Engine of growth: The focus is now turning to exploiting sour gas reserves

Given the demands of power generation, industry and oil field reinjection, gas is becoming more important to the emirate’s economy. As such, in conjunction with international partners, Abu Dhabi National Oil Company (ADNOC) is turning to tight marginal reserves once thought commercially unviable.

Rising Consumption

Sour gas has been noted as a possible source of future growth for the sector in the Abu Dhabi Economic Vision 2030, the emirate’s long-term development plan. As consumption rates of natural gas are expected to increase from the current figure of 2.8trn cu feet to 5.19trn cu feet by 2015 and 6.32trn cu feet by 2020, it is unsurprising that the emirate is eager to exploit domestic reserves.

Al Hosh Gas

In the coming 12 months, Abu Dhabi Gas Development Company (Al Hosn Gas), a joint venture partnership between ADNOC (60%) and Occidental Petroleum (Oxy, 40%), will take a significant step in helping the government achieve this ambition. The project will extract 1bn cu feet of gas per day (500m cu feet per day of sales gas) from the Shah field, around 210 km south-west of Abu Dhabi City. As of mid-October 2013, 90% of the facility and pipelines were completed and the drilling was three months ahead of schedule. As such, the facilities should be commissioned and begin producing by late 2014. The project will be a game changer in terms of the accessibility and pricing of gas for domestic use. The $10bn project presents challenges for the emirate as it is the first attempt to extract the territory’s highly sour gas. Al Hosn Gas could set a precedent for future sour gas projects, demonstrating that they are commercially feasible. However, the hydrogen sulphide content at the Shah gas field is high, which has implications for the types of equipment that can be used, as well as the cost. The major challenges with the Shah field include a hydrogen sulphide content of 23%, carbon dioxide content of 9%, bottom hole temperatures in the region of 150°C and pressure as high as 5500 pounds per square inch. As such, the health and safety procedures are highly complex and the cost of extraction and processing is substantial. Although the project will produce 1bn cu feet per day of gas, once stripped, the amount of sales gas will be half this total.

Cost Considerations

The cost of production from the field is expected to be as high as $5.5 per mmBtu, by far the highest current cost in the emirate. These cost considerations have meant that the gas has remained under the emirate’s sands for decades. It has been a delicate balancing act getting international oil companies on board for Abu Dhabi’s sour gas projects. For example, ConocoPhillips was awarded the contract for the Shah field in 2008, but withdrew in 2010. Oxy took the stake in the joint venture in 2011 and is confident that the project can be commercially successful. “The sheer volumes and cost of alternate energy (including alternative gas sources) have all contributed to making sour gas projects economically viable. Additionally, there is a regional and international market for the sulphur by-product,” Glenn M Vangolen, senior vice-president of Oxy for the Middle East, told OBG.

Making It Feasible

The major incentive for Oxy is that the Shah field will produce rich gas, comprising sales gas, condensate and natural gas liquids (NGL). It is the latter two, the liquids, which will make the project financially feasible for the joint venture partnership of ADNOC and Oxy. Al Hosn Gas will not only bring 500bn btu per day of sales gas to market, but also 35,000 barrels per day (bpd) of petroleum condensates and 25,000-30,000 bpd of NGL during the life of the project up to 2041. The liquid-rich field presents an opportunity for the partners. Liquids will be sold at a market-based price to ADNOC, while the gas price is fixed, with an annual increment locked in. There is an expectation that the joint venture can at a minimum recover costs on the extraction and processing of sulphur, which will have a production rate of 9200 tonnes per day. “Indeed, Abu Dhabi will have a competitive edge when it comes to the supply of sulphur, which will benefit fertiliser and other similar industries,” said Saif Al Ghafli, the CEO of Al Hosn Gas. “How this supply can be successfully leveraged by the downstream industry, particularly in the private sector, remains to be seen.” Al Hosn Gas will produce 5% of the world’s sulphur, and will likely have a dramatic impact on a global market that has already shown substantial price volatility. Yet the partners have calculated that the export revenue from the sulphur, which will be transported by rail to the port of Ruwais, even using an extremely conservative forecast price, will offset the cost of extraction. “Transporting, handling and marketing the huge sulphur production will remain a major challenge for sour gas projects. Price is an inherent risk in any commodity business. The sulphur prices over the last seven years have fluctuated widely, significantly more so than petroleum prices,” Al Ghafli said. The other consideration was the competitive cost of construction for the project. The engineering, procurement and construction bid for Al Hosn Gas came in at 50% of the front-end engineering design (FEED) and pre-FEED estimates, largely as a result of the favourable contracting environment for clients in 2009-10 when the tender was issued. The major packages for the project have been awarded to Saipem, Technicas Reunidas, Punj Lloyd, Samsung Engineering, Al Jaber Group, Ascon and Consolidated Contractors Company.

Further Plans

Abu Dhabi will hope that the delivery of Al Hosn Gas signals the viability of developing the emirate’s sour gas reserves. The government has ambitions for multi-field development of sour gas. This includes reservoir development in the Umm Shaif, Shuwaihat and Bab fields, in addition to Shah. Total field development will require capital investment of $30bn for gas with sulphur content ranging from 2% to 33% and carbon dioxide from 5% to 10%. While Shuwaihat is currently under appraisal by OMV of Austria and Wintershall of Germany, the next reservoir that will be brought to development – the participating firm is not yet clear – is the Bab field. In May 2013, Royal Dutch Shell won a 40% share in the 30-year concession for the field (60% is taken by ADNOC). The reservoir will require upwards of $10bn in investments to reach the production target of 1bn cu feet per day of gas (500m cu feet of sales gas) by 2020. Shell will be able to book reserves from the Bab field and a production figure of 30,000 barrels of oil equivalent per day when it reaches plateau production from 2020, which is equivalent to 0.92% of its 2012 global production. While this is a relatively small share of its total portfolio, and is likely to come on low margins, it consolidates Shell’s position in this stable Middle Eastern market and positions it well for the concession award for the Abu Dhabi Company for Onshore Oil Operations (ADCO) operations that are currently up for renewal.

Bab is likely to present a challenge even greater than the Shah field, not least because it is more sour and not as rich in liquids. The Shah and Bab fields were tendered at the same time in 2006, but initially only Shah moved to the contract stage. However, the field development project has been rehabilitated with Shell coming on board. While the terms of the deal have not been revealed, research by Wood Mackenzie estimates that the gas will have to sell at a minimum of $5 per million cu feet to break even and the concession will have to operate in a lower tax and royalty environment.

Big Ambitions

It is clear that Abu Dhabi is showing real ambition by maximising the production potential of its ultra-sour reserves. While they remained unexploited for decades, the current demand pressure created by the emirate’s growth has brought them very much into play. The production capacity of 500m cu feet per day from the Shah field that will come on-stream by the end of 2014 could meet just over a quarter of the emirate’s 2012 average daily fuel consumption requirements for power generation (1.8bn cu feet). Furthermore, the combined 1bn cu feet per day capacity of the Shah and Bab fields, which will be reached in 2020, could meet just under a third of the forecast average daily requirement for power generation of 3.35bn cu feet. As such, the upstream investments in the non-associated sour gas in the Shah and Bab fields will dramatically change the domestic energy landscape.