Terms of Conoco bid for Shah gas fuelled doubts

US oil major had offered to produce gas from the field free of charge

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The exit of ConocoPhillips from Abu Dhabi's Shah gas venture was predicted years ago by analysts who believed the US oil major was promising impossibly good terms. The company reportedly undercut rival bids from international oil majors, especially Royal Dutch Shell, by offering to produce the challenging field's gas free of charge.

It planned to recoup its investment through sales of valuable gas liquids, which it would strip from the gas stream for export or as a feedstock for domestic petrochemicals plants. That would leave mostly methane, the main constituent of natural gas, as fuel for Abu Dhabi power plants. ConocoPhillips also planned to sell sulphur, which it would produce as a by-product of removing the toxic hydrogen sulphide from the raw gas pumped from Shah.

The reservoir, buried thousands of metres below the desert south of Liwa, contains a high percentage of the deadly gas. Abu Dhabi's sulphur production would more than double after Shah started pumping gas, rising by more than 7 million tonnes a year, which could make the emirate the world's biggest sulphur exporter. The yellow solid is used to make fertilisers, sulphuric acid and rubber. But due to increased global gas production and the recession the international market is oversupplied. "Sulphur is not a money-making business today and won't be for quite some time," said Samuel Ciszuk, the Middle East energy analyst with the international consulting firm IHS Global Insight. "It's going to cost [ConocoPhillips] a lot, whatever they do."

The transport options alone came down to building the world's longest pipeline for liquid sulphur or building a new rail line - both very expensive. Industry sources estimated oil prices of more than $100 a barrel would be needed for ConocoPhillips to make a 10 per cent investment return on Shah. "I'm not too surprised," Mr Ciszuk said of the company's decision. "It was a very tight deal in terms of margins for the company." Neither ConocoPhillips nor its joint venture partner, the Abu Dhabi National Oil Company, have ever commented publicly on the terms of the deal, but analysts speculated the US oil company was seeking a foothold in Abu Dhabi and hoped additional deals might compensate for low returns from Shah. ConocoPhillips was "paying a premium" to get into Abu Dhabi, Energy Compass, the industry blog, noted at the time. The sour gas deal would set new standards in toughness for gaining a presence in the Gulf's upstream oil and gas sector, the blog predicted. In the end, ConocoPhillips could not justify the risk. Hit hard by the recession and lower oil prices, the company underwent a major restructuring last year and is still trying to cut costs.

tcarlisle@thenational.ae cstanton@thenational.ae