Abu Dhabi - The LNG Business.

Abu Dhabi in 1977 was the first country in the Middle East to export gas in LNG form. The Abu Dhabi Gas Liquefaction Co. (ADGAS) had in April 1977 brought on stream a grassroots complex consisting of two LNG trains located on the isle of Das. Their capacity was raised by over 10% in the subsequent years to 2.3m t/y of LNG and 1.3m t/y of LPG. Most of the gas fed to the complex at the time was associated with offshore oil production and it was rich in propane and butane. The two trains were debottlenecked in 1988 and their capacity was raised to 2.6m t/y. By then, the complex had begun receiving non-associated gas developed from a Khuff reservoir at Umm Shaif. A third 2.3m t/y LNG train came on stream in late 1994, which brought the nominal capacity of the complex to 4.9m t/y of LNG and 1.55m t/y of LPG. This output is sold mostly to Tokyo Electric Power Co. (Tepco), Japan's biggest power utility and the biggest importer of LNG in the world. The actual output of LNG is averaging about 5.3m t/y, with the third train producing 2.7m t/y. Until end-1997 Tepco used to buy 3.6m t/y of LNG and 750,000 t/y of LPG from ADGAS under a 25-year contract. From 1998 it raised the LNG volume to almost 4.7m t/y, with an option to raise it to 4.9m t/y having been waived by Tepco because of a recession in Japan. Surpluses of LNG, LPG and sulphur are sold mainly on spot basis by ADGAS. Most LNG spot shipments now go to Gaz de France, Enagas of Spain, Distrigaz of Belgium, Cabot (Distrigas) of Boston and Botas of Turkey. Under a deal signed in September 1998, ADGAS was to supply Edison of Italy with 660,000 cubic metres in 11 shipments starting from last October until June 1999. ADGAS in late 1994 and in 1995/96 sold LNG to Chubu Electric Power Co. of Japan. All have taken the LNG on fob basis, with West-bound tankers owned by ADNOC or chartered by ADGAS passing through the Suez Canal and paying transit fees at a 35% discount. The spot deal with Chubu was under a special arrangement worked out with Tepco. From January 1997, Chubu began buying LNG from Qatar's Qatargas JV under a 25-year contract. ADGAS' third train was completed in April 1994 and related facilities were completed in August that year. After test production and the overhauling of the first two trains and related facilities, the third unit came on stream in August 1994. The first shipment from it to Tepco arrived in Tokyo two months later aboard one of four new tankers ordered from Japan. ADNOC has another four LNG tankers ordered from Kvaerner's yard in Finland. ADGAS' was the sixth LNG plant to be built in the world, next to Arzew GL4Z (Algeria, October 1964), Kenai (Alaska, October 1969), Marsa El Brega (Libya, April 1970), Lumut (Brunei, December 1972), and Skikda GL1K (Algeria, December 1972). ADGAS was created in 1973, at the start of an oil boom which lasted until the mid-1980s. The ADGAS partners and their background are as follows: 1. ADNOC, 70% since July 3, 1997 when an agreement was signed raising the state-owned company's share from 51%. ADNOC is the sole owner of all reserves of natural gas. At the time when the first two trains went on stream, the gas was mostly associated with oil production in the offshore oilfields of Umm Shaif and Zakum as well as the Al Bunduq oilfield (shared equally by Abu Dhabi and Qatar and operated by UPD of Japan, with BP and Total as sleeping partners). ADGAS is only a downstream venture, with the upstream owned by ADNOC. This applies to the third train as well, with the gas now sold to ADGAS by ADNOC at about $0.50/m BTU. The increase in ADNOC's share from 51% had been agreed in the early 1990s when the partners decided to add a third train. 2. British Petroleum as project leader, 10% (reduced in 1997 from 16.33%), heading the ADMA-OPCO consortium in offshore operations, as well as the ADCO group in onshore operations. It was BP (D'Arcy's Anglo-Persian) which had first put Abu Dhabi on the world's oil map. That was before World War Two. The only other LNG venture in which BP is involved is Australia's NWS, having withdrawn from the Qatargas venture in early 1992. The ADGAS general manager is a BP man in charge of the company's daily operations, with BP providing technical support. His deputy is from ADNOC. The chairman of ADGAS must be a top-ranking ADNOC representative. The first chairman was Mana Said Al Otaiba, then the UAE oil minister who personally headed most of the ADNOC ventures with foreign companies. The current chairman is Yusuf Bin Omeir Bin Yusuf, ADNOC's general manager and SPC secretary general as well as a former UAE oil minister. 3. Total, 5% (reduced in 1997 from 8.17%), being one of the partners in ADMA- OPCO, ADCO and GASCO. Since the first ADGAS experience in the 1970s, the French company has become involved in a number of gas ventures around the world. Now it is a major investor in the LNG business, being the leader in Qatargas' upstream element and a key partner in its downstream venture. It is a partner in Oman's LNG venture and leader of Yemen's LNG project. Total is involved in several other Abu Dhabi ventures, as well as being the operator of Abu Bukhoosh which is one of the fields providing gas to the LNG complex. In 2000, Total will become the biggest supplier of gas to the Bontang LNG complex in Indonesia, the biggest in the world. 4. Mitsui & Co. and Mitsui Liquefied Gas, 15% (reduced in 1997 from 24.5%), brought in Tepco as a customer buying the LNG output and most of the associated liquids production of ADGAS. Mitsui is the main investor in Middle East LNG projects among Japanese companies, being a key partner in Qatargas and in Oman's project. Its role has been crucial to both ADGAS and Qatargas, as well as to the huge oil/LNG venture on Russia's Far Eastern island of Sakhalin. The July 3, 1997 agreement which raised ADNOC's share and reduced that of the others, extended the foreign partners' participation in ADGAS until 2019. The capital then was shared in identically the same way for the three ADGAS trains. ADNOC insisted on raising its share because ADGAS had become quite profitable, with its gross revenues in 1995 having risen to about $1.5 bn and its expenditure limited to $600m. But now LNG prices have fallen due to the collapse of oil prices. ADGAS, in keen competition with Qatargas, NWS and other suppliers, is selling spot LNG at very low prices. The Costs & Wider Implications: BP had strived to cut costs across the board long before oil prices collapsed. So the third train and associated installations and storage tanks cost about $1.3 bn. The contract to build the third train was worth around $600m, awarded to Chiyoda which lowered its price to help the project's economics. In lowering its plant price, Chiyoda's move was to be followed by a price war among international contractors. This worsened in March 1996 when JGC/Kellogg won the contract to build the 6.6m t/y Rasgas LNG plant in Qatar at a price of $1 bn. The loser was Chiyoda, which had bid a little over $1 bn. But Chiyoda fought back seven months later, this time in Oman. A partnership of Chiyoda and Foster Wheeler on Nov. 14, 1996, signed with Oman LNG the contract to build a 6.6m t/y LNG complex at Al Galilah for $1.2 bn, i.e. about $182m per 1m t/y capacity. In the 1980s, the going price for the construction of a grassroots plant used to be between $600-900m per 1m t/y capacity. So one can see how far plant costs have come down.