By Ron Bousso
LONDON (Reuters) - Royal Dutch Shell is set to end a century of oil production in Iraq by withdrawing from two of the Arab state's flagship fields to focus on more profitable gas development.
Shell's retreat highlights the challenges foreign operators face with low-margin oil contracts in Iraq, an OPEC member that sits on some of the world's biggest oil reserves and wants to boost production after years of conflict hindered development.
The Anglo-Dutch firm said on Wednesday it had agreed with Iraq's oil ministry to relinquish operations at Majnoon field to the government after unfavourable changes to fiscal terms. The announcement confirmed an earlier Reuters report.
Shell is also selling its 20 percent stake in West Qurna 1 oil field in the south of the country. The field is operated by Exxon Mobil.
Investment bank Lazard is running the sale for Shell, industry sources told Reuters. The bank did not immediately respond to a request for comment.
Shell said it was still committed to producing gas in Iraq, saying it would focus on developing and expanding the Basra Gas Company, which processes gas from the Rumaila, West Qurna and Zubair fields. It has a 44 percent stake in the joint venture.
Shell produced almost 20 million barrels of oil from Iraq during 2016, which accounted for about 3.5 percent of the firm's total oil output last year, according to Shell's annual report.
Precise terms of the contract terms are not public and Shell has not detailed its earnings from Iraqi oil.
But a source told Reuters last year Shell had found limited financial benefit in recent years from oil production in Iraq, where it is paid in crude but has limited say on strategy.
"The Oil Minister of Iraq formally endorsed a recent Shell proposal to pursue an amicable and mutually acceptable release of the Shell interest in Majnoon, with the timeline to be agreed in due course," a Shell company spokesman said.
Shell took the decision after Iraq applied performance penalties on the Shell-operated venture "which had a significant impact on its commerciality," he said.
Battling a sharp fall in oil prices since 2014, Iraq asked foreign firms to cut spending on oil projects in order to reduce the cash-strapped government's contribution in shared ventures.
Foreign firms in Iraq have long urged Baghdad to revise oil production contract terms to encourage development of reserves that Iraq estimates at about 153 billion barrels, the fourth biggest in the Organization of Petroleum Exporting Countries.
"Maybe now they will speed things up," one executive from another company operating in Iraq said.
Shell, via its subsidiary Anglo Saxon Oil Company, was among a consortium of European firms called Turkish Petroleum Company which acquired concessions in 1912 from the Ottoman Empire to explore for oil in today's Iraq. Oil was found 15 years later.
Shell started developing Majnoon, which means "crazy" in Arabic, in 2010.
It holds a 45 percent stake in the field that it operates under a technical service contract that expires in 2030. Malaysia's national oil company Petronas holds a 30 percent stake, while Iraqi government holds 25 percent.
(Reporting by Ahmed Rasheed in Baghdad, Rania El Gamal in Dubai and Fanny Potkin in London; Editing by Jason Neely and Edmund Blair)