ConocoPhillips loses $1bn on project exits

28 April 2010

US oil company has pulled out from Shah gas development and Yanbu refinery scheme

The US’ ConocoPhillips faces losses of hundreds of millions of dollars after quitting a second successive major oil and gas scheme in the Gulf.

Conoco confirmed on 28 April that it would not take part in the $10bn Shah gas development in Abu Dhabi. It was set to be a 40 per cent partner in the project, with Abu Dhabi National Oil Company (Adnoc) taking the remaining 60 per cent share (MEED 28:4: 10).

This followed the 21 April announcement that the company was quitting the $10bn Yanbu refinery development in Saudi Arabia, in which the company was meant to be 50:50 joint venture partner with energy giant Saudi Aramco (MEED 21:4:10).

Sources close to Conoco say that it had spent $850m on the two schemes, which it cannot recover after breaking the terms of its contracts by leaving at such a late stage in the projects’ development.

“On Yanbu they have spent close to $700m and on Shah about $150m,” says a source with close ties to the company. “Between them, they had spent nearly $1bn.”

“Even with such spending, they decided it wasn’t economical to proceed further,” says another source with close ties to Conoco’s Abu Dhabi management. Conoco declined to comment on its losses from the projects when contacted by MEED.

A major rethink of strategy at Conoco since it signed up for the projects during a 2006-08 boom in prices and demand for oil and gas means that it is ready to walk away from some of the most powerful energy companies in the region with little likelihood of winning work in either country for some time, adds one engineering consultant.

Major engineering, procurement and construction (EPC) deals had been tendered on both developments and were due to be awarded in April and May. In the case of the Shah development, the companies selected for the five main EPC contracts were sent draft letters of award that still contained references to Conoco just hours before the company announced its intention to leave the project.

Conoco says that it decided to leave the 400,000 barrel a day (b/d) Yanbu refinery development because it no longer fit in with the company’s strategy of moving away from downstream oil projects – stripping oil and gas into more useful products and selling them on international markets at a profit.

Adnoc and Conoco planned to produce 1 billion cubic feet a day of sour, or sulphur-rich, gas from the southern Shah field before separating the sulphur from the natural gas and transporting both to processing and distribution facilities at Habshan and Ruwais.

Conoco is yet to give an explanation for its decision to leave the Shah scheme, which is more in line with its current focus on upstream oil and gas exploration and production.

Sources with detailed knowledge of the companies’ joint venture agreement say that Conoco only had access to the sulphur, condensates, and natural gas liquids produced by at the Shah field, and that it would only have been able to turn an effective profit when oil prices were above $80-90 a barrel. Adnoc signed Conoco up to work on the scheme in February 2008 when oil prices had just topped $100 a barrel for the first time.

The relationship between the Adnoc and ConocoPhillips executives working at the joint venture vehicle  Abu Dhabi Gas Development Company had also become increasingly fractious in recent months, and sparked crisis talks between senior managers from both companies in late December and early January.

Sources close to Adnoc and Aramco say bids for the Shah and Yanbu contracts came in as much as 40-60 per cent under initial budgets for both schemes.

Aramco plans to build the refinery alone, while sources close to Adnoc indicate the UK/Dutch Shell Group would be interested in stepping in to the void left by ConocoPhillips if the terms of the project could be worked to make it more profitable.

The energy major was closely involved in plans to produce gas from the Shah field before Conoco won the development deal in 2008. It is also a 15 per cent shareholder in Abu Dhabi Gas Industries Company (Gasco), the Adnoc subsidiary which has been overseeing the tendering process on the scheme.

“Shell spent a lot of money, time and effort on Shah and they deserve to get it,” says a source at another international oil company. “It ran into millions of dollars, and they have always left the door open for a return to the project.”

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