UAE to sign $10bn gas deal

UAE to sign $10bn gas deal
Tamsin Carlisle, THE NATIONAL

Last Updated: April 30. 2008 3:51AM UAE / April 29. 2008 11:51PM GMT
Conoco was among the four bidders on the Shah project. Tim Johnson / Bloomberg News
ConocoPhillips rumored to be partner
A long delayed contract to develop big new natural gas reserves will be signed within a week, according to a senior official from the Abu Dhabi National Oil Company (Adnoc).

The US$10bn (Dh37bn) Shah gas project, which is key to providing new fuel needed for power plants to meet soaring domestic electricity demand, has been in limbo for eight months.

“There are no delays, no problems,” said Omair Suwaina, a senior Adnoc official, who was speaking yesterday while attending an industry conference in Abu Dhabi. “We expect to sign within a week,” he told the Reuters news agency.

Mr Suwaina declined to confirm the identity of the contract winner, widely expected to be ConocoPhillips, the US energy company.

Once under way, the project will produce up to one billion cubic feet a day of gas at the Shah field near Abu Dhabi’s southern border with Saudi Arabia. This will be the first of a series of similar projects that the Government wants to undertake.

The Shah project is scheduled to start in 2012. It was first tendered in April 2007 as part of a larger project, but no winning bidder was selected. Adnoc invited four foreign companies including ConocoPhillips to bid again on the Shah development in July of that year. It has since been evaluating the bids.

Deborah Algosaibi, a ConocoPhillips external affairs co-ordinator said Adnoc’s long delay in formally announcing the development could be related to smoothing out contract details. “Perhaps they are dotting an ‘i’,” she said.

Craig McMahon, an analyst with Wood Mackenzie, a British research and consulting company, suggested the delay could be related to the size and complexity of the project, which could involve the parties crafting a detailed commercial agreement. “The devil is always in the details,” he said.

The Shah project is the largest Abu Dhabi upstream development in the past year open to bids by international companies. The gas involved is known as “sour gas” because it contains high levels of acidic and toxic hydrogen sulphide, which makes the project costly and dangerous. Cost projections by analysts have doubled within a year in line with global inflation in the industry. Last April, when Adnoc was proposing the simultaneous development of Shah and Bab, another sour gas field, they pegged the cost for both developments at US$10bn.

Mr Suwaina, who declined to disclose Adnoc’s cost projection for Shah, told the conference that rising costs for energy development worldwide had pushed up the investment required for sour gas projects. He said the UAE would go ahead with plans to develop several sour gas fields to supply its power needs.

“There will be more developments. It is necessary and we have to do it,” he said.

However, sensitivities surround the proposed Bab field and are more pronounced than that of Shah because the toxic gas deposit is close to residential settlements. Bab, and the offshore Hail sour gas field, are next in line for development.

While costs for Abu Dhabi’s technically challenging sour gas projects could be four or five times higher than the emirate has traditionally paid for gas, the rising price of sulphur could sweeten the deal. Hydrogen sulphide stripped out of the gas stream can either be pumped back into the ground for storage or, with favourable economics, processed to yield sulphur. This month, the price of sulphur exported from Abu Dhabi surpassed US$600 a tonne, a stunning increase from about US$20 a tonne just a few years ago. Mr Suwaina said estimates for sulphur contracts were based on spot prices of $700 to $800 a tonne.

The UAE holds the world’s fifth-largest gas reserves at nearly 214 trillion cubic feet., much of it “ultra-sour” with a hydrogen sulphide content of 30 per cent or higher. Although deposits with a similar composition have been developed in other countries, safety concerns, technical challenges and rising costs have held back exploitation here.

tcarlisle@thenational.ae