Occidental to Partner in Abu Dhabi's Shah Sour Gas Project

ABU DHABI (Dow Jones Newswires), Jan. 19, 2011

Occidental Petroleum (OXY) has been selected by state-run Abu Dhabi National Oil Co., or Adnoc, to help develop the estimated $10 billion Shah sour gas field in Abu Dhabi, which is essential to help meet the emirate's soaring gas needs, an Adnoc official said Wednesday.

"Adnoc's CEO decided after a meeting late yesterday that Occidental Petroleum has been awarded" the contract to participate in the Shah project, said the official, who did not want to be identified.

"The share has not been confirmed yet but Occidental will be part of the gas development," the official added.

The deal has not been formally announced because details on the transaction are still been worked out, but an official notice is expected to come Thursday, another person familiar with the deal said.

Occidental's appointment to partner in Shah comes nearly nine months after ConocoPhillips withdrew from the scheme in April last year in a bid to concentrate on short to medium-term revenue growth. Adnoc subsequently said it would proceed with the project, with or without an international partner.

Occidental is expected to be awarded a 20% to 40% interest in the Shah project, a stake that would add up to $1 per share to the company's annual earnings, said investment bank UBS in a note to clients. UBS estimated Occidental's 2010 earnings at $5.67 per share.

The final price tag of the Shah sour gas field in Abu Dhabi is still uncertain, and this is the reason why the profitability of the project depends on gas prices, UBS said. The project aims at producing 1 billion cubic feet a day of sour gas, which is highly corrosive, and generally more costly and challenging to process because of its high sulfur content, and therefore requires special handling and infrastructure.

State-run Abu Dhabi National Oil originally estimated the project to cost $13 billion to $14 billion, but it was later reduced to about $10 billion on cost deflation.

Participation in the Shah field could also better position Occidental to win a meaningful number of concessions that are expiring in the United Arab Emirates in the next few years, according to UBS.

Occidental's shares were trading 23 cents down at $98.33.

"Oxy are very flexible and long-term people, and they are willing to negotiate; they are very stable and that's what Adnoc wants after the ConocoPhillips exit," said Dalton Garris, associate professor of economics and petroleum market behavior at The Petroleum Institute in Abu Dhabi.

The Shah development is integral to Abu Dhabi's plans to boost gas output to meet soaring domestic demand, which is rising rapidly as the government builds gas-fired power stations, desalination plants and develops industries such as petrochemicals.

Abu Dhabi, with more than 200 trillion cubic feet of gas reserves, boasts one of the biggest gas basins in the world, a large portion of which is sour. The sheikdom is the largest of seven emirates that make up the United Arab Emirates, the Middle East's second-biggest economy.


Kuwait-based independent oil analyst Kamel Al Harami said Abu Dhabi desperately needs gas for local consumption. The deal with Occidental, he said, could also be a blessing for neighboring countries such as Saudi Arabia, Bahrain and Kuwait, who are all short of gas and could benefit from importing the surplus production from the Shah project.

ConocoPhillips in 2008 signed an interim agreement with Adnoc for the development of natural gas condensate reservoirs within the Shah sour gas field, followed in July 2009 by a joint-venture and field-entry agreement. Under the deal, ConocoPhillips was going to have a 40% stake in the joint-venture development, with Adnoc to hold the remainder.

The Houston-based company was selected by Abu Dhabi at the time after competing against Occidental, Shell and Exxon Mobil, among other firms.

The Shah project has faced delays partially due to the question over whether the sulfur, a toxic byproduct from the sour gas development, will be transported to export facilities at Ruwais on the U.A.E.'s Persian Gulf coast via pipeline or railway.

A spokeswoman for state-run Union Railway, which is tasked with developing a 1,100-kilometer railway network across the U.A.E., earlier in January confirmed that the company "will provide a rail route for the transport of granulated sulfur."

Dodsal Engineering and Construction, the U.A.E.-based contractor, earlier this month said it had won the $490 million contract to build the sulfur granulation facilities, which will have capacity to process 11,000 tons a day of liquid sulfur recovered from the Shah and Habshan onshore gas fields.

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