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Viewing cable 09BASRAH36, BASRAH: SHELL STILL OPTIMISTIC ABOUT FLARED GAS PROJECT

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Reference ID Created Released Classification Origin
09BASRAH36 2009-06-20 14:02 2011-08-24 16:30 UNCLASSIFIED//FOR OFFICIAL USE ONLY REO Basrah
VZCZCXRO4857
RR RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHBC #0036/01 1711402
ZNR UUUUU ZZH
R 201402Z JUN 09
FM REO BASRAH
TO RUEHC/SECSTATE WASHDC 0882
INFO RUEHGB/AMEMBASSY BAGHDAD 0460
RUCNRAQ/IRAQ COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHBC/REO BASRAH 0920
UNCLAS SECTION 01 OF 03 BASRAH 000036 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV ENRG EPET PGOV IZ
SUBJECT: BASRAH: SHELL STILL OPTIMISTIC ABOUT FLARED GAS PROJECT 
 
REF: A. BASRAH 31 
     B. BAGHDAD 955 
     C. BASRAH 16 
     D. BAGHDAD 194 
     E. 08 BAGHDAD 3397 
 
BASRAH 00000036  001.2 OF 003 
 
 
1. (SBU) Summary.  During a June 8 meeting with PRT EconOff, 
visiting Shell Gas and Power Vice President Mounir Bouaziz 
(Amcit, please protect) expressed optimism that Shell's 
multi-billion dollar South Gas Utilization Project would be 
approved within the next three months, although "there is still 
a lot of work to be done."  He said that there was "really no 
one opposed to the project," including Prime Minister Maliki. 
Bouaziz's visit included meetings with key local leaders, who he 
said all expressed unconditional support for the project.  He 
inaugurated a "quick win" rehabilitation of a 28-MW generator 
that will now be available to an electricity-starved public. 
Bouaziz said that Shell faces "major challenges" dealing with 
existing environment problems such as waste management, oil 
leaks, and oil condensates.  On doing business in Basrah, he 
highlighted the "unbelievable" visa requirements, as well as 
shortages of office and hotel space.  On the looming June 28 oil 
licensing bid deadline, he said that despite major misgivings 
about the bid terms, virtually all companies will bid, although 
they may not abide strictly by the "difficult or impossible" 
rules.  End summary. 
 
-------------------------- 
Gas project still on track 
-------------------------- 
 
2. (SBU) The South Gas Utilization (SGU) Project is a 51-49 
percent, South Gas Company (SGC)-Shell joint venture to gather 
and market natural gas (produced in the region's oil fields, and 
currently flared) in the Governorate of Basrah.  While the 
initial Heads of Agreement was signed in September 2008, a final 
approval by the Council of Ministers (COM) is still needed. 
Bouaziz, completing another of his frequent visits to Basrah 
which included meetings and site visits, expressed overall 
optimism that the project (the), and prospects for eventual 
approval, would be realized, although "there is still a lot of 
work to be done."  He said that there was "really no one opposed 
to this project," and even Prime Minister Nouri al-Maliki, 
during the London April 30 investment conference in London, 
"reiterated his support."  During this Basrah visit, Bouaziz 
said that he met with a wide range of stakeholders, including 
Basrah Governor Shaltagh, members of the Provincial Council, 
Iraq Southern Region Commander General Mohammed, the Basrah 
Investment Commission, the U.S. 34th Infantry Division 
Commander, and two vocational schools.  All expressed their 
unqualified support for the project.  (Note: In the past, some 
local leaders have criticized Shell for having largely ignored 
local stakeholders.  End note.)  Bouaziz said that he was still 
hopeful that in "July to September" time period the project 
would receive the official approval of the GOI Cabinet (COM). 
He said there had been only one member of the Parliament 
(Council of Representatives) that had expressed any opposition 
to the project. 
 
