Abu Dhabi’s ambitious Shah sour gas development being constructed near its southern border with Saudi Arabia is likely to be the first of a new era of alternative gas plays in the Gulf.
The decision to develop the $11bn Shah project came with the realisation that, despite the UAE’s ample natural gas resources, the Gulf state now has few easy targets with which to boost its domestic production capacity.
While the government has a multi-pronged strategy to increase access to gas – including the Dolphin pipeline from Qatar, a new liquefied natural gas (LNG) terminal and an increase in associated gas from oil field development – further sour gas projects are on the radar.
State-owned energy firm Abu Dhabi National Oil Company (Adnoc) has now invited prequalified companies to submit bids to form a potential joint venture on the development of the Bab sour gas asset.
Bab field progress
The Bab field, located about 150 kilometres southwest of Abu Dhabi city, is expected to be an operation similar in size to Shah, requiring an investment in excess of $10bn.
The Bab sour gas development was initially tendered along with Shah in 2007, but after receiving bids, Adnoc decided to shelve the scheme and focus instead on the Shah project.
Shah is on track to come on stream by the end of 2014, according to project owner Abu Dhabi Gas Development Company (Al-Hosn Gas). In October 2012, Al-Hosn’s chief executive officer, Saif al-Ghafli, said facilities at the onshore project were 60 per cent complete and drilling had progressed more than 20 per cent.
The project, located 210km south of Abu Dhabi, will process 1 billion cubic feet a day (cf/d) of feed gas to produce 540 million cf/d of desulphurised gas in addition to condensates and marketable sulphur.
Shah is significantly more challenging than previous gas developments undertaken in the UAE. Sour gas fields contain high levels of toxic hydrogen sulphide and carbon dioxide. As Adnoc has no previous experience with such complex fields, it is essential it forms international partnerships to bring in technical expertise. Adnoc chose ConocoPhilips as a 60:40 joint venture partner on the Shah scheme in 2008 after the initial tender, but the US-based company pulled out of the deal, later to be replaced by Occidental Petroleum, also of the US.
Shah gas will put the utilisation of sour gas on the map in terms of how a field can be brought into production
Moss Daemi, GL Noble Denton
While the Shah sour gas field is challenging and costly to develop, containing 30 per cent hydrogen sulphide, the Bab field is even more complex. Moss Daemi, executive vice-president for the Middle East and Africa at GL Noble Denton, a Germany-headquartered consultancy, believes the costliness of the Bab development means returns have to be more attractive for international oil companies (IOCs) to invest.
“The complexity of the reservoirs for some of these is quite substantial. That’s why the further exploration on some of the newer fields requires a much higher level of technology and more significant capital investment to make sure the optimum recovery from the reservoir is achieved,” says Daemi.
“There needs to be some softening of attitudes regarding the commercial terms that can be offered to attract companies to invest here. At the moment, some of the commercial terms are making it difficult for investment decisions to be made in a timely manner.”
The terms for Bab must attract IOCs with the high levels of technology and experience necessary to work on high-sulphur reservoirs. Companies receiving invites included the UK’s BP, US-based ExxonMobil, UK/Dutch Shell Group and France’s Total.
Drilling must be carried out to a great depth with many different layers, including oil, a gas cap and associated gas. The operator may have to extract products in several phases to avoid degrading the remaining hydrocarbons reserves.
“The commercial contractual terms need to be more favourable to actually attract potential investors. Even when we look at Shah gas and the investment by Occidental, when you look at the rate of return, it’s quite risky in terms of what they’ve actually got for it,” says Daemi. “Based on a total joint-venture capital investment of $10bn, with the 40 per cent shareholding, they are looking at no more than 10-12 per cent return, and that is very much conditional of commodity pricing around the sulphur and liquefied petroleum gas [LPG].”
Like Shah, the Bab development is expected to have a capacity of about 1 billion cf/d of sour gas, which will be processed to a smaller amount of sales gas and associated sulphur and LPGs. The complexity of the reservoir is also likely to make the processing operation more costly than Shah.
In addition to Bab, Abu Dhabi is exploring the potential to develop the Shuwaihat sour gas and condensate field, located 25km west of Ruwais in the Western Region of Abu Dhabi. In July 2012, Adnoc signed a technical evaluation agreement with two oil and gas groups – Germany’s Wintershall and Austria’s OMV – to appraise the field.
