Royal Dutch Shell’s long-standing plan to capture and refine gas in south Iraq has moved a step closer following the approval by the country’s state-owned gas company.

In a statement the Anglo-Dutch energy company, which would own 44 per cent of the venture, confirmed that the project had been “initialised” by Iraq’s South Gas Company, which owns a 51 per cent stake, and by Japan’s Mitsubishi Corporation, which has 5 per cent. The $12.5bn investment project now has to be approved by Iraq’s cabinet.

The joint-venture, named the Basrah Gas Company, would collect and process raw gas from Iraq’s southern Rumaila, Zubair and West Qurna 1 oilfields which are currently being flared.

According to Shell some 700m square cubic feet of gas is flared every day in southern Iraq. The company hopes to process it into natural gas initially for domestic consumption and later for export.

“The execution of the deal will open the competition door for Iraq to export liquefied gas [LNG] to the international market,” Ali al-Khudhier, head of South Gas Co, said in a statement, according to Reuters.

The project was first signed in 2008 but has since faced legal disputes, some political opposition and renegotiations on gas pricing.

Shell declined to comment on whether the latest agreement has resolved those issues. However Richard Griffith, an analyst at Evolution Securities, said investors should be cautious.

“This is one step in a long process [and] the next step could be as long as a piece of string…A deal is in the government’s interest, so it should be earlier rather than later, but at the moment we just don’t know,” he said.

The joint venture is part of plans by the Iraqi government to modernise its oil facilities, boost oil exports and lessen blackouts which continue to plague the country in the aftermath of the US-led invasion in 2003.

Shell is ploughing between $25bn and $27bn a year into upstream investment until 2014, according to analysts.

In December 2009 Shell won the right to develop Iraq’s Majnoon oilfield – which is targeting production of 1.8mn barrels of oil per day – via an auction. That marked the re-entry of foreign companies 37 years after the nationalisation of Iraq’s entire oil industry.

Get alerts on Oil when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article