3. (SBU) Regarding the asset valuation study that accounting 
firm Ernst and Young was to complete by the end of May (ref B), 
Bouaziz said that they had recently completed a draft report, 
which Shell was analyzing.  Ernst and Young will establish the 
current market price to replace SGC (and a unit of South Oil 
Company, or SOC) facilities, and then depreciate the replacement 
value based on the facility's age.  This exercise will also 
place a value on the GOI contribution to this joint venture. 
 
4. (SBU) Bouaziz said that he had just presided over a "quick 
win," the rehabilitation of a 28 megawatt (MW) SOC generator in 
the nearby city of Az Zubayr, that had not worked for over 20 
years.  He noted the importance of this fix-up, as this 
generator will now be available to a power-starved public, 
instead of going towards SOC and SGC use.  He said that last 
month, Shell rehabilitated a critical dry gas compressor that 
will facilitate export of this product.  Bouaziz said that Shell 
is also in the process of importing a new 50 MW, General 
Electric generator.  On GE, Bouaziz said that Shell is trying to 
have GE enter its GOI-Shell joint venture that will operate this 
gas project (ref B) in some role, but indicated that GE is still 
reluctant to do so, on security grounds. 
 
---------------------- 
With Mitsubishi in tow 
---------------------- 
 
5. (SBU) On this latest visit to Basrah, Bouaziz brought along 
several Mitsubishi executives.  Bouaziz said that Shell hopes 
that Mitsubishi will take some still-unspecified role in the 
GOI-Shell joint venture, including working with various 
fertilizer, gas, and power plants in the Basrah region.  Bouaziz 
 
BASRAH 00000036  002.2 OF 003 
 
 
said that Mitsubishi was active in Iraq in the 1970s and 1980s, 
and Iraqis have expressed a strong desire for them to return, 
and in order to upgrade equipment and replace badly needed spare 
parts in these old facilities.  Bouaziz also said that the 
presence of such an internationally well-known firm would 
bolster Shell's project. 
 
------------------------------- 
Town Hall meeting well received 
------------------------------- 
 
6. (SBU) Bouaziz said that Shell has regularly conducted town 
hall meetings in an attempt to inform as wide array of 
stakeholders and citizens of the project's plans.  Given that 
Iraqis can sometimes believe in "conspiracy theories," he said 
that these meetings are a "useful exercise."  He had just 
concluded another one, which included NGOs, labor, women, 
business, farmers, and academic groups.  Bouaziz said that he 
was greatly encouraged and even surprised at how "extremely well 
informed and responsible" these groups were, how eager they were 
to learn about the project.  There was "virtual unanimity" about 
its importance, and no objections were voiced.  The tone and 
questions were "sober and responsible," and demonstrated 
"sophistication."  Bouaziz said that a similar meeting would 
soon be held for local companies and contractors, for them to 
learn about Shell's tender processes. 
 
------------------------------- 
"Shocking" state of environment 
------------------------------- 
 
7. (SBU) Bouaziz noted that, while a prime benefit of the 
project was environmental (gas flares and pollutants, so 
prominent on the Basrah skyline, would eventually be 
eliminated), for locals, this is not as important as the 
hoped-for economic benefits of jobs and investment.  On the 
issue of the environment, he said that Shell has concluded a 
fairly extensive environmental survey of the 100 by 150 
kilometer region where it would operate 32 sites.  He said that 
overall, "it's a shocking situation," and Shell faces a "tall 
order" as it contemplates dealing with existing environment 
challenges such as waste management, oil leaks, and oil 
condensates.  At the same time, he said that it is "not 
comparable to worse off places, such as Nigeria." 
 
---------------- 
Engaging the MOO 
---------------- 
 
8. (SBU) Bouaziz said that Shell had provided laptops and 
software to several mid-level MOO executives to introduce to 
them -- for the first time -- concepts such as net present value 
and internal rate of return, and to assess the financial impact 
of differing terms and pricing (ref B).  He said that MOO 
Sharistani, who apparently had not known about this initiative 
and when recently shown a demonstration of this, asked for a 
laptop for himself, which was provided.  Bouaziz joked that this 
application is now the "most popular program in the MOO."  At 
the same, he said that this was a positive step and an important 
idea for MOO executives to know about. 
 
