ADNOC signs Shah deal with Conoco

A final agreement to develop the Shah sour gas field is yesterday between the Abu Dhabi National Oil Company and ConocoPhillips, the US energy company.

A final agreement to develop the Shah sour gas field at an estimated cost of US$10 billion (Dh36.73bn) was signed yesterday between the Abu Dhabi National Oil Company (ADNOC) and ConocoPhillips, the US energy company. The agreement is the latest in a series of high-profile deals that are changing a foreign partnerships structure in the oil and gas sector that dates back to 1939. The Shah gas field was discovered decades ago, but was left undeveloped because of the high concentrations of hydrogen sulphide, a deadly gas, mixed with the huge deposits of natural gas. Increasing demands for power and the high cost of imported fuel has prompted ADNOC to press ahead with the development, close to the line of control with Saudi Arabia, which is expected to take five years to complete.

Conoco will own 40 per cent of the Shah development, with the rest to be held by ADNOC. "ADNOC and ConocoPhillips will jointly share the cost of the Shah gas field development project," ADNOC said yesterday. Shah will produce a total of 1 billion cubic feet of raw gas a day, of which 540 million cu ft will be usable and transferred to the emirate's distribution network. The final agreement came exactly a year after the two firms signed a preliminary deal to develop the field. In that time, estimated costs for the project rose to $13bn but then fell back to $10bn as a result of the financial crisis, which reduced prices for contractors and building materials.

The Shah deal is Conoco's first foray into oil and gas development in Abu Dhabi, and the first major project ADNOC has opened to foreign firms since 2006. The choice of the American firm initially surprised many analysts, who had expected the project to be awarded to Royal Dutch Shell, an old participant in the emirate's oil sector. In the past year ADNOC has both renewed existing partnerships with foreign firms and brought in new players, said Raja Kiwan, an analyst at PFC Energy, the Washington-based energy consultancy. The Shah deal comes after a smaller concession ADNOC granted Occidental Petroleum, an Abu Dhabi "outsider", last autumn to develop two oil fields near the capital. However, ADNOC also elected to renew a 45-year-old concession with a Japanese oil consortium for the offshore Mubarraz field, and renewed the concession for Abu Dhabi Gas Industries, an ADNOC subsidiary which operates in partnership with Shell, Total and Partex.

"It's taking a two-track approach, and they have not necessarily decided whether they will open everything up to competitive bids or they'll go with the old Abu Dhabi club," Mr Kiwan said. "The Conoco deal was a step in a different direction, but it does not necessarily represent a shift in thinking." In addition to sulphur, production of sour gas at Shah would yield a large amount of condensates. These are hydrocarbons that emerge as a gas at the wellhead but settle into valuable liquids that are easily refined into fuels. Analysts said Conoco's main commercial interest was in the condensates, instead of the gas, and revenues from the venture would hinge to a large extent on oil prices. At a conference in May, Saif al Ghafli, the chief executive of the joint venture, said Shah would produce about 50,000 barrels a day of condensates and 4,400 tonnes of natural gas liquids. "Like all the other more difficult gas projects in the region, they are dependent to a large extent on condensates," Mr Kiwan said. "This deal is no different." The field will also produce 10,000 tonnes of sulphur a day, which is likely to be transported through a heated pipeline to processing facilities in Ruwais. The pipeline could prove to be a major challenge for the project, since few contractors have experience in building sulphur pipelines. [e-mail]