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Tue 20 Jul 2010 04:00 AM

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Conoco’s capital crunch caused cagey cop-out

Senior VP hints Shah Field may have been a sour deal for American firm.

Conoco’s capital crunch caused cagey cop-out
James Mulva is ConocoPhillips chairman and chief executive officer.
Conoco’s capital crunch caused cagey cop-out
ConocoPhillips also recently pulled out of a JV refinery deal in Yanbu, KSA.

Senior VP hints Shah Field may have been a sour deal for American firm.

Capital concern is being touted as the major reason behind the decision of ConocoPhillips to pull out from the US$10bn Shah gas field in Abu Dhabi last April, according to Ryan Lance senior vice president, exploration and production, International of ConocoPhillips.

"We have restrained capital. We have to look at total costs. But Abu Dhabi is a good place to do business," he added when speaking to reporters on the sideline of the Asian Oil and Gas conference held in Kuala Lumpur, Malaysia last month.

The JV agreement between ADNOC (60%) and ConocoPhillips (40%) was signed in July 2008, and aimed the development of the Shah Field's sulphur-rich sour gas reserves, the construction of a gas processing plant, pipelines and sulphur-exporting facilities at Ruwais. According to Q1 filings the company's exit from both the Shah project and the Yanbu refinery in Saudi Arabia caused write-downs of $110 million.

The project is designed to produce 10bn cubic metres of natural gas annually, in addition to 50 000 barrels per day (b/d) of condensates, 4,400 tonnes per day (t/d) of natural gas liquids (NGLs) and a massive 10,000 tonnes per day of sulphur. The gas and marketable by-products will then be transported from the gas field, which is situated onshore near the oasis of Liwa, to UAE customers or to storage and handling facilities at Ruwais on Abu Dhabi's coast. Sulphur granulation storage, an export terminal and a marine channel will also be built at Ruwais. The scheduled start-date for production start-up is 2013-14, having been pushed back from 2012.

When the deal was first signed the bi-product sulphur was trading at over $1000 a tonne, but that collapsed last year and has only recently seen a recovery to around $500 per tonne. It is widely thought that as part of the deal ConocoPhillips would be responsible for the marketing and sale of the sulphur, but when its price slid below what was considered a reasonable threshold the company wanted out of the deal.

Abu Dhabi Gas Development company, the JV vehicle established by Conoco and ADNOC, Abu Dhabi's state owned oil and gas company, has ploughed ahead in the wake of the US firm's withdrawal.

"The Shah gas development is set to come on stream in the second or third quarter of 2014," CEO Saif Al Ghafli told ArabianOilandGas.com, speaking at the annual Sour Oil and Gas Advanced Technology (SOGAT) event in Abu Dhabi in March.
Since Conoco's exit, ADGD has made over $5.5 billion worth of contract awards for the project, viewed as a key element in Abu Dhabi's future energy strategy. Despite sitting on vast gas reserves the UAE is today gas-short, and imports billions of cubic feet of Qatari gas each day through the Dolphin Energy pipeline, and purchases LNG on spot markets.

Earlier this year ConocoPhillips also withdrew from its joint venture with Saudi Aramco for the building of the Yanbu refinery on the western coast of the Kingdom.

The cancellation of Yanbu project came four years after the signature of a memorandum of understanding between Aramco and ConocoPhillips to develop the refinery, which was planned to supply global markets including the US with refined products.

The refinery was originally set to cost $6 billion to build. However, the project's price tag doubled to as much as $12 billion in 2008 when raw material and commodity prices peaked. Construction of the facility is now estimated to cost about $10 billion. Escalating costs also led ConocoPhillips in 2007 to pull out of another export refinery project in Fujairah in the UAE to be developed with Abu Dhabi's International Petroleum Investment Co.

The day after Conoco officially pulled out of the Shah project the company reported first-quarter earnings of $2.1 billion, compared with first-quarter 2009 earnings of $0.8 billion. Excluding after-tax charges of $110 million for ending participation in the Shah and Yanbu projects, first-quarter 2010 adjusted earnings were $2.2 billion.

Despite ConocoPhillips' departure from all of these Middle Eastern projects, local owners have proved their mettle and dedication by pushing ahead.

The fact that a listed company has bailed on these projects should perhaps be seen as part of a financing gap trend, and which is bound to get wider in the region. With National Oil Company coffers still brimming thanks to a fairly sustained high oil price, and access to the huge capital wealth of the Middle East's investment vehicles, it is surely these companies, not beholden to shareholders and dividend expectations who can afford to fund the mega-projects the region wants to develop.

The region has long-been on a quest of greater autonomy for its upstream industry, and if international oil companies to too risk-shy to participate in getting these projects off the ground, there relevance in the region diminishes even further.