------------------------------------ 
Barriers to doing business in Basrah 
------------------------------------ 
 
9. (SBU) Bouaziz lamented the continued barriers to doing 
business in Basrah.  Interestingly, he did not highlight the 
"usual" problems such as lack of hotel and office space (which 
he noted are major problems), but rather the "absurd" process to 
obtain a visa on every visit, both before departure to Iraq, and 
upon arrival at Baghdad or Basrah airports.  He recounted the 
recent "unbelievable, two-hour ordeal" going to different 
counters, getting stamps and signatures on "different scraps of 
paper."  He said that he had mentioned this problem to PM Maliki 
in London in April, and although the latter said he would do 
something, nothing has changed so far. 
 
10. (SBU) Bouaziz discounted the idea that international oil 
companies (IOCs) would encounter significant transport 
bottlenecks at the Port of Umm Qasr when they begin to ramp up 
operations when they being the first licensing round.  He said 
that bringing in heavy equipment overland via Kuwait or via the 
Port of Umm Qasr would not pose significant problems. 
 
11. (SBU) Bouaziz and PRT EconOff discussed another long 
discussed investment irritant, the Basrah International 
Airport's former administrative building, provisionally dubbed 
the "Basrah Business Center," or BBC (ref C).  (Note: The BBC is 
conveniently located next door to the airport, and the Coalition 
has long sought, so far unsuccessfully, to develop and modernize 
 
BASRAH 00000036  003.2 OF 003 
 
 
the building, seen as an ideal place to locate a business center 
for the multinational businesses that will presumably work in 
the Basrah region.  Several UK and US-based business offers to 
develop the center, with Coalition support, have so far gone 
unheeded by the Ministry of Transportation, the line ministry 
that owns the building and land.  End note.)  Bouaziz repeated 
an earlier assertion that Shell would like to lease two of the 
BBC's five floors.  He said that he had mentioned this 
long-standing issue to the Minister of Transportation at the 
April London investment conference.  He said that the minister 
had indicated that he knew of these proposals, but said that he 
had been waiting for some kind of "master plan" for the airport, 
which Bouaziz sees as a stalling tactic. 
 
----- 
Exxon 
----- 
 
12. (SBU) Bouaziz said that Exxon, which he expects to bid on 
one or more oil or gas fields in the first round, has not made 
any preliminary visit to Iraq.  Bouaziz twice expressed his 
"shock" and "amazement" that they have not undergone such an 
important scouting visit. "You cannot possibly understand this 
place without being on the ground."  He said that most western 
oil majors have a largely incorrect view of social, economic and 
security conditions here, and that the situation is far better 
than most believe. 
 
--------------------------------------------- ----------- 
Deadline looming for bids for oil licensing first round 
--------------------------------------------- ----------- 
 
13. (SBU) The GOI has set a late June deadline for IOCs to 
submit bids for the first round of oil and gas licenses (refs A, 
C, D and E).  Bouaziz said that, in the end, and despite some 
"major misgivings and complaints" about the bid terms, virtually 
all 32 IOCs that remain eligible will place bids -- "they cannot 
afford not to be here."  However, he said that these bids might 
very well not strictly conform to what he said were the "crazy" 
bid rules, and that many firms may very well submit bids in 
their own way, as the bid rules were "almost impossible" to be 
complied with, and the MOO in turn may or may not accept these 
bids.  He said that the London-based Gaffney Cline and 
Associates that has been advising the MOO on the bidding had 
"made a mess of the process," and made it "way more complicated 
that it had to be."  In any event, Bouaziz said that if the 
process does go forward in any reasonably successful manner, it 
will be an important move forward for Iraq, and that significant 
economic activity in the Basrah region, and other parts of Iraq, 
will ensue. 
NALAND