EXXON REQUEST FOR ADVOCACY ON SOUR GAS

UNCLAS SECTION 01 OF 03 ABU DHABI 000490

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR NEA/ARP, EEB/ESC/IEC/EPS, EEB/CBA
ENERGY FOR SENIOR FOREIGN POLICY ADVISOR MOLLY WILLIAMSON
OVP FOR O'DONOVAN
6000/ITA/TD/AS/AC/CJAMES
3004/ITA/TD/AS/AC

E.O. 12958: N/A
TAGS: EPET ENRG EINV AE
SUBJECT: EXXON REQUEST FOR ADVOCACY ON SOUR GAS

REF: 06 ABU DHABI 3026


1. (SBU) Summary: On March 18, Exxon Al-Khaleej President
Kemnetz presented Ambassador with suggested advocacy points
on ADNOC's sour gas tender. The tender is for gas reservoirs
beneath two on-shore oil fields. Reserves of gas in each
field are estimated to be extensive (around seven trillion
cubic feet per field),but there is significant uncertainty
about the figure. In addition, the gas is sour (20%-35%
Hydogen Sulfide) and the reservoir is technically
challenging. Exxon officials believe that they have he most
experience with this technically challening project. They
noted that this would be the irst time that a foreign
company participated ingas exploration and production. The
tender submissions are due on April 15. Chevron and
Occidenta Petroleum are two other U.S. companies interested
in the project. End Summary.


2. (SBU) On March 18, Exxon Al-Khaleej President Frank
Kemnetz, Vice President Michael Perry, and Marco Rossi, Vice
President for Upstream energy Research met with Ambassador,
Econchief, and Commercial Counselor to discuss Exxon's
request for advocacy on ADNOC's sour gas tender.

Background
--------------


3. (SBU) Strong economic growth in the UAE in general, and in
the Emirate of Abu Dhabi in particular, is driving an
increase in the emirate's demand for natural gas. Currently
ADNOC is projecting a three billion cubic feet per day
shortfall in gas beyond 2010, even with imports from Qatar
(the Dolphin Project). Currently ADNOC supplies about one
billion cubic feet per day to ADWEA and would be looking to
double that figure.


4. (SBU) Abu Dhabi has significant undeveloped gas reserves,
primarily in sour gas fields. ADNOC's sour gas tender is for
the development of the Bab and Shah sour gas fields
(onshore). Both fields are currently active oil producers:
Bab is Abu Dhabi's largest onshore field producing 400,000
barrels per day of crude and condensates and Shah (by the
Saudi border) producing 50,000 barrels per day.


5. (SBU) The reservoirs being tendered are the Arab fields,
located below the oil reservoirs. Estimated reserves are
large -- in the range of seven trillion cubic feet of gas per
field -- but there is significant uncertainty about the real
reserves in both fields. Exxon notes that the range in the
resource size is /- 50%, with additional appraisal drilling
required. The reservoirs have low permeability .01-10 md and
the gas is sour, with Hydrogen Sulfide levels of 20-35% and
CO2 levels of 10%. Bab is dry gas, while Shah has
condensates.


6. (SBU) Exxon officials explained the toxic nature of
Hydrogen Sulfide and the need for flawless operations to
ensure safe production. They noted that ExxonMobil has
demonstrated experience and capabilities in managing sour gas
projects, including Labarge (U.S.) and RasGas. They noted
that this sour gas development could be the world's largest
acid gas injection project (both in terms of volume of flow
and in injection pressure). In addition, the complexity of
the reservoir and the scale of the project require
significant expertise, they noted. Expertise that Exxon has.

Who is Competing?
--------------


7. (SBU) According to Exxon, ADNOC has tendered to 10 IOCs.
In response to Ambassador's question about competitors,
Kemnetz said that the strongest competitor was likely to be
Shell. Stressing that he was working from second hand
sources, he said that he understood Shell, BP, Total, Exxon,
Conoco, Occidental Petroleum, and the Japan Oil Development
Co (JODCO) were all competing. He said that he understood
that Chevron, BG, and Marathon had all dropped out.
Initially, he noted Chinese and Indian firms were also
interested.

