Occidental Joins $10 Billion Abu Dhabi Shah Project

Occidental Petroleum Corp. won a contract to join Abu Dhabi’s state oil company in developing the $10 billion Shah natural-gas project, beating out Exxon Mobil Corp. and Royal Dutch Shell Plc.

Abu Dhabi National Oil Co. will hold 60 percent of the project and Los Angeles-based Occidental the rest, the government-owned company known as Adnoc said today. Occidental’s stake will last 30 years, it said in a separate statement.

The largest sheikhdom in the United Arab Emirates, Abu Dhabi holds the world’s seventh-largest reserves of oil and gas, according to U.S. Energy Information Administration data. The emirate is seeking to develop more of its gas supplies to meet domestic demand for the fuel used in power plants.

“They need more gas and they are ready to pay more for it,” Samuel Ciszuk, a senior Middle East energy analyst at IHS Global Insight, said by phone from London in reference to Abu Dhabi. Fuel from Shah may cost more than $5 per million British thermal units to produce, more than five times the price Persian Gulf countries have traditionally paid for gas, he said.

Shah, about 180 kilometers (112 miles) from the city of Abu Dhabi, poses a technical challenge because it contains gas that is mostly sour, or high in hazardous hydrogen sulfide. The hydrogen sulfide must be stripped from the gas before the fuel can be used. The sulfur must then be converted into a solid and transported 250 kilometers to be loaded on ships and exported.

Capital spending is estimated to be about $10 billion for the project, with Occidental’s share proportional to its ownership, the U.S. company said.

‘Big Prize’

Natural gas for February delivery was little changed at $4.566 per million Btu in electronic trading on the New York Mercantile Exchange as of 8:25 a.m. local time. Business and residential consumers in the Gulf have generally paid about $1 or less for gas extracted along with crude oil.

Occidental will join Abu Dhabi Gas Development Co., a unit of Adnoc, in developing Shah after the original foreign partner, ConocoPhillips, withdrew from the project last April.

For Occidental, “the big prize will be being able to become the world leader in producing very sour gas,” Ciszuk said. “If they succeed, they’ll be seen as the top company by other countries looking at such projects.”

Drop Outs

Abu Dhabi, the U.A.E. capital, originally chose ConocoPhillips in July 2008 after considering bids from Shell and Exxon Mobil, among others. ConocoPhillips withdrew after announcing last October that it planned to divest from some assets and intensify its focus on exploring for oil and gas.

Abu Dhabi shortlisted Exxon, Occidental and Shell as potential partners to develop the project, two people familiar with the plan said Nov. 1.

The U.A.E. imports gas from neighboring Qatar and aims to develop nuclear power to help meet electricity demand, which is likely to double by 2020, according to government studies. The first nuclear plants won’t be ready until the end of the decade, creating a gap in the supply of fuel for the emirate’s power stations that officials hope to fill partly with gas from Shah.

Occidental and Abu Dhabi’s state-controlled investment arm Mubadala Development Co. are partners in oil and gas ventures in the U.A.E. and Bahrain. The U.S. company owns 24.5 percent of Dolphin Energy Ltd., the pipeline venture bringing gas from Qatar to the U.A.E. Mubadala holds 51 percent of Dolphin, and Total SA the rest. Occidental and Mubadala also have an exploration and production company in Bahrain.

Important Step

“This is another important step in the implementation of our growth strategy and in our relationship with the emirate of Abu Dhabi,” Occidental Chairman and Chief Executive Officer Ray Irani said in a statement. “The development of this field under the agreement provides an exciting opportunity to create value for the people of Abu Dhabi and for our stockholders.”

Shah, scheduled for completion by the third quarter of 2014, will process 1 billion cubic feet a day of sour gas into about 500 million cubic feet of fuel daily. It may also process 4,400 tons of natural-gas liquids a day, 35,000 barrels a day of condensates and 9,200 tons a day of sulfur.

To contact the reporter on this story: Anthony DiPaola in Dubai at adipaola@bloomberg.net. Ayesha Daya in Dubai at adaya1@bloomberg.net.

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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