Shell and Total in Face-Off over Iraq's Akkas Field as Positioning for Contracts Continues

The Iraqi Oil Ministry has asked Shell to undertake “a long-term production test” of the Akkas field in Iraq's western Anbar province, according to a report in U.K. daily The Times. The gas field is located just 40 km from the Syrian border and could very easily and quickly be connected to the Syrian pipeline system, which gathers gas from Syrian fields right across the border. An old deal to develop the field and export 50 mmcf/d to Syria was reached by the Iraqi regime of Saddam Hussein, in place before the U.S.-led invasion in 2003, but Syrian interest in Iraqi gas imports has not diminished, as the country faces falling oil output from mature fields and booming energy consumption. Future Iraqi plans to pipe gas to Syria and connect to the Egypt-Jordan-Syria-Turkey Arab gas grid have also been mentioned, opening up for exports further on to Europe, although that would require larger volumes and be much further in the future.

In the positioning by IOCs to gain access to Iraqi oil and gas fields, both Shell and Total have shown interest for the Akkas field which—while being situated in the volatile Anbar province—is earmarked wholly for exports and will require comparatively little work and investment to be brought onstream. Under the unclear legal situation currently prevailing in Iraq's hydrocarbons sector, the IOCs would have to enter service contracts with the Oil Ministry (or its regional production companies), only receiving a set fee for their work. With a field whose production is destined immediately and fully for export, the ministry's margin would be visibly higher, potentially making the service contract more lucrative too. Having reserves of somewhere around 6-7 tcf, the Akkas field's infrastructure—when repaired—has a capacity to produce around 50 mmcf/d, although the ultimate potential production of the field could well be around 450 mmcf/d, according to The Times' sources. Such a large field, so close to an established market, would be relatively lucrative to develop even under a service contract, making the competition between Shell and Total to gain the final contract understandable. Many companies are beginning to adjust to the possibility of Iraq never adopting a production-sharing agreement-based legislation that allows IOCs to book reserves and receive a portion of the production.

While Total has understandably been tight-lipped over the possibility of Shell receiving the assistance request, it might yet be challenged before Shell is able to supply the asked-for services. While the Anbar province has become much safer in the past six months, it is still dangerous territory, dominated by Sunni tribal militias who currently support U.S. security efforts, but whose allegiance to the central Iraqi government is shaky at best and might turn sour when the U.S. army surge is wound down later this year. The proximity to the Syrian border is perhaps the only upside for this project from a security perspective, as both Shell and Total have significant experience of operations in that country.

Outlook and Implications

If Shell manages to get the requested assistance operations going at the Akkas field, the geological knowledge and experience of mapping out the reservoir for the Oil Ministry would greatly benefit the company in a later bidding process, making it possible for Shell to submit accurate project calculations and production estimates. Shell, Total, BP, ConocoPhillips/LUKoil, and other large IOCs have already used these tactics to home in on certain desired fields among Iraq's assets, prior to bidding and licensing rounds, building relationships with the Oil Ministry and providing technological assistance and training for free.

The Iraqi Oil Ministry has announced that a prequalification round is imminent, somewhat contradictory to ministry statements in previous months saying that service contracts would be awarded by the Oil Ministry in a non-competitive way. The launching of a prequalification round followed by a bidding round will, however, serve to legitimise the service contracts awarded, adding to the security of the IOCs, which already operate in Iraq on a very shaky legal basis.

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