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BAGHDAD (Reuters) - Iraq signed a final $17 billion deal with Royal Dutch Shell (RDSa.L) and Mitsubishi 8058.T on Sunday to capture flared gas at southern oilfields, a project that should boost production of badly needed electricity.
The 25-year project, one of the largest Iraq has signed with foreign energy firms, is meant to help harness more than 700 million cubic feet per day of gas being burned off at southern fields and will ultimately handle 2 billion cubic feet per day, officials said.
"This day represents a historic change in the Iraqi oil industry ... the best utilization of (associated) gas to meet the increasing needs for gas in Iraq," Luaibi said at a signing ceremony attended by Shell Chief Executive Peter Voser.
OPEC member Iraq has signed a series of deals with foreign oil companies to modernize its energy industry after years of war and economic sanctions.
Its official goal to raise production capacity to 12 million bpd by 2017 would vault it into the top echelon of global producers, although officials say 8 million bpd capacity is more realistic.
Increased crude production is expected to bring huge increases in associated gas output and Iraq may soon produce more gas than it can use, opening up the possibility of gas exports.
The Shell deal will involve the creation of the Basra Gas Co joint venture, in which the government will hold 51 percent, Shell 44 percent and Mitsubishi 5 percent.
The project aims to capture gas at Iraq's workhorse field, Rumaila, as well as Zubair and West Qurna.
Intermittent electricity is one of Iraqis' major complaints against their government. Power supply is about half of demand.
The goal of 2 billion cubic feet per day capacity is linked to peak production at the southern fields, which is expected by 2017, Deputy Oil Minister Ahmed al-Shamma told Reuters.
Existing facilities are currently handling 370 million cubic feet of gas per day from seven southern fields.
"We expect within a year to complete all the preparation to process 1 billion cubic feet. The other 1 billion cubic feet will depend on the increasing production from the three oil fields," Shamma said.
The project may include the construction of an LNG export facility with a maximum capacity of 600 million cubic feet per day. Exports are possible once Iraq's domestic needs are met.
The project needs investment of $17.2 billion, officials said, including $12.8 billion to rehabilitate existing facilities and build new ones, and $4.4 billion for the LNG export unit.
The Shell-Mitsubishi partnership expects an internal rate of return on the project of 15 percent on an initial investment of $6.98 billion, while SGC plans to put in $3.7 billion of public funds initially and fund the rest through gas sales.
Voser said Iraq is now a substantial part of Royal Dutch Shell's Middle East portfolio.
"We at Shell, together with our partners, will now start, after this signing, the work so that we can actually bring further electricity to the country, but also over time further revenues by bringing Iraq into the export business of gas," he said.
Writing by Jim Loney; Editing by David Holmes