Shell (NYSE: RDS-A) Middle Eastern Oil Investments

Brian Hicks

Written By Brian Hicks

Posted May 17, 2013

Shell (NYSE: RDS-A) is setting up a wider tent in the Middle East.

The Anglo-Dutch company will begin producing crude in the Majnoon oil field of Southern Iraq next month. It is mostly for domestic consumption, but there is room for exports.

iraq oilShell is currently the lead operator of the Majnoon, with a 45 percent stake. Malaysia’s Petronas holds a 30 percent share, and the Iraqi government holds the remaining interest. Output from the region is expected to start by the middle of this year.

But Shell is going after Middle Eastern natural gas as well.

The company is also in the midst of negations with Saudi Arabian officials for a natural gas project in the Kidan field of the Rub al-Khali desert, Bloomberg reports. The talks are delicate, and details of the negations have not been given thus far. Shell has wanted to pull out of Kidan after talks with the Saudi government fell through, but discussions seem to be back underway.

In Iraq, Shell, Mitsubishi Corp. (OTC: MSBHY), and Iraq’s South Gas Company began a $17 billion joint venture on May 1, and the outlook looks promising. Under the banner of Basrah Gas Company, the partners are currently capturing approximately 400 cubic feet per day of associated gas, but the development could lead to 2 billion cubic feet per day, according to a Shell news release.

Shell has a 44 percent stake, Mitsubishi a five percentage stake, and the remaining shares of 51 percent will be in the hands of South Gas.

The Iraqi government maintains that 112.6 tcf of natural gas reserves could be in the nation.

But Iraq currently lacks the infrastructure needed to store flare gas and is forced to spend $2 billion a year in burning it.

Also known as associated gas, flare gas is found with crude but normally burnt off with gas flares. There is not much use for it in the West, since it is considered a pollutant, but the extracted gas can be a useful source of energy for countries with faltering electric grids.

In parts of Iraq, people have had to routinely undergo power outages, sometimes lasting for hours, and the situation became worse when the nation was at war.

Prime Minister Nouri al-Maliki is looking to not only provide more energy to his people, but to also revitalize the Iraqi economy through energy.

To Shell’s benefit, the Basrah project could eventually produce liquefied natural gas – a special source that many petroleum-producing nations are seeking and a valuable commodity to East Asian markets.

Shell’s Middle East Strategy

For Shell, the Majnoon is the crown jewel of Iraq. Considered one of the richest oil fields in the world, the Majnoon is said to have 23 to 25 billion barrels of oil, with a proven 12.8 billion barrels. Shell output from the Majnoon is expected to hit 175,000 bpd by year’s end.

Shell has a wise strategy of investing in two of the most prosperous oil producers of OPEC. Because of political instability and terrorist attacks, many investors and companies have been hesitant to remain in the region.

Lacking infrastructure and disputes between Iraqi and Kurdish officials are further barriers that prevent Iraq from reaching its full energy potential.

But Iraq recently toppled Iran as the second best oil producer under OPEC, with Saudi Arabia coming in first. Since Iran’s oil ventures have been crippled mostly by international pressures, Iraq has been able to take Iran’s place as an OPEC-producing powerhouse.

Iraq comprises roughly 20 percent of production, but the International Energy Agency has cited political instability as a liability for future development.

But Shell is willing to invest in the region regardless of the problems and risks.

Iraq’s current oil production is 3.3 million barrels per day, but analysts are expecting output to grow to 4.5 mbpd by the end of 2014. If production maintains positive levels, Iraqi production could grow to 9 mbpd, or 13 mbpd in a best case scenario.

Couple that with Saudi Arabia’s refusal to expand its production rates to 15 mbpd by 2020. Currently, Saudi Arabia produces 9 mbpd with an intention to increase levels to only 10 mbpd by 2020.

These estimates give an indication that Iraq could run neck-and-neck with its OPEC superior someday, but don’t count on that anytime soon.

In theory, it is possible, but since Saudi Arabia is cutting down on exports as a result of worldwide petroleum production, it is highly probable that Iraq would need to do the same if Iraqis plan to undertake an export boom of their own.

And the lacking stability in Iraq will most likely remain for years.

To this day, Iraqi workers are not able to fix pipelines in the north because of poor security. And despite Iraq’s rich reserves, Saudi Arabia will continue to hold influence over the region.

There is also the North American drilling boom, forcing Saudi Arabia to cut back on production because of falling demand.

As of May, U.S. oil production stands at 7.4 mbpd – expected to hit 9.1 mbpd by 2018 and reaching 11.1 million by 2020.

Shell also has petroleum interests in the U.S., but it has a special eye for the Middle East.

The company has played its hand well by pinpointing and capitalizing on under-served and problematic areas in the Iraqi energy market. Iraq and Shell investors are sure to reap the benefits as production evolves.

Shell can indeed awaken the sleeping giant that is the Iraqi oil industry, and the company could be a trailblazer in sparking new investment in the region.

Companies Interested

Energy companies and investors have treated Iraq like the plague in recent years, but there are some companies that think the risk is far worth the gain.

A joint venture company by the name of Wood Group has acquired a one year contract to work in Majnoon.

And Exxon Mobil (NYSE: XOM) has teamed up with Turkey and the Kurdistan Regional Government for oil exploits in Northern Iraq.

Since Exxon Mobil’s operations are in the south, the Texas-based company does not pose a threat to Shell, and Exxon will most likely be entrenched in lingering disputes between the KRG and the Iraqi government regarding oil territory.

As U.S. companies retracted from Iraq, energy-hungry China has swooped in to fill the void. China National Offshore Oil Corp., Ltd., PetroChina (NYSE: PTR), and China National Petroleum Corp. all have oil interests in Iraq.

The only way for investors to gain confidence in Iraq is for al-Maliki to address issues of security, corruption, and infrastructure.

Right now, Iraq is the Wild West of energy investing. The dangers and risks are high, but the reward can be plentiful. 


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