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Oil and gas: Battle to exploit hidden riches

 

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Financial Times: Oil and gas: Battle to exploit hidden riches

By Sharmila Devi

Published: May 15 2008 04:20 | Last updated: May 15 2008 04:20

When the United Arab Emirates is listed among the world’s top 10 oil producers, the UAE’s name could easily be substituted for that of Abu Dhabi.

The emirate – which is the nation’s capital – is home to about 95 per cent of the UAE’s proven oil reserves and 90 per cent of its proven gas reserves.

But, like other countries in the region, rising drilling and riggings costs, combined with shortages of skilled personnel and equipment, are affecting Abu Dhabi’s expansion plans.

The emirate embarked on a multibillion-dollar programme a few years ago to increase oil production to 4m barrels a day, through the development of new and old fields, by the end of the decade. However, tight market conditions have meant delays seem inevitable.

Abu Dhabi’s current production is around 2.6m b/d.

“Things are moving more slowly than planned, mainly because of the tight markets in labour, services and materials,” says Ross Cassidy, an analyst at Wood Mackenzie.

Officials say 4m b/d is still the target, with the ambition to reach it as quickly as possible, but there is a recognition that it will “take as long as it takes”.

A report by the Centre for Global Energy Studies in London said in April that the UAE would boost oil production by more than 10 per cent to 3m b/d in 2012 – below earlier targets – as part of Opec plans to manage resources.

The UAE has proven oil reserves of about 97.6bn barrels, according to the US’s Energy Information Administration, the fifth largest in the region, and there remains scope to increase production at numerous underdeveloped fields.

Abu Dhabi is also one of the few Gulf countries where international companies are able to be fully operational. However, although there is no income tax in the UAE, oil companies remain an exception and pay 50 per cent or more, making for tight margins of an estimated $1 per barrel.

The 75-year-old onshore and offshore oil concessions granted to foreign companies are set to expire in 2014 and 2018 respectively. Little has been said publicly about negotiations as the international oil companies try to get a better deal when the concessions are renewed.

Another area where Abu Dhabi is seeking to expand is with non-associated gas. The UAE’s gas reserves are estimated to be the fifth largest in the world, with proven reserves of 214 trillion cubic feet.

A significant development expected this year is the award of a $10bn sour gas contract by the Abu Dhabi National Oil Company (Adnoc) to develop the Shah field.

The notoriously secretive company has kept its cards close to its chest, butConocoPhillips said in April it expected to be “working” on the project. Royal Dutch Shell and Occidental had been viewed as frontrunners during the months-long negotiations.

“Hopefully, there will be an announcement that we will be working together in the next month or two,” Jim Mulva, Conoco’s chief executive, told the FT in Houston.

“ConocoPhillips’ win was a surprise as the industry expected Shell or Occidental to win,” said Mr Cassidy. “The company’s sour gas experience and aggressive bid perhaps gave it a competitive edge over its rivals, but it remains a very challenging project.”

Yet there have also been difficulties with Abu Dhabi’s gas expansion plans.

Officials had initially put the development of the Bab and Shah fields out to joint tender, hoping the two would eventually produce 3bn cu ft a day towards meeting rising demand for power generation and energy intensive industries.

But the development of the Bab field has been delayed, mainly because of the scarcity of specialised equipment needed for the sour gas project. The lead time for some equipment is 18 months to two years, experts say.

Adnoc elected to re-tender just for Shah as it is less complex and has higher liquid yields, analysts say.

A large portion of Abu Dhabi’s gas is sour gas, which requires expensive and complicated production techniques to reduce high levels of toxic hydrogen sulphide.

In an attempt to help the emirates meet soaring demand for gas for power generation, water desalination and industry as the UAE’s economies expand, a project called Dolphin, that imports 2bn cu ft a day from Qatar to Abu Dhabi, went online last year. That was a landmark because it was the first export pipeline within the region, said Mr Cassidy.

But plans to increase its capacity to 3.2bn cu ft a day are unlikely to materialise any time soon because of a moratorium Qatar’s North Field until 2010.

Occidental Petroleum of the US and Total of France are Abu Dhabi’s partners in Dolphin, which carries gas from Qatar’s North Field gas reservoir to the UAE and Oman.

“It seems hard to believe there’s a gas supply shortfall,” says Mr Cassidy. “But gas is needed to support oil production as well as meet domestic demand and the whole region is facing supply pressures.”

 

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