Abu Dhabi National Oil Company (Adnoc) and the US’ ConocoPhillips are due to evaluate technical bids on the main construction package of the Shah sour gas development by late December. If it goes ahead, the $10bn megaproject will be one of the largest and most challenging hydrocarbons developments the Gulf has attempted.

The tendering process on the main gas gathering plant on the Shah field – located onshore approximately 180 kilometres southwest of the capital – which started on 10 June this year, represents a possible breakthrough for the region to realise the potential of its massive but largely untapped gas reserves.

Sour gas – natural gas that contains high levels of toxic hydrogen sulphide – is estimated to account for more than 50 per cent of the Gulf’s natural gas endowment. About one-third of the world’s gas reserves contain high concentrations of contaminants. The Shah field, containing nearly 30 per cent hydrogen sulphides, is one of the largest in the region. 

In the past, sour gas was deemed unsuitable for feeding downstream industries such as petrochemicals plants due to the complex and expensive process of turning this corrosive substance into a usable ‘sweet’ product – gas that does not contain hydrogen sulphide. But the Gulf’s current gas shortfall has compelled regional national oil companies to reconsider sour gas.

Key Fact

Abu Dhabi has set itself a target year of 2015 to complete the development of the Shah gas field

Source: MEED

Gas processing

If Shah is developed, it will produce 1 billion cubic feet a day (cf/d) of raw gas, yielding 540 million cf/d of processed gas available to Adnoc’s distribution network.

The Shah project will involve building several gas gathering systems, the construction of processing trains in addition to new gas and liquid pipelines and sulphur-exporting facilities at Ruwais.

Three gathering systems will take gas and fluids from the Shah field to the processing plant. Pipelines will then take 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 technology, while costly, is well developed and is not an obstacle to exploitation of sour gas accumulations”

Senior Saudi oil executive

Shah is not the only sour-gas-rich field in the UAE – Hail and Bab also have large concentrations of contaminants – and it would not be the first field in the world with very high levels of hydrogen sulphides to have been brought on stream in recent years. In 2007, National Iranian Oil Company brought its 18 million cf/d Amak project on stream, extracting 25 per cent hydrogen sulphide gas from the Bangestan reservoir in southwest Iran.

Saudi Arabia is endowed with more than 10 trillion cubic feet of non-associated gas of high non-hydrocarbon composition.

“It is inevitable that much of this gas will be developed due to domestic energy requirements and the need to minimise domestic crude oil burning,” says a senior Saudi oil executive. “The technology, while costly, is well developed and in itself is not an obstacle to the exploitation of sour gas accumulations.”

In March, state-run oil company Saudi Aramco awarded a contract for manufacturing and installation of four platforms and the construction of a 110-kilometre-long sub-sea pipeline to carry offshore sour gas from the Karan field to be treated and processed at the onshore Khursaniyah gas plant. Aramco is targeting production of 1.8 billion cf/d of gas from the Karan field from mid 2011.

Commercial potential

In July, Khalid al-Falih, chief executive officer of Aramco, claimed there is potential for producing commercial volumes of sour gas in the Kidan field in the Rub al-Khali  (Empty Quarter) concession, which is being developed by the South Rub al-Khali joint venture between the UK/Dutch Shell Group and Aramco.

The partners are now looking at developing Kidan, a massive gas deposit that has been left untouched for decades due to its ultra-sour gas reserves and location in inaccessible terrain. 

Other producers are investing in challenging gas developments in the Gulf. The UAE and Oman’s future gas development is dependent on production from ‘tight’ gas reservoirs, where extraction is complicated by the terrain.

For example, in central Oman, the UK’s BP is seeking to develop gas from the Khazzan and Makarem contract areas, both of which are tight-gas reservoirs.

Gulf states are also using sour gas to boost their oil production. At Petroleum Development Oman’s Harweel field, hydrogen sulphide and carbon dioxide are removed from sour gas streams and reinjected into the reservoir to blend into the oil to make it more fluid. Using this method, Petroleum Development Oman expects to increase the recovery factor by about 20 per cent. Abu Dhabi is already reinjecting sour gas into reservoirs in the Umm al-Anbar and Niwat al-Ghalan offshore fields.