Wintershall as the operator, with OMV as an equal partner, will carry out the appraisal phase by drilling up to three appraisal wells and conducting a 3D seismic survey of the field. If the appraisal programme is successful, Adnoc will participate in the field’s development and production phase, the German company has said.
Adnoc has also reportedly sent letters to oil and gas companies to submit offers for gas development on the Hail field. The offshore sour gas asset was being looked at around the same time as the Shah field was being tendered in 2007, but plans did not progress.
The Hail field contains lower levels of the intoxicants hydrogen sulphide and carbon dioxide than Shah and Bab, but its location in shallow coastal waters makes it ecologically sensitive, and stringent environmental studies must be carried out before exploration and development can take place.
It is estimated Hail could be developed into a smaller 500 million cf/d project.
In 2011, Abu Dhabi awarded a contract to Japan-owned private oil and gas developer Abu Dhabi Oil Company (Adoc) to develop the Hail field’s oil-production potential. Hail was added to the existing three fields in Adoc’s concession starting from December 2012 under a 30-year agreement.
While Shah is a pioneering sour gas development in the Middle East, it is not the only sulphur-rich field in the region being developed. The National Iranian Oil Company brought its 18 million cf/d Amak asset on stream six years ago, extracting 25 per cent hydrogen sulphide from the Bangestan reservoir in southwest Iran.
Saudi Arabia is also looking at the potential for the extraction of sour gas from the Kidan field in its southeastern Empty Quarter. In November 2011, national oil company Saudi Aramco formed a joint venture with Shell to appraise the assets, with the programme expected to be completed by the end of 2013.
One of the major problems in attracting partners for a sour gas development in the current climate is the declining value of sulphur – one of the co-products of sour gas processing. The volatile market has seen prices at $750-800 a tonne, when the original Shah joint venture was signed in mid-2008, dropping to $45-50 a tonne at the end of the same year. With sulphur and LPGs forming a large part of the sharing agreement for joint-venture partners, IOCs will be wary of the potential return on investment from these by-products.
Saudi Arabia and the UAE share a common need to increase gas production amid rocketing power demand from the expansion of industry and fast-growing populations. Associated gas has long been flared as a waste product of oil production, or re-injected into reservoirs to improve crude recovery, but the commodity is proving increasingly costly to produce or import. Middle East sulphur prices have recently levelled at about $140-150 a tonne, according to UK fertiliser consultants Ferticon.
“The dynamics have changed in regional demand for gas in power and reinjection … It is imperative to look at unconventional gas reserves,” says Al-Hosn’s Al-Ghafli.
Daemi believes these early projects in the UAE could set the benchmark for subsequent sour gas projects in the region.
“Shah gas will put the utilisation of sour gas on the map in terms of how a field can be brought into production,” he says. “It will be a very good acid test … as a success story, and others will learn from it and learn from the technology utilised – and materials needed to achieve your production target – and will start repeating it in the exploration and development for their own sour reservoirs.”
The UAE has in recent years shifted from being a net gas exporter to net gas importer. Its gas consumption increased by 66 per cent in the decade up to 2011, reaching 62.9 billion cubic metres. Domestic production lagged behind at 51.7 billion cubic metres in the same year.
During this time, the Gulf state started importing gas through the Dolphin pipeline from Qatar and a liquefied natural gas (LNG) import facility was brought online in Dubai.
The government is pursuing several options to fill the growing gap between consumption and production. Abu Dhabi may be able to increase imports from Qatar to the full capacity of 3.2 billion cf/d, up from the original supply contract of 2 billion cf/d, but this depends on price negotiations.
In addition, another LNG regasification facility is being planned in Fujairah by Abu Dhabi Water and Electricity Company, while Adnoc is reviewing its long-term LNG exports to Japan from its Das Island liquefaction terminal, and a Nuclear Power Plant is under construction.
Nonetheless, despite the costliness of extracting and processing sour reserves, gas looks to be part of the UAE’s energy mix for decades to come.
$10bn: The expected development cost of the Bab sour gas field
1 billion cf/d: The expected capacity of the Bab sour gas development
cf/d=Cubic feet a day. Source: MEED