Energy giant Royal Dutch Shell has agreed to a joint venture deal worth up to $4 billion with the South Gas Company of Iraq for the processing and marketing of all associated natural gas produced in the Governorate of Basra in southern Iraq.

The Anglo-Dutch oil major becomes the first western oil company to sign a deal with Baghdad after nearly four decades since Saddam Hussein threw out foreign oil companies after he nationalised the oil sector in 1972.

Earlier this month China National Petroleum Corporation (CNPC) had signed a revised version of an earlier contract of 1997 for $3 billion with Iraqi authorities to develop and operate Iraq's al Ahdab oil field for 20 years.

Many international oil companies have signed contracts with the Kurdish government in Iraq's northern area but none with the central government.

The JV structure is the model chosen by the Ministry of Oil as the vehicle to create a world-class natural gas industry in Iraq as it has one of the world's largest natural gas resource bases. South Gas Company will be the 51 per cent majority shareholder in the JV, with Shell holding 49 per cent.

Iraq's stake in the JV would be the existing facilities and equipment which it already has and the investment for purchase of natural gas from upstream operations, own and operate existing gas gathering, treating and processing facilities, and invest to repair non-functioning assets and develop new facilities would come from Shell.

As of now some 700 million standard cubic feet per day of natural gas, is being flared in southern Iraq by upstream suppliers of oil.

By capturing and processing this natural gas, the JV should create an important and reliable supply of domestic energy and create significant value for Iraq.

The JV will be focused initially on creating reliable sources of domestic energy, including liquefied petroleum gas, natural gas liquids, natural gas supply for power generators, and deliveries to local distribution networks.

In the future, the JV could develop a liquefied natural gas facility to export natural gas not needed for local domestic use.