
TAGS: EPET ENRG EINV IZ
SUBJECT: SHELL LOOKS TO ESTABLISH A PRESENCE IN BASRA 
 
SENSITIVE - NOT FOR INTERNET DISTRIBUTION 
 
¶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 
Refinery. 
 
¶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.). 
 
Crocker