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Abu Dhabi set to exploit gas from Shah field

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Abu Dhabi set to exploit gas from Shah field

By James Drummond in Abu Dhabi

Published: July 9 2008 03:00 | Last updated: July 9 2008 03:00

The state-owned Abu Dhabi National Oil Company and ConocoPhillips of the US yesterday signed a long-awaited deal to develop a mammoth onshore gas project.

According to the interim engineering and design contract, Adnoc will take a 60 per cent stake in the Shah field, located 180km southwest of the city of Abu Dhabi, and ConocoPhillips will take 40 per cent.

The aim is to process 1bn cubic feet daily of sour gas, the two parties said.

They did not disclose the total project cost of the Shah field, however, development expenditure has previously been put at $10bn.

Costs in the exploration and production industry have been spiralling as demand for labour and materials has risen with the price of crude oil.

Sour gas is so-called because it contains large quantities of sulphur.

It is highly toxic and technically demanding to extract.

The agreement to develop the Shah field paves the way for an easing of looming gas shortages in the United Arab Emirates.

Abu Dhabi, the UAE capital, has sizeable quantities of gas – the emirate is estimated to hold the fifth largest gas reserves in the world. But it exports much of its gas and has not developed the assets because of the cost and difficulty.

Rapid urban and industrial development in Abu Dhabi and the other six emirates that make up the UAE, particularly Dubai, have eaten into the volumes of gas.

Abu Dhabi imports gas from nearby Qatar, via the Dolphin pipeline.

Royal Dutch Shell and Occidental had been viewed as frontrunners during the long negotiations but ConocoPhillips said this year that it expected to be “working” on the project.

The two parties to the deal said yesterday that “final project agreements are expected to be completed by year-end”.

Analysts said that, even by the standards of tight-lipped Adnoc, the information disclosed on the agreement was unusually sparse.

“This project has taken it to another level,” said Ross Cassidy, an analyst at Wood Mackenzie, the Edinburgh consultants.

Mr Cassidy said the main challenge was dealing with the impurities that must be stripped out of the gas, which in turn have an impact on the profitability of the deal.

Aside from sulphur, Shah gas contains significant amounts of carbon dioxide. This makes the gas acid and, once separated, represents a sizeable environmental challenge.

Abu Dhabi is increasingly keen to stress its environmental credentials but has to dispose of the carbon dioxide and the sulphur.

The technology to develop sour gas fields such as Shah has been used before in Canada and Kazakhstan, Mr Cassidy said, but the economics of yesterday’s deal had yet to be tested.

“This is really the first project to develop Abu Dhabi’s sour gas reserves which have pretty much been locked until now,” Mr Cassidy said.

“It is difficult technically and financially.”

However, an agreement on Shah is likely to provide a template to develop Abu Dhabi’s remaining sour gas reserves, including the Bab field, which has also been delayed.

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