Commercialising sour gas appears to be a straightforward proposal in a region that is seriously short of gas supplies. But the scale and ambition of the Shah scheme represents a major leap into the unknown for its sponsors, which goes some way to explaining why the project has had such a long gestation. 

It been scaled down from the original project parameters of early 2007, which envisaged bundling up Shah with the Bab field in one giant development programme. The complexity of the scheme prompted a rethink at Adnoc, which then split Shah and Bab into separate projects, with the former taking precedence.

Downstream innovation

Abu Dhabi’s decision to opt for ConocoPhillips to develop the Shah field may also turn out to be an astute move. Abu Dhabi has previously worked with the US’ ExxonMobil in the offshore Upper Zakum field, with Shell, in projects including the development of the Rumaitha field, and with the US’ Occidental Petroleum in offshore oil and gas fields including Ramhan. As a new entrant to the emirate, ConocoPhillips will want to makes its mark in a country where its profile until now has been lower than other international oil companies.

 “ConocoPhillips is a very good downstream innovator and there is no reason to think it would be any different in sweetening sour gas,” says Dalton Garis, associate professor at the Abu Dhabi Institute of Petroleum. “[The Shah project] could also provide a jump up the learning curve [for international oil majors] that could make the second or third generation of gas schemes commercially viable.”

Yet the technical challenges at Shah are still substantial. The partners will have to build one of the world’s largest sulphur removal plants and the project will also require sophisticated materials, such as specialised steel, to protect pipelines and drilling equipment from the gas, which is highly corrosive to iron and threatens flow lines and production equipment with stress cracking.

Despite the signing of a joint venture agreement on 9 July – one year after it won the contract – ConocoPhillips has been careful not to commit to a final investment decision on Shah. It has said it will make a final decision in 2010, once it has evaluated engineering, procurement and construction bids.

“The bottom line here is economics,” Sig Cornelius, chief financial officer at Conoco-Phillips, told investors during a conference call on 29 July. “The go-forward decision is subject to the bids we receive and evaluation that is done at that time.”

Further, ConocoPhillips is aware that even though it has experience in developing difficult hydrocarbons schemes, only a few contracting companies possess the technology to be able to build the required sulphur-resistant pipelines.

Project sources have indicated to MEED that contract awards may be delayed because of concerns over the sulphur pipeline package. At least three firms declined an invitation to bid on the 275km sulphur pipeline linking the Shah facilities with the process plants at Habshan and a sulphur-export terminal at Ruwais. No-one is rushing into anything – awards on the main gas gathering plant are not expected until the first quarter of next year.

“This is not an experiment. These resources are critical to Abu Dhabi’s economic development strategy”

Raja Kiwan, analyst, PFC Energy

For Abu Dhabi to build a stronger financial case for Shah, it may need to offer its joint venture partner more assurance on remuneration. This could include a change to domestic gas pricing, which is well below international rates of less than $3 a million British thermal units (BTU), at about $1 a million BTU. The Shah development’s technical complexities suggest it would be unfeasible to base gas sales on such a low level, given that the sponsors would require a delivered price of at least $5 a million BTU to justify the scheme, according to technical estimates.

“If [Abu Dhabi] is going to get this up and running within five years, it may have to revise the delivery price upwards,” says Garis.

The issue goes far wider than the economics of sour gas alone. Across the Gulf, pressure is building for deregulation of low, fixed domestic pricing structures. But the capital-intensive nature of sour gas developments makes the issue even more pressing.

If the economic case for the Shah sour gas scheme is made over the next year, it stands to transform the region’s energy dynamic. Abu Dhabi could, within the next five years, emerge as a global leader in sour gas development.

Adnoc has set an ambitious target on Shah, which is expected to be completed by 2015. Despite concerns over costs and technology, Abu Dhabi has staked its reputation on the project. “This is not an experiment. Developing these resources is critical to Abu Dhabi’s economic development strategy,” says Raja Kiwan, analyst at US energy consultant PFC Energy.

In the long term, the advent of Gulf nuclear energy will help to resolve the region’s energy shortage, but in the meantime, the region’s gas-rich producers need to unlock the challenging reserves lying beneath their feet.

If Abu Dhabi is to stake a claim to first mover advantage, it might have to pay the price. The will is there, as is the strategic imperative.