ConocoPhillips to decide on Shah participation by 29 April

26 April 2010

US energy major wants to finalise plans before releasing first quarter results

The US’ ConocoPhillips will make a final decision on its participation in the $10bn Shah gas development in Abu Dhabi by 29 April at the latest, sources close to the project tell MEED.

Senior executives from the company including Stan Tripp, senior vice-president for projects at Conoco, who is working directly on the project, have been recalled to the company’s Houston headquarters to discuss whether or not it should continue working on the scheme, executives involved in the scheme say.

The talks follow the company’s 21 April announcement that it had quit its $10bn joint venture refinery project with Saudi Aramco at Yanbu on the kingdom’s Red Sea coast because it no longer fit in with Conoco’s long-term strategy.

The decision to walk away from the 50:50 Yanbu joint venture came despite having reached an extremely advanced stage of tendering for engineering, procurement and construction (EPC) contracts and finance deals for the 400,000 barrel a day export refinery (MEED 21:4:10).

Conoco wants to make a decision on how to proceed with the similarly-sized Shah project before it releases its first quarter results on 29 April, one source says. Contractors have submitted final bids for five major EPC deals on the scheme to date.

Engineering executives in talks with Conoco and its partner on the Shah scheme, Abu Dhabi National Oil Company (Adnoc), say that the US energy major looks increasingly likely to drop the project because of a lack of financial return and ongoing tensions between the two firms’ management.

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

However, the relationship between the Adnoc and ConocoPhillips executives working at the joint venture in Abu Dhabi has become increasingly fractious in recent months, and sparked crisis talks between senior managers from both companies in late December and early January.

The return on investment available to Conoco is not thought to sit well within the company’s strategy to only work in the most profitable of upstream oil and gas schemes. Sources with detailed knowledge of the companies’ joint venture agreement say that Conoco only has access to the sulphur, condensates, and natural gas liquids produced by at the Shah field, and that it can only turn an effective profit when oil prices are above $80-90 a barrel. Adnoc signed up Conoco to work on the scheme in February 2008 when oil prices topped $100 a barrel.

There are also major technological concerns over the project. Conoco and Adnoc are yet to decide on the best way to transfer the 7 million tonnes a year of sulphur produced at the field to processing and export facilities at Habshan and Ruwais in the north of the emirate. They are due to choose between a railway line and a liquid sulphur pipeline by the end of April.

Adnoc wants to use the gas produced by the scheme to fuel the emirate’s domestic power needs, and is prepared to move ahead with the development, even though producing the gas could effectively cost as much as $4 for a billion thermal units – more than it costs to buy on international gas markets.

Sources close to Adnoc indicate that the UK/Dutch Shell Group, which bid on the project in 2007 and 2008, would be interested in stepping in to the void left by ConocoPhillips, if the terms of the project can be worked to make it more profitable.

“They are definitely waiting in the wings,” says one adviser on the project. “But the terms would need to be better.”

Another executive suggests that Adnoc would rather work on the project alone, allowing the state energy firm to award EPC contracts as soon as possible as bids were significantly below budget, as Aramco has chosen to do.

“I think they would prefer to be on their own,” he says.

ConocoPhillips made a net profit of $1.2bn in the fourth quarter of 2009 and earned $4.89 billion for the full year as compared to a $17bn loss in 2008. The company said in January that it planned to sell off assets worth a total of $11bn and cut capital expenditure by $1.5bn to $11bn in 2010.

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