First Foreign Participation in Gas
--------------

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8. (SBU) Currently, there is no foreign participation in
either on-shore or offshore gas development and production.
Foreign equity partners hold equity interest in producing gas
liquids. The Abu Dhabi Gas Liquefaction Company (ADGAS)
currently processes around 1.2 billion cubic feet per day
from offshore fields. ADNOC holds a 70% stake in ADGAS.
Three foreign partners hold the other 30% (Mitsui - 15%, BP -
10%, and Total 5%) Liquid production is around 180,000
barrels of oil equivalent per day. The Abu Dhabi Gas
Industries Company (GASCO) processes about 4.6 billion cubic
feet per day of gas from onshore fields. Associated gas
liquids production is around 80,000 barrels of oil equivalent
per day. ADNOC has a 68% stake in GASCO, foreign partners
the rest (Total - 15%, Shell 15%, Partex 2%).


9. (SBU) Kemnetz noted that, if the project were done
correctly, Abu Dhabi would want a company with capabilities
that meet the Emirate's needs. He would expect the project
to involve some sort of equity participation, with ADNOC as
the majority stakeholder. Although the commercial terms
remain to be negotiated, he said that he hoped ADNOC would be
flexible on the Joint Venture. The project, he noted would
be very expensive (over $5 billion).

Timeline and Details
--------------


10. (U) ADNOC has hired Sherman and Sterling to provide legal
advice and Rider Scott for technical advice on the tender.
These companies worked on the Upper Zakum tender.


11. (U) ADNOC first requested expressions of interest to
tender for sour gas fields in April 2006. In July, companies
submitted their experience package to ADNOC as part of the
tender prequalification. Also in July ADNOC announced the
initial tender for the Arab reservoirs of Bab and Shah and
released data on the reservoirs. In December, ADNOC released
the tender terms of reference.


12. (SBU) Tender submissions are due to ADNOC on April 15,

2007. In mid-2007, ADNOC is expected to select tendering
companies for negotiations. During the second half of 2007,
ADNOC is expected to negotiate the technical and commercial
terms with the selected IOC with a goal of awarding the
tender and signing the agreement during the first quarter of

2008. (Comment: Based on our experience with the awarding
of a concession for Upper Zakum, this appears to be an
ambitious timetable. End Comment.)


13. (SBU) Exxon Suggested Advocacy Message

-- Emphasize fairness and transparency in decision-making,
facts on current participating interests, and benefits of
technology and know-how from American companies.

-- We applaud Abu Dhabi,s ongoing emphasis on fairness and
transparency in decision-making, and we fully support
decisions based on the technical and commercial merits of
bids. We recognize that Abu Dhabi government might also
consider other factors in the sour gas award. If other
factors are considered(


Tier I messages to emphasize:
--------------
-- We hope that some consideration will be given to the
current level of participation. At present, only European
and Japanese companies participate in the processing of Abu
Dhabi,s gas resources. There are no American companies. We
hope that Abu Dhabi will also consider the value of U.S.
company participation.

-- Abu Dhabi would benefit from application of American
technology to ensure safe and economic recovery of its gas
resources. Certain American companies are widely recognized
for their technology, and some particularly for their
advanced technology and expertise with sour gas.

-- An equally important consideration is excellence in
project execution, especially critical in as challenging a
project as the development of these resources. There are

ABU DHABI 00000490 003 OF 003


American companies that have repeatedly demonstrated the
ability to complete multi-billion dollar projects on time and
on budget.


Tier II message to also convey as opportunity presents:

Another strength of American companies is their training and
development programs to develop the talents and capabilities
of the UAE nationals.

Greater participation of American companies in Abu Dhabi gas
industry would benefit Abu Dhabi in the development of the
Emirate,s resources and in the development of UAE nationals.
SISON