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Occidental Petroleum steps in at tricky Shah sour-gas project

THE US' Occidental Petroleum (Oxy) has stepped into compatriot ConocoPhillips's shoes at Abu Dhabi's $10bn Shah sour-gas development, eight months after the major walked away

OXY, one of the original bidders for the 40% stake state-owned Adnoc offered in the 1bn cubic feet a day (cf/d) development about three years ago, is believed to have joined the scheme on similarly tough commercial terms as ConocoPhillips. Shell and ExxonMobil also bid for the stake.

Under its deal, ConocoPhillips agreed to deliver 0.54bn cf/d of gas into the Abu Dhabi grid, free of charge, on the understanding that it would make money back from its share of the field's expected output of 32,000 barrels a day (b/d) of NGLs, 35,000 b/d of condensate and 9,200 tonnes a day of sulphur. Adnoc retains a 60% stake in the project.

Adnoc official Saif Ahmed al-Ghafli told Bloomberg that Oxy's deal was not exactly the same as the ConocoPhillips agreement; "there are some differences," he said, but declined to elaborate.

ConocoPhillips pulled out of the partnership last year, saying it wanted to concentrate on oil production. Reports published at the time also suggested that the financial terms agreed for Shah's gas and associated products output was not sufficient to make the project profitable. Neither Adnoc nor ConocoPhillips commented on the reports.

After ConocoPhillips's departure from the technically complex project, Adnoc signalled its reluctance to renegotiate partnership terms, saying it would continue development work on its own if necessary. It later drilled six wells at the field and handed out about $6bn-worth of engineering, procurement and construction contracts by the end of last year.

Adnoc's decision to turn to Oxy rather than Shell or ExxonMobil suggests it was not willing to give way on the contract's commercial terms. While Adnoc was aware a supermajor would be a safe pair of hands for this tricky project – Shah's gas carries a deadly 23% hydrogen-sulphide content – it also knew Oxy was hungry enough to agree to its terms.

For Oxy, if it can deliver on Shah it could be in with a chance of joining Adnoc's big equity partnerships. The Adco (onshore) and Adma-Opco (offshore) concessions end in 2014 and 2018, respectively, and international players are positioning themselves to secure stakes when the time comes to renew contracts or create new shareholder groups.

Abu Dhabi is eager to bring Shah – its first sour-gas effort – on stream. The emirate's domestic gas supply is tight and will only grow tighter as gas demand continues to rise to meet increasing demand for electricity generation and water desalination. The push to develop sour gas is a clear admission of the problem – production costs at Shah are estimated at $5.0-5.5/m British thermal units (m Btu), whereas traditional production costs are around $1/m Btu.

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