In numbers

30per cent: Proportion of the Shah field’s deposits made up of sour gas

540millon cf/d: Shah field’s anticipated processed gas yield

40per cent: Occidental Petroleum’s stake in the Shah gas project

cf/d=Cubic feet a day. Source: MEED

After a nine-month-long search, Abu Dhabi National Oil Company (Adnoc) has finally found a new partner for its $10bn Shah sour gas development. In January, the firm signed a new joint-venture agreement with the US’ Occidental Petroleum.

Abu Dhabi could barely have waited any longer. Despite having the world’s sixth-largest reserves, the UAE is facing a gas shortfall, as demand for electricity rapidly rises.

The scheme is crucial to the development of the emirate as it will provide access to additional gas supplies and help address the growing imbalance between demand and supply in the federation.

Technical challenges for the Shas gas project

National oil companies across the region are increasingly being forced to exploit oil and gas fields that are sour, meaning they contain high levels of toxic hydrogen sulphide. The Shah field, located onshore about 180 kilometres southwest of the capital, contains plenty of gas, but it is highly sulphurous. This makes extraction and processing technically challenging, and Adnoc has little relevant experience.

Sour gas is estimated to account for more than 50 per cent of the Gulf’s natural gas deposits. Abu Dhabi’s Shah field, containing nearly 30 per cent hydrogen sulphide, is one of the largest in the region.

The partners will produce 1 billion cubic feet a day (cf/d) of sour gas from the southern Shah field. After separating the sulphur from the natural gas, the scheme is expected to yield about 540 million cf/d of processed gas. The sulphur by-product will be transported to granulation and distribution facilities at the Shah and Habshan fields and then onto Ruwais on the Gulf coast.

Shell were favourites, but Occidental is well connected with Mubadala and it seems that … has paid off

Source close to the project

Three gathering systems will take gas and fluids from the Shah field to the processing plant. Pipelines will then transport gas, condensate and natural gas liquids to other processing and distribution facilities at Habshan, which will be linked to a sulphur export terminal at Ruwais Port.

The choice of Occidental as partner for the scheme fills a major gap in skills and technology left by the departure in April 2010 of ConocoPhillips, another US oil major. ConocoPhillips’ delay in making a final investment decision on the scheme has already lost Adnoc a year. Further delays would have an impact on the emirate’s domestic supply programme.

Beating proposals from UK/Dutch Shell Group, as well as US rival ExxonMobil, Occidental will take a 40 per cent stake in the Shah gas project. Shell had been widely tipped to win the race for the project as a stakeholder in Abu Dhabi Gas Industries, the Adnoc subsidiary, which had been overseeing the tendering process for the sulphur projects.

Occidental [is] more committed to the region and in better financial shape than Conoco-Phillips was last year

Source in Abu Dhabi

“It’s not a great surprise that Occidental won it,” says a source close to the project. “Shell were favourites, but Occidental is well connected with Mubadala [Abu Dhabi’s energy investment vehicle] and it seems that relationship has paid off.”

The precise terms of the agreement have not been revealed, but industry analysts speculate that Adnoc would have had to make an improvement on the deal offered to Conoco-Phillips. Last year, sources close to the joint venture told MEED that ConocoPhillips was only given access to the sulphur, condensates and natural gas liquids produced at the Shah field.

Abu Dhabi’s decision to opt for Conoco-Phillips to develop the Shah field was at first considered an astute move. A new entrant to the emirate, ConocoPhillips was hoping to make its mark with the Shah project, in a country where its profile had been relatively low.

With its departure, Adnoc has had to rebuild the financial case for Shah. Its new partner is likely to have demanded significantly improved returns from the project.

“It was never entirely clear why Conoco left the project, so it is hard to guess what the terms will be,” says a source in Abu Dhabi. “But Occidental appears to be more committed to the region and in better financial shape than ConocoPhillips was last year.”

Sulphur handling at the Shah field

Abu Dhabi is keen to make up for lost time and the project is now gathering pace. Adnoc has already made progress, awarding contracts to Italy’s Techint and India’s Dodsal for two schemes worth an estimated $1.2bn to build new sulphur forming, handling and export facilities in the Western region. Only the Shah sulphur facilities are left, with an award expected in April.

Adnoc is planning to build an estimated $2bn-worth of new sulphur handling and distribution facilities as it develops its sour gas resources. Production is expected to rise to 7 million tonnes a year (t/y) by 2015, from about 1.7 million t/y in 2008.

