ITOCY Itochu Corp (PK)

Energy company leaves last Iraqi site but keeps a presence in natural-gas industry

By Sarah Kent and Benoit Faucon 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 16, 2018).

LONDON -- Royal Dutch Shell PLC is giving up on its last oil fields in Iraq, leaving the world's second-biggest oil company with a dwindling footprint in the Middle East -- a region it helped build into a petroleum powerhouse.

Shell said Monday it is selling for an undisclosed amount a stake in the West Qurna 1 oil field in Iraq to Japan's Itochu Corp., the latest step in a gradual retreat from the region. The company is also expected to give up its holding in Iraq's Majnoon oil field later this year, though it will retain its natural-gas interests in the country.

Shell's departure from Iraqi oil assets marks one of the final chapters in a slow pullback from the Middle East's vast fields of petroleum. Shell pumped as much as 450,000 barrels of oil in 2003 in the Middle East, and over the past 15 years had operations that produced thousands of barrels of oil daily across six countries in the region. Once it officially leaves Iraq later this year, Shell will have oil assets in Oman that produce about 220,000 barrels a day.

Shell is keeping its considerable natural-gas interests in Middle Eastern countries, including Qatar, Oman, Egypt and Iraq, a strategy it has followed after its $50 billion deal to buy gas giant BG Group PLC in 2016. The deal also brought Shell big business in Brazil's offshore oil fields, where it has centered its oil-production strategy.

"We have definitely not turned our back on the region, far from it," said Shell Chief Executive Ben van Beurden in November, referring to the Middle East. But he added that projects such as Majnoon "are increasingly less strategic in our portfolio."

The move reflects the waning attraction of the Middle East's once-prized oil reserves, as companies find that the free flow of crude in the region often comes at a political or financial cost. U.S. oil giants Exxon Mobil Corp. and Chevron Corp. have ratcheted up their focus on shale interests on their home turf in recent years, though both retain interests in Iraq.

In addition to the escalating security risks following the Arab Spring, oil contracts offered by Middle Eastern governments often don't have profitable terms, analysts say.

Iraq has some of the toughest terms in the business. Foreign companies are paid fixed fees per barrel of oil pumped, terms that many in the industry say is low.

"The terms are too tight for Shell," said Robin Mills, a former Shell executive involved in the Middle East who is now chief executive of Dubai-based Qamar Energy. For the British-Dutch oil giant, "it isn't worth the trouble."

Shell declined to comment further on its footprint in the Middle East beyond confirming its exit from the West Qurna oil field. The company said it is still working to gain necessary approvals for the sale from the Iraqi government.

Iraqi oil officials didn't respond to requests for comment.

In the past year, Shell has had to contend with delays in Iraq including tardy government payments for pipelines and water-treatment facilities, according to Iraqi officials and contractors.

Much of the Middle East's oil business is off limits to foreign companies, but a handful of countries including Iraq still offer the promise of barrels at relatively low prices. But the crash in oil prices over the last three years has helped lower the costs of production elsewhere in the world, including the U.S., where Shell has earmarked its shale interests as a catalyst for growth.

Shell also has taken a number of steps in recent years that have reduced its presence in the region, passed on opportunities and been forced out by Western sanctions.

Shell walked away from a bid to renew its rights to a massive oil concession in the United Arab Emirates -- a privilege that BP PLC and Total SA paid about $2 billion to keep but both Shell and Exxon didn't. The company stopped producing in both Syria and Iran after 2010 because of sanctions related to the Syrian civil war and Tehran's nuclear program, respectively.

Shell has shown interest in returning to Iran, but it hasn't followed Total in signing a deal to invest in the country. The sanctions risk remains high, and Shell has struggled to find suitable, mainstream banks to enable its Iranian investments, people familiar with the matter say.

Write to Sarah Kent at sarah.kent@wsj.com and Benoit Faucon at benoit.faucon@wsj.com

(END) Dow Jones Newswires

January 16, 2018 02:47 ET (07:47 GMT)

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