Shell and China in Iraq

Brian Hicks

Written By Brian Hicks

Posted April 15, 2009

Shell pioneered oil drilling in the North Sea…

Now, North Sea production and exploration is dwindling, and Shell seems to be throwing in the towel in its European backyard.

Drilling is down 41% in the UK, and including Anglo-Dutch Shell, the number of exploration drilling wells around the whole region was down 78% this year from the same period in 2008. There just isn’t enough money flowing into energy markets to justify milking the North Sea’s waning supply.

So Shell is hoping to team up with Chinese international oil companies for a jackpot in Iraq.

"We are in the process of forming partnerships for certain bids [in Iraq], and Chinese companies are a part of that," Shell CEO Jeroen van der Veer said Tuesday, April 13.

Back home, North Sea fossil fuel aficionados now say nearly half of all local oil infrastructure could come offline just a little over a decade from now.

The rigs, linkups, and transport systems Shell has built over decades are not only less profitable to keep up, they’re also more dangerous. The Guardian reported a rash of safety inspection failures at Shell facilities in 2007, just a few years after the company got caught inflating its reserve numbers by 20%. That management fiasco forced restructuring and joined the British and Dutch arms of the company under one primary London listing (LSE:RDSA, NYSE:RDS.A).

Is the move into Iraqi oil with Chinese companies (probably China National Petroleum Corporation, CNPC) just a last gasp for Shell, or a new breath of life?

Iraq’s northern oil fields near Kirkuk, the seam region between Sunni-dominated and Kurdish autonomous areas, do hold the key to Iraq’s oil wealth. To date, Shell has operated mainly in handling gas flares near Basra in Iraq’s south. Basra is also where British coalition forces have had their strongest presence since 2003.

By moving into northern Iraq, Shell may be taking a calculated risk that it is even less economically adventurous to operate there than in war-free European waters.

"We look at opportunities…and compare them against other opportunities on a global base," Shell CFO Peter Voser said about the potential Chinese tie-up in Iraq.

And this is one heck of a recalibration of opportunity by a European oil company.

Sam Hopkins


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