Abu Dhabi National Oil Company (Adnoc) and ConocoPhillips, the US oil and gas company, will finalise a long-awaited deal to develop Abu Dhabi’s first major sour gas project at a signing ceremony later today in the capital.
According to industry sources, the companies are likely to announce a 30-year partnership to develop the US$10 billion (Dh36.7bn) onshore gas project, which last year was the biggest Middle Eastern energy development open to bids by international oil companies.
The goal of the technically challenging Shah project is to produce up to one billion cubic feet per day (cfd) of gas to help boost Adnoc’s current output of about 4.5 billion cfd of gas to a targeted six billion cfd. The gas, which could start flowing in 2011, is urgently needed to fuel power and industrial developments in the emirate.
To achieve this, ConocoPhillips and Adnoc would tap deadly sour gas deposits, containing a high concentration of toxic hydrogen sulphide, from thousands of metres below ground. The partnership, in which Adnoc is likely to hold a 60 per cent controlling stake and ConocoPhillips a 40 per cent interest, would call on the US company’s international experience with such developments to render the gas safe.
The deal has been many months in the making. Adnoc surprised the industry in January, when it picked ConocoPhillips as the front-runner for the Shah project, which was expected to go to one of Adnoc’s existing partners – a select congregation that includes the Anglo-Dutch energy group, Royal Dutch Shell, and the US oil companies, ExxonMobil and Occidental Petroleum, all of which submitted bids.
ConocoPhillips may have had to agree to some exceedingly tough terms from Adnoc to gain a foothold in the Middle East and access to the region’s coveted oil and gas reserves analysts said. For instance, it may have agreed to produce Shah’s gas free of charge, in exchange for a substantial share of the liquids that are extracted from the gas and sulphur when the hydrogen sulphide is removed.
The strategy would be extremely risky for the international partner, especially with a forecast of volatile commodity prices. “They would be relying on prices for liquids and sulphur remaining high,” said Ross Cassidy, an analyst with the British energy industry research firm, Wood Mackenzie.
“Adnoc would continue to get a cheap source of gas, which I think has been their objective all along,” he added.
Still, natural gas liquids such as ethane, propane and butane – which are used as petrochemical feedstock and often trade at a premium to crude – are currently fetching near record prices on world markets. Likewise, the price of sulphur, a yellow solid used to make fertilisers and sulphuric acid, has soared more than 10-fold since the beginning of this year to unprecedented heights.
The end game for ConocoPhillips may not be development of the Shah project, but the chance to participate in future energy projects in Abu Dhabi and the Gulf region. Total, the French energy company, is thought to have the best chance of winning a contract for Adnoc’s next sour gas development, the proposed Bab project near Abu Dhabi’s Gulf coast.
But the US company may have set its sights on the emirate’s oil projects.
The 75-year oil concessions that are held by Occidental, ExxonMobil, Shell and other Adnoc partners are due to expire in the next decade, some as early as 2012.
Whether ConocoPhillips would eventually reap an acceptable financial return from joining the UAE concession holders’ club is an open question, although it would certainly be able to book substantial oil and gas reserves. “I do not think Adnoc is going to give anything away as a favour. When these other projects come along, they will be just as competitive,” Mr Cassidy predicted.
However, the US company has already established a beachhead in one Gulf state, Qatar, where it is a partner with the state-owned Qatar Petroleum in a large gas production and liquefaction project. Qatar is the world’s leading exporter of liquefied natural gas.
Last December, ConocoPhillips and Qatar Petroleum signed another deal to pursue joint energy projects outside Qatar.
Adnoc officials could not be reached yesterday for comment, and ConocoPhillips did not return calls.