The Iraqi government's approval of a $17 billion deal with Royal Dutch Shell and Japan's Mitsubishi Corp. to harness vast volumes of natural gas should significantly bolster efforts to upgrade an abysmal electricity generation system that falls far short of meeting demand.

The project aims to end the wasteful process of flaring off 70 percent of the associated gas recovered from oil fields, currently running at more than 874 million cubic feet a day.

The Shell-Mitsubishi Corp. deal is to capture the huge volumes of gas flared off in the giant southern oil fields of Rumaila, Zubair and West Qurna Phase 1.

The two companies will form the Basra Gas Co. with the state-owned South Gas Co. Shell will have a 44 percent stake and Mitsubishi 5 percent, while the Iraqi partner will hold a controlling 55 percent.

The landmark deal, which Baghdad hopes will open up new joint ventures to utilize natural gas in other oil zones, has taken three years to finalize.

That underlines the extent to which political infighting, both in Prime Minister Nouri al-Maliki's fractious Shiite-dominated coalition and the Parliament, impede efforts to modernize and expand Iraq's all-important energy industry on which all national reconstruction rests.

In addition to proven oil reserves of 144 billion barrels, Iraq has known natural gas reserves of 110 trillion cubic feet, plus another 150 trillion in probable reserves.

Iraq has prequalified at least 46 foreign companies to bid in a fourth auction for oil and gas contracts that's scheduled for Jan. 25-26, 2012, with the focus this time on accelerating the development of gas reserves rather than oil.

The 12 exploration blocks up for grabs could add 29 trillion cubic feet of natural gas, as well as 10 billion barrels of oil, to Iraq's abundant energy reserves.

Although the 12 blocks on offer are expected to yield sizeable volumes of gas, Iraq still does not have the infrastructure in place to produce, transport or utilize gas domestically, or to develop an export capability.

Boosting gas production has taken on a new urgency because it can be used to fuel electricity generation.

That's woefully inadequate right now because of the parlous state of the national power grid after decades of war and neglect.

It only produces half of what's needed nearly nine years after the U.S. invasion of March 2003 -- 8,300 megawatts with a peak summer demand of 15,000MW.

This is enough for only 8 hours of power a day and causes constant power cuts across the country. That's impairing postwar industrial development.

It has also triggered riots that have resulted in stopgap measures by Maliki's fragile coalition government that is also grappling with a serious security problem.

But a long-term solution to the problem is still years away, so the sooner Iraq can start using the gas for power generation the better.

"The Electricity Ministry had hoped to turn this around in 2010 when it launched the country's first independent power project program," or IPP, the Middle East Economic Digest reported.

"However, the scheme fell apart in May when the quality of the bids, and the bidders, was called into question. … Many international firms shied away from the program due to the high risks associated with the deals."

The ministry is now considering relaunching the program. But MEED observed that payment issues, another of the roadblocks in the original scheme, remain a problem.

"In a country where governments and ministers come and go several times a year, it will be an additional source of worry for investors," MEED noted.

"Much is at stake. The development of new projects, such as IPPs or otherwise, should be one of the Iraqi government's key priorities.

"Demand is growing six times as fast a capacity and as other sectors of the economy recover in the postwar period, Iraq will need more power."

The government is seeking to install by 2013 gas turbines with an output of 11,000MW it acquired from General Electric and Siemens, while it cranks up efforts to harness gas from the oil fields.

According to plans now circulating, the government is aiming for a 1,250MW power plant in the southern city of Basra, with 500MW stations in Muthana, Maysan, Qadisiyah and Basra governates.