When ConocoPhillips pulled out of its joint venture to develop the Abu Dhabi gasfield, it opened the field for a range of contenders to make their case.
A partner to exploit Shah's difficult gas
The appointment of the US engineering firm Fluor to manage Abu Dhabi's Shah sour gas project is a reminder of the strategic importance of the development to a region short of gas. The emirate intends that the project go ahead, come what may, but can it go it alone?
The question has loomed large since the US company ConocoPhillips made a surprise decision in April to quit its joint venture with Abu Dhabi National Oil Company (ADNOC) for the technically challenging US$10 billion (Dh36.72bn) project. On Wednesday, Saif al Ghafli, the chief executive of Abu Dhabi Gas Development, the ADNOC unit in charge of the Shah project, said the company's strategy was to find another partner.
But who might step into ConocoPhillips' shoes? There are not many qualified candidates. Developing toxic "ultra-sour gas" poses serious challenges. Only a few large international energy groups have safely and profitably exploited such reserves. The best candidates include the four companies that bid for Shah initially, and there are few others that might be suitable. Here is an assessment of the main contenders, none of which stands out as a perfect fit:
Royal Dutch Shell The Anglo-Dutch group was the front-runner for the Shah project right up to Abu Dhabi's surprise decision in July 2008 to award the contract to ConocoPhillips. The company is the acknowledged world leader in ultra-sour gas, having developed such deposits in Canada. In February, Shell struck an agreement to work with Kuwait Oil Company to develop deep and very sour gas in the north of the emirate.
"It's an important project for Kuwait as it seeks to enhance security of natural gas supply as the cleanest-burning fossil fuel by extracting gas from challenging tight, sour, high-pressure reservoirs," Malcolm Brinded, the executive director of Shell's exploration and production operations, said in April. "And it's relevant to the wider region." Shell was upset about losing Shah, but a spokeswoman said the company had moved on.
Its Middle East projects include $21bn of gas-related developments in Qatar. Shell also led the group that recently won a 20-year contract to boost production from Iraq's giant Majnoon oilfield, which contains some 13 billion barrels of reserves, and the company has a preliminary deal to gather and market gas produced from Iraq's biggest oilfields. Shell is a partner in a major Abu Dhabi oil concession that expires in 2014 and wants to ensure it is part of any deal to renew the contract.
Analysts suggest, however, that Shell has too much on its plate to take on another major project, unless the undertaking offers especially attractive returns. Abu Dhabi is unlikely to offer such terms, as the Government is constrained by domestic expectations that it will keep gas prices low. ExxonMobil The biggest international oil company has deep pockets and has been honing its global gas strategy.
Rex Tillerson, its chief executive, sees the global gas business growing faster than oil. In keeping with his prediction, ExxonMobil paid $41bn last December for XTO Energy, a major US shale gas developer. ExxonMobil might want to balance its big bet on North American gas with projects overseas. It already has excellent relations in Abu Dhabi through its Zakum concession, under which it produces oil from a giant offshore oilfield.
The company is one of four that bid on Shah in 2007. The gasfield's slated output of just 500,000 million cubic feet per day of sales gas, however, could make it too small a target. ExxonMobil would have little motivation to accept tight terms, as its Zakum contract, signed in 2006, is nowhere near expiring. It declined to comment when contacted recently. Occidental Petroleum The fourth bidder for Shah in 2007 is considered a US peer of ConocoPhillips.
The Los Angeles-based oil and chemicals group has been seeking to expand its presence in Abu Dhabi ahead of anticipated concession renewals. It is a partner in the Dolphin Energy joint venture, led by Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, to import gas to the UAE from Qatar. Recently it teamed up with Mubadala to boost oil production in Bahrain and pursue oil and gas projects in Oman.
In 2008, it won a concession to develop two small Abu Dhabi oilfields. Occidental's ambition to widen its Abu Dhabi footprint, however, has financial limits. Ray Irani, the company's chairman and chief executive, has clearly articulated his view that the company would not tackle Shah on the terms that ConocoPhillips eventually rejected. "We have consistently said over the last two years that the terms of the contract that was negotiated between ConocoPhillips and Abu Dhabi, the terms economically, are not attractive to us; however, if the Government wishes to approach us with different terms, we'll look at them," he said.
Total The French energy group did not bid on Shah in 2007. Rather, it expressed interest in an earlier proposal to develop two sour gasfields. The company's main interest is understood to have been the Bab field. The Abu Dhabi Government, however, made Shah its priority. Total is a partner in an Abu Dhabi oil concession that expires in 2018. Before that happens, the company wants to expand its regional presence. It recently led the development of LNG export facilities in Yemen. This month, it was picked by Masdar, the Abu Dhabi Government's clean energy company, to build a $600 million solar plant in the emirate with Spain's Abengoa Solar.
"There is a lot of potential in the Middle East, and Total wants to be a partner," said a company spokeswoman. If Abu Dhabi offered terms for Shah that conformed to Total's investment criteria, the company would be interested, she added. "We'll be looking at the Middle East, and we'll be looking at opportunities as they arise." Total has sour-gas experience and has developed proprietary technology in a research and development collaboration with the French Petroleum Institute. The process involves pumping a liquid sulphur residue back into the reservoir to push out more gas.
That might not mesh with Abu Dhabi's strategic plans for a rail network including a spur to transport sulphur to the coast for export. ConocoPhillips wanted to build a pipeline for liquid sulphur. That plan was quickly shelved when the company turned its back on Shah. Abu Dhabi Gas Development is understood to have firm plans to award $3bn of contracts for sulphur processing facilities by the end of this year.