Shell Natural Gas Iraq Project Valued 2.5 Billion

Jan. 31 (Bloomberg) -- Royal Dutch Shell Plc may spend $2.5 billion on a natural gas plant in southern Iraq to meet energy demand in the Middle East, where economies are growing 5.9 percent a year, according to a person involved in the plan.

Shell met with Iraqi officials in The Hague last week to propose building a pipeline that would link the Basrah region to a new facility on the country's coast, the person said. Shell would also build a facility that could freeze 16 million cubic meters of gas a day and ship it to Kuwait and the United Arab Emirates, the person said.

Gas demand in the Persian Gulf grew 28 percent from 2003 to 2006 as the United Arab Emirates and Saudi Arabia developed steel, aluminum and chemical industries to curb their reliance on crude oil exports. Shell, based in The Hague, needs new energy sources after oil and gas production fell 14 percent in four years.

``The Gulf Arab states need extra sources of gas one way or another,'' said David Butter, a London-based senior Middle East analyst at the Economist Intelligence unit. ``And you'd expect Shell to be looking very closely at Iraq as it has unique potential.''

Iraq had 3.17 trillion cubic meters of gas in reserves at the end of 2006, according to estimates by BP Plc. The proposed project's daily output would be enough to supply about 14 percent of the U.A.E.'s demand, the BP figures show. Abu Dhabi National Energy Co., a state-run utility in one of the country's seven sheikdoms, plans to expand its power capacity by 78 percent, to 16,000 megawatts, over five years.

Iraqi Contracts

Shell may complete its proposal in about a week, the person said. Representatives in Shell's press offices in The Hague and in London couldn't be reached for comment. Calls to the Iraqi Oil Ministry spokesman weren't answered.

Middle East gas consumption has grown faster in the past decade than in the U.S., Europe and Asia, according to BP. Use of the fuel in the region almost doubled to 289 billion cubic meters annually in the 10 years through 2006, BP said.

Prices for Algerian LNG tripled in the five years through Sept. 30, according to Gas Strategies Group Ltd. Producers have charged more amid rising construction costs and a shortage of equipment and contractors.

LNG is natural gas that's chilled to a liquid, shipped by tanker and then turned back into gaseous form at its destination.