* Agreeing terms to coax Shell back will be touch
* UAE likely to consider improving terms after Conoco exit
* Talks so far only at informal level
By Simon Webb and Amena Bakr
DUBAI, June 23 The United Arab Emirates' would
like Royal Dutch Shell (RDSa.L) to step in as its partner at the
$10 billion Shah gas project after U.S. major ConocoPhillips
(COP.N) withdrew, industry sources in the UAE said on Wednesday.
Agreeing terms would be the biggest issue in coaxing Shell
into taking on the project to produce sour gas in the UAE, the
world's third-largest oil exporter, sources said.
Shell lost out in the auction for the project in 2007-2008,
after long being regarded as the frontrunner and spending
substantial resources on preparing its bid.
"ADNOC approached Shell," a UAE-based industry source said.
"Shell might not take on the project as a pride issue because
they were rejected before. But if there is a talk of money... I
think there will be a compromise."
Conoco pulled out of the project in April, part of a global
company strategy change to focus on oil and gas exploration and
production and move away from refining and processing.
The Shah project is to produce gas, but it also requires
multi-billion dollar investment in gas processing facilities of
the type that Conoco wants to avoid.
The UAE has said that it will proceed regardless of Conoco's
exit, but that it was looking for another international partner
to help execute the complex project.
Shell was one of four companies that bid for the contract,
which Conoco won in February 2008. The others were the U.S.
companies Exxon Mobil (XOM.N) and Occidental (OXY.N).
Shell was seen as the favourite for the deal until just
weeks before Conoco won, as the Anglo-Dutch firm had carried out
extensive studies at Shah and has played a part in gas
production in the UAE for over 30 years.
Shell is a 15 percent shareholder in state-run Abu Dhabi Gas
Industries (Gasco). Gasco holds the concession to produce and
process natural gas produced at the UAE's onshore fields.
The UAE has approached Shell about Shah since Conoco's
withdrawal, but discussion was informal, industry sources said.
A Shell UAE spokeswoman declined to comment.
When Conoco withdrew from Shah in April, Shell was lukewarm
to the suggestion that it may participate.
"Our own porfolio of opportunities has moved on a bit," said
Shell's Chief Financial Officer Simon Henry told a conference
call with reporters in late April. "We've got some great stuff
elsewhere in the world now."
Agreeing terms that would make the project profitable for
Shell and cheap enough for the UAE would be tough, sources said.
The UAE subsidises most energy prices to consumers, so the more
it pays Shell, the more expensive the subsidy unless the Gulf
Arab state raises prices to consumers.
Still, the UAE would either have to raise the price it was
willing to pay for the gas to bring Shell on board, or improve
the terms in some other way, sources said.
"Shell has all the experience, technology, and knowledge of
the field," said a second industry source. "Shell of course is
playing coy now, that's part of its negotiating tactics. But I
think if they do come back to the table there would be an option
there for them."
What Conoco perceived as poor terms played a part in the its
withdrawal, sources said. The UAE wanted Conoco to produce the
gas for free, and to recover costs and make profit through sales
to internationa markets of condensate, a light oil produced with
To make the project profitable, the UAE would have to offer
around $5 per million British thermal units (mmbtu) of gas, the
second industry source said.
Offering that sort of internal price for gas would mark a
big change in the way gas production and costs in the UAE are
perceived, he said.
The region's giant oil exporters have seen gas discoveries
as failures to find oil. Gas was perceived as a nuisance
by-product, and was either burned, reinjected in oil fields or
sold cheaply to state petrochemical companies and industry.
Now, gas demand in Saudi Arabia, the UAE, Kuwait and Oman
has outstripped supply as their economies have grown and
diversified with a petrodollar-fuelled boom. Kuwait is importing
liquified natural gas (LNG) at international prices, the UAE is
dependent on gas imports from Qatar, and the emirate of Dubai
plans to start importing LNG soon.
This is exposing domestic governments to international
markets and promoting a change in the value they place on
domestic energy supplies.
Paying more for gas would likely facilitate future projects
and import schemes, the second industry source said.
The UAE holds the world's seventh-largest gas reserves, at
around 227.1 trillion cubic feet, according to BP statistics.
Much of the UAE's gas is sour.
The gas at Shah has a content of around 30 percent of deadly
hydrogen sulphide, making it tougher to produce than
conventional gas reserves.
(Additional reporting by Reem Shamseddine in Khobar, Saudi
Arabia; Editing by William Hardy)