ADNOC'S SOUR GAS DEVELOPMENT PLANS

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 003026 SIPDIS SIPDIS DEPARTMENT FOR NEA/ARP, EB/ESC/IEC/EPC NSC FOR HUTTO ENERGY FOR WILLIAMSON, GETTO AND BRODMAN OVP FOR KEVIN O'DONOVAN E.O. 12958: DECL: 07/25/2016 TAGS: EPET ENRG EINV PINR AE SUBJECT: ADNOC'S SOUR GAS DEVELOPMENT PLANS REF: A. ABU DHABI 1219 ¶B. ABU DHABI 470 ABU DHABI 00003026 001.2 OF 002 Classified By: Ambassador Michele J. Sison for reasons 1.4 (B) and (D). This cable contains business proprietary information. ¶1. (C) Summary: Exxon Al-Khalij president Frank Kemnetz (protect) briefed Ambassador and Econchief on developments in Abu Dhabi's oil and gas sector including its proposal to develop its onshore non-associated gas fields near the Shah and Bab fields. Exxon and Occidental Petroleum are two of the companies that have been invited to express interest in this project. Kemnetz confirmed that Abu Dhabi's onshore production capacity had increased to 1.4 million barrels per day and that he did not expect any more large increases onshore before 2009/10. He said that he thought Upper Zakum was on track to increase its production to 750,000 barrels per day in the medium to long term. End Summary. ADNOC's Sour Gas Project -------------- ¶2. (C) Kemnetz told Ambassador that ADNOC was planning to issue a significant tender later in 2006 to develop its on-shore non-associated gas reserves near the Bab and Shah oil fields. (Note: The Shah field is near the Saudi border. End Note.) According to Kemnetz, ADNOC has invited expressions of interest from a number of companies, including ExxonMobil. He added that he had heard that ADNOC had extended the invitation to some Asian (i.e., Chinese) companies and expressed concerns that some of invitees did not have the expertise to handle Abu Dhabi's sour gas. (Note: In an earlier conversation with Econchief, Oxy of Abu Dhabi GM David Scott (protect) said that Oxy had also been invited to express its interest and noted that ADNOC had invited "more than the usual players." Kemnetz's comments appear to confirm this. End Note.) ¶3. (C) Kemnetz explained that Abu Dhabi's gas is highly sour (containing large concentrations of Hydrogen Sulfide) and under high pressure. He stressed that developing these non-associated gas fields would require significant technical expertise. He expressed his concern that ADNOC did not have the technical expertise to effectively evaluate the competence of all of the potential bidders, especially given the ambitious time frames contemplated. He also said that as this contract moved to tender he worried that there would be political pressure brought to bear on ADNOC on who could actually bid. ¶4. (C) Kemnetz acknowledged Abu Dhabi's massive need for gas. He added, however, that the plans appeared very ambitious, given the relative lack of knowledge about the non-associated gas fields. In addition, he noted that there were other economic factors to consider (i.e. what to do with the sulfur and the Carbon Dioxide byproducts). He noted that there was already more sulfur production worldwide than the market demanded, so ADNOC might decide dispose of the Hydrogen Sulfide via deep injection, which presented its own technical challenges. Oil Field Development -------------- ¶5. (C) Kemnetz briefly discussed ADNOC's plans to increase oil production capacity. He noted that the Abu Dhabi Company for Onshore Operations (ADCO) had added capacity in 2005/06, bringing its production capacity to 1.4 million barrels per day, confirming what ADNOC Deputy CEO had told us earlier this year. (Ref b). He said that he did not expect any further large increases in production capacity before the 2009-2100 time frame. Kemnetz briefly discussed Exxon's plan to increase production at the Upper Zakum oil field. (Ref A). He said that he expected to be able to increase the production to 750,000 barrels per day, but that it would take time (i.e., beyond the 2010 timeframe). He stressed that Upper Zakum could relatively rapidly increase production by 20-25 thousand barrels per day using existing facilities, but that new facilities would be needed to be build to go beyond that. ABU DHABI 00003026 002.2 OF 002 ¶6. (C) In response to a question from econchief, Kemnetz confirmed that ADNOC's major onshore fields and Upper Zakum were at "pretty low depletion rates" despite the fact that they had been produced for many years. He commented that the major impediment to Abu Dhabi's increasing oil production was political, with Abu Dhabi committed to sustaining oil production for the long term. ADNOC was happy to increase production as long as it did not speed up reservoir depletion. It was developing some of its remoter (more expensive and difficult) fields rather than increasing production at its existing giant field. Kemnetz noted that this was a problem that appeared to affect all of the Arab members of OPEC. He noted that, even in Upper Zakum, which had extremely low depletion rates at current production (around 520 thousand barrels per day); there was some pressure to focus on the more difficult areas of the field rather than to focus on the easy areas first. Emirate of Fujairah Refinery and Oil Terminal -------------- ¶7. (C) Kemnetz briefly discussed the UAE's plans to build an oil refinery in the Emirate of Fujairah and a possible pipeline from Abu Dhabi to Fujairah as a way to avoid the bottleneck in the straits of Hormuz. Kemnetz noted that he was not sure whether a new greenfield refinery and pipeline made commercial sense, and that the UAE likely had a broader political strategic motivation. He noted that building a pipeline solely out of fear that someone might shut down the straits was not the most logical response and that it should be possible to develop contingency planning for keeping the straits open or reopening them quickly. Kemnetz also acknowledged that Abu Dhabi might have a broader goal of fostering economic development in the northern emirates. ADNOC CEO - Khalifa's Man, Not MbZ's -------------- ¶8. (C) Kemnetz briefly discussed the rumors about pressures on ADNOC CEO Yousef Omair bin Yousef. He said that he took occasional rumors of bin Yousef's departure with a "grain of salt" since he was UAE President Sheikh Khalifa bin Zayed Al-Nahyan's trusted person. Kemnetz said that it was clear that Khalifa wanted a person in charge of ADNOC that he trusted. He speculated, however, that Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al-Nahyan's (MbZ) people were criticizing bin Yousef. It was clear that ADNOC had not done a good job forecasting gas demand and bin Yousef made a good scapegoat. He said that MbZ would not be happy hearing that a project needed to be delayed because the power was not there. That said, he noted that he was struck by the way in which President Khalifa had maintained his control over the financial levers of power in Abu Dhabi (ADNOC, ADIA, and the Abu Dhabi Department of Finance). He further speculated that some of the otherwise unexplainable shifts in ADNOC's decisions reflected Khalifa saying one thing and MbZ saying another. Comment -------------- ¶9. (C) The UAE's projected energy needs are immense as development plans (especially in Abu Dhabi and Dubai) take place. Because oil and gas belong to the individual emirates, there is no unified development plan. There are at least two U.S. firms interested in this project and we expect increasing interest as it moves forward. End Comment. SISON