Royal Dutch Shell opened an office in Baghdad this week, the first major international oil firm to do so since 1972 when the industry was nationalised.

The news of the opening comes after Shell signed a deal, potentially worth billions of dollars, with the state-run Southern Oil Company. The enterprise will see the recovery and sale of billons of dollars' worth of natural gas, currently being burnt off and wasted in the southern Iraqi oil fields. Shell will acquire a 49 per cent stake, with Southern Oil holding the remaining 51 per cent.

The development heralds an exciting new chapter in Iraq's oil sector, made possible by a massive improvement in the country's security. Attacks on US and Iraqi forces, as well as civilians, have plunged in the last six months.

The Shell venture comes on the back of a $3 billion (£1.6 billion) deal with the China National Petroleum Corporation, due to be finalised next week. The contract will see the development of an oil field in Wasit province, about 100 miles southeast of Baghdad. The former government, under Saddam Hussein, initially agreed to the project but it was cancelled after the US-led invasion of 2003.

Despite the increased security, which has opened up the country for development, the situation remains precarious. An attack by militants today left up to 35 people dead in the province of Diyala, north of Baghdad. There has also been an increase in violence in the capital over the past fortnight, according to Iraqi commanders.

Aware of the continuing security concerns, Shell held a press conference on Monday in the heavily fortified Green Zone. Employees were flanked by security guards and refused to release the location of their offices.

"We are ready to establish a presence," Linda Cook, executive director of the company's gas and power unit, said. "Today I inaugurated the Baghdad office. It's a milestone for Shell."

Iraq sits on one of the world's largest crude-oil deposits, making it an attractive investment opportunity for companies prepared to take a risk.

Shell, a leading oil and gas firm, concluded the multi-billion-dollar deal after the Iraqi Government approved an agreement for them to harness the huge amounts of natural gas being burnt off in Iraq's southern oil fields.

The deal was established in partnership with the state-owned Southern Oil Company. Together they will set up the infrastructure to capture the natural gas that is burnt off and goes to waste during oil extraction. Currently the amount of gas that is flared and burnt in southern Iraq is 700 million square cubic feet a day.

The new deal could bring the Iraqi Government and Shell millions of dollars daily, as the wastage is turned into liquefied petroleum gas and sold locally as well as exported.

Speaking at the signing ceremony in Baghdad, Ms Cook, said: "Iraq has one of the world's largest natural gas resource bases and I am delighted that the Iraqi Government including the Ministry of Oil have supported Shell ... We look forward to moving jointly ... and begin investing in the energy infrastructure in Iraq."

Insurgents in in Diyala province launched an audacious ambush, killing police commandos and Sons of Iraq — an anti-al-Qaeda Sunni group funded by the US — near the village of Al-Dulaimat.

"The bodies are riddled with bullets," Doctor Ahmed Fuad, who works in a hospital in the capital Baquba, told the AFP news agency.

The troops had deployed to a known al-Qaeda stronghold and were travelling in pick-up trucks when the ambush happened.

"They were in three vehicles when several armed men ambushed and killed all of them," a security official said. The dead included a Colonel, a Lieutenant-Colonel and a Captain.

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