Occidental Wins ConocoPhillips's Abandoned Shah Sour Gas Project in Abu Dhabi

Troubled Legacy

Occidental has been awarded the leading role at Abu Dhabi's Shah field development, which in effect is a complicated and challenging US$10-billion pilot project aimed at monetising some of the emirate's large sour gas reserves. The project was initially tendered in 2006-07 in an integrated deal with the Bab sour gas reservoir, but the scale of the challenge and costs involved in the end led IOCs asking the Abu Dhabi National Oil Company (ADNOC) to break up the project, leading to Shah being prioritised in a first try on its own. Planning and negotiations for the spearhead project dragged on, with ConocoPhillips, Oxy, and Shell emerging as front-runners by late 2007 and ConocoPhillips in the end securing the project in 2008 (see United Arab Emirates: 9 July 2008: ConocoPhillips and ADNOC Sign Abu Dhabi Sour Gas Project; Costs Exceed US$10 bil.). Further detailed planning, negotiations, and delays, however, meant that ConocoPhillips had to drag out the final investment decision (FID) at the project, especially after the global economy turned downwards, and with it oil and gas prices, thus hurting the company's profitability and capital expenditure (capex) abilities. ConocoPhillips withdrew definitively from the project in April last year, after having procrastinated for quite some time and thoroughly testing ADNOC's patience.

ConocoPhillips's initial win of the Shah project did raise eyebrows in the industry, with its acceptance of very tight terms from ADNOC widely seen as over-optimistic. The scale of the technical challenge and the risks involved in potentially not getting the technical solutions entirely right when such a toxic and corrosive raw gas flow was involved, opened up a very high risk of cost overruns at a time when general regional contracting and material cost inflation had already hit the project hard. Estimates have taken the total capex need from US$9 billion initially to upwards of US$15 billion at the peak. IOCs bidding for the project naturally needed assurances of its financial viability and hence found it hard in the end to accept the terms at which ConocoPhillips chose to undertake the project. ConocoPhillips had also reportedly placed a lot of its profitability hope on being able to market the large amounts of associated sulphur production more or less freely, and therefore felt ready to accept a significantly lower gas price then its competitors. The global sulphur market has, however, not developed in a very exciting way, with increasing amounts of associated sulphur being produced at gas projects around the world, not the least at Qatar's and Iran's massive North field and South Pars developments, making this a doubtful factor on which to base profitability calculations.

Act of Faith

For Abu Dhabi, which for over a decade has been suffering from a rather tight domestic gas supply balance, getting the pilot project under way has become a high priority. While it has struggled to accept the high production costs—likely to be between US$5-5.5/mmBtu, compared with traditional gas production costs of well under US$1-1.5/mmBtu and the cost of imported gas from Qatar through the Dolphin pipeline at a price of about US$1.3/mmBtu—a successful Shah development would unlock other similar sour reserves in the emirate. This would give the country access to the gas it so desperately needs to feed its growing economy without infringing on its main source of revenue, oil exports. With an increasingly sophisticated economy, Abu Dhabi is also realising that higher energy costs can be borne, although it is still subsidising heavily commodities like gas and electricity to its inhabitants.

ADNOC has traditionally worked with only the largest supermajors in its upstream sector (with the exception of some Japanese companies that entered the emirate decades ago for politico-economical reasons). The financial abilities and stability of the supermajors have made them good partners to ADNOC as they could afford to take a similarly long-term view as the NOC and were not swayed by short-term market fluctuations in the same way as smaller and mid-sized outfits. This way of thinking is prevalent in most of the Gulf, explaining why the region traditionally has been a remit for only the largest private oil and gas companies. ADNOC's irritation at ConocoPhillips was hence significant when the company finally abandoned the Shah venture after having stringed ADNOC out for many months over the FID, and the gut reaction of many industry watchers was that ADNOC would turn to another supermajor to restart Shah in order to gain a stable partner with a clear ability to handle the economical challenge over the long term. ADNOC's choice of Oxy is therefore highly significant and shows the crowning achievement of two decades of relationship-building, co-operation and lobbying on behalf of the U.S. mid-size. Oxy secured a part in the Dolphin pipeline consortium in the late 1990s and a part in a small-scale upstream concession late last decade, and is now taking the big step to become a leading player in Abu Dhabi's coveted upstream sector. For a host of other IOCs hoping to bring specialised technical know-how and competitive advantages to Abu Dhabi in order to get parts in its large mature oil producing concessions when they expire between 2014 and 2018, Oxy's success shows that there might be a way forward. This is a spectre, however, that might frighten the large established supermajors in the emirate.

Outlook and Implications

Winning the Prize

Oxy will, providing it is successful in developing the project, establish itself as the global leader in ultra-sour gas production. The Shah field will have a production capacity of 1 bcf/d of raw gas, but only produce about 540 mmcf/d of actual sales gas after all the highly toxic and corrosive impurities have been stripped out. Dealing with the challenge of handling that raw gas and those impurities safely, especially after they have been stripped out, monetising as much of them as possible, as well as safely and sustainably sequestering the rest, will be key to the project's viability and the possibility of replicating it elsewhere in Abu Dhabi and elsewhere. Managing the costs at a project that already produces very expensive gas is another challenge, although for now, at least, costs have come down to US$10 billion from the heights estimated in late 2007 to mid-2008. Oxy has received a large responsibility from ADNOC, which, especially after the ConocoPhillips debacle, was widely expected to give priority to another supermajor over the mid-sized player in order to make sure that there was enough financial muscle to see the project through. Oxy was, however, a front-runner in the first tendering of the project, meaning that its technical credentials have been well-established in ADNOC's eyes for some time.

Abu Dhabi will now hope that the Shah project can get back on track as soon as possible. The original hope of bringing the field onstream by 2012 or 2013 has of course, long been abandoned, although hopes for 2015 might not yet be entirely extinguished. Expecting production to start during 2016 is probably more realistic given that plenty of details will need to be hammered out and that Oxy is likely to want to make some changes to ConocoPhillips's development plan. On the other hand, several of the core contract packages have already been awarded, making it potentially easier to discuss changes with existing subcontractors directly and shorten the need for multiple planning and negotiation sessions somewhat.

Related Articles

• United Arab Emirates: 13 July 2010: Costs Cut Further As Abu Dhabi Signs More Shah Sour Gas Contracts Worth US$3.6 Bil.
• United Arab Emirates: 30 April 2010: Samsung Awarded US$1.5-bil. Shah Contract in Abu Dhabi, Oxy Eyes Vacant ConocoPhillips Stake
• United Arab Emirates: 4 May 2010: Saipem, Samsung in Lead as US$5.55 bil. of Contracts at Abu Dhabi's Shah Awarded
• United Arab Emirates: 14 November 2009: ConocoPhillips Senses Low Contractor Interest in Abu Dhabi Sour Gas Contracts Amid Safety Fears
• United Arab Emirates: 31 October 2008: ConocoPhillips Says US$10-12 bil. Abu Dhabi Sour Gas Project Estimate is "On the Low End"
• United Arab Emirates: 25 January 2008:Spiralling Costs Suggest Further Delays to Abu Dhabi's Sour Gas Project Likely
• United Arab Emirates: 11 January 2008: ConocoPhillips Reportedly Overtaking Oxy, Shell in Abu Dhabi's Sour Gas Project Race
• United Arab Emirates: 6 December 2007: Shell and Oxy Shortlisted for Abu Dhabi's US$10-bil. Sour Gas Project
• United Arab Emirates: 3 September 2007: ConocoPhillips, ExxonMobil, Occidental and Shell Submit Bids for Abu Dhabi's Sour Shah Field