Abu Dhabi faces a dual challenge of a crunch in domestic gas supplies and an oversupply of sulphur, arising from increased sour gas production. Since 2008, the global sulphur market has collapsed, with prices falling by three quarters to less than $200 a tonne.

The imbalance in the sulphur market is set to get worse for producers. By 2016, consumption is forecast to be 91.1 million tonnes, compared with production of more than 100 million tonnes. The Middle East plays a major role in this, with as much as 20 per cent of global production.

The Shah scheme paves the way for another grand scheme in the UAE. Adnoc rejected the idea of building the world’s largest sulphur pipeline in favour of a railway system. Federal rail company Union Railway is planning the 264-kilometre first phase of its $11bn railway to transport granulated sulphur between the Shah and Habshan gas fields, then on to Ruwais on the Gulf coast. By incorporating industrial projects into the scheme, Union Railway has set a template for the regional development of rail projects.

The line will support Adnoc’s ongoing production programmes at Shah and Habshan. Later phases of the railway will contribute significantly to the development of the oil, natural gas and petrochemical industries in the UAE.

Power demand in the UAE

When Adnoc announced its original deal with ConocoPhillips, the company set itself an ambitious target, aiming to complete the Shah project by 2015. Despite the delays, it is sticking to this timeframe and cannot afford to let it slip.

The UAE has been able to cope so far with the gas constraints through a combination of its own production from associated fields and imports from Qatar, via the Dolphin pipeline, since 2007. Its natural gas production has increased rapidly in recent years, from 38.4 billion cubic metres in 2000, hitting 50.3 billion cubic metres in 2007. But consumption has risen even more quickly, from 31.4 billion cubic metres in 2000 to 49.2 billion cubic metres in 2007. More worrying still, production growth stagnated in 2008 and fell to 48.8 billion cubic metres in 2009.

UAE gas production
Year Billion cubic metres
1999 28.5
2000 38.4
2001 44.9
2002 43.4
2003 44.8
2004 46.3
2005 47.8
2006 49.0
2007 50.3
2008 50.2
2009 48.8
Source: BP

Between 2000-07, electricity consumption rose every year, almost doubling from 36.2 billion kWh in 2000 to 66 billion kWh in 2007, according to the US government’s Energy Information Administration. But every year, generation has managed to stay just ahead of the demand curve. Output increased from 37.5 billion kWh in 2000 to 71.5 billion kWh in 2007.

Continued power plant investment means electricity demand is likely to continue to be met in the medium term, but Adnoc will have to find gas feedstock for the new power stations, as well as for planned industrial projects.

UAE gas consumption
Year Billion cubic metres
1999 31.4
2000 31.4
2001 37.9
2002 36.4
2003 37.9
2004 40.2
2005 42.1
2006 43.4
2007 49.2
2008 59.5
2009 59.1
Source: BP

Abu Dhabi Water & Electricity Company forecasts peak electricity demand in the emirate to triple by 2030, driven by rapid growth of the emirate’s industrial sector. By 2020, the UAE’s gas deficit is predicted to widen to at least 30 billion cubic metres, with production at 78 billion cubic metres and consumption at 108 billion cubic metres.

Led by Abu Dhabi, the Gulf’s current gas shortfall has compelled regional national oil firms to reconsider using sour gas, previously deemed unsuitable for downstream industries. The development of the Shah scheme appears to be a straightforward proposition, given the precarious gas supply and demand balance.

Pioneering oil and gas projects in the UAE

Shah is not the only sour field in the UAE. The Hail and Bab fields also contain large concentrations of contaminants. It is also not the first sulphur-rich field in the region to be developed. In 2007, National Iranian Oil Company brought its 18 million cf/d Amak project onstream, extracting 25 per cent hydrogen sulphide gas from the Bangestan reservoir in southwest Iran.

Saudi Arabia also believes there is potential for the production of commercial volumes of sour gas from its Kidan field in the Rub al-Khali (Empty Quarter).

But the scale and ambition of the Shah project represents a major leap into the unknown for the region. This in part explains why the project has taken so long to get off the ground.

The technical challenges are substantial. Not only will Adnoc and Occidental have to build one of the world’s largest sulphur removal plants, they will also have to protect their pipelines and production equipment from the highly corrosive gas. Few contractors possess the technology to be able to build the required sulphur-resistant pipelines.

Adnoc has staked its reputation on this grand scheme. Even if it does not quite hit its 2015 deadline, Abu Dhabi could still emerge as a global leader in sour gas development.