Occidental Petroleum Corporation (OXY) has received an invitation from the government of Abu Dhabi to jointly develop one of the largest gas fields in the Middle East – the Shah gas field. Occidental will work with government-owned Abu Dhabi National Oil Company (ADNOC) on this project.
Per the 30-year deal, Occidental will hold a 40% interest in the onshore Shah field, which is located about 180 km (110 miles) southwest of the city of Abu Dhabi. Abu Dhabi NOC will retain the remaining 60% interest in the field.
The Shah gas project entails the development of several gas gathering systems, construction of new gas and liquid pipelines and processing trains. The project is expected to process about 1 billion cubic feet of high-sulfur content gas from the field, while the net gas produced (after removing impurities) is estimated to be nearly 500 million cubic feet per day.
Development of the field poses a major challenge as the gas produced in the region is mostly sour gas, whose extraction is costly due to the presence of high levels of the toxic compound hydrogen sulfide. Also, this gas has to be purified before being put to use.
Earlier, ADNOC had ties with ConocoPhillips (COP) to develop the project, which backed out last year, due to cost concerns and lower levels of projected margins for sale of the sulfur that will be produced as a byproduct.
The Abu Dhabi Company has already awarded the majority of project engineering procurement and construction contracts related to the development of the Shah field. Production from this field is scheduled to begin in 2014.
The project costs are expected to be in the range of roughly $10 billion with Occidental’s share equaling the proportion of its ownership. This brings Occidental’s estimated net costs to $4 billion in the Shah project.
Despite the challenges embedded, this project provides an opportunity for Occidental to expand its footprint in the United Arab Emirates, which is one of the largest producers and consumers of gas in the world.
Currently, Occidental’s international assets account for only 45% of the company’s worldwide production while about 55% is produced in the United States. So far, Occidental’s Gulf production activities have been largely focused on Qatar and smaller producers such as Bahrain and Oman. It also has regional operations in Yemen and Libya and is a partner in the regional cross-border Dolphin gas pipeline.
We believe the success at the Shah field could open up the doors for Occidental for additional projects of the same kind in UAE and elsewhere. We believe this project is a major link for Occidental to strengthen its bond with United Arab Emirates, which holds the world’s seventh-largest reserves of natural gas. Going forward, we expect the Shah field to contribute largely to fill the rapidly expanding regional demand for gas.
Based in Los Angeles, California, Occidental Petroleum along with its subsidiaries operates as an oil and gas exploration and production company. Occidental has operations in the United States, Middle East/North Africa and Latin America.
Occidental Petroleum currently has a Zacks #3 Rank (short-term Hold rating). We also maintain a longer–term Neutral rating on the stock.
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