Dolphin gas megaproject logs further progress

The other partners are UOG (51%) and TotalFinaElf (24.5%). Enron was to have operated the subsea pipelines in the project but withdrew in May 2001, selling its holding to UOG (OGJ Online, May 22, 2001).

Oxy and UOG last month signed a definitive agreement to acquire the 24.5% stake in the the Dolphin gas project for $310 million (OGJ Online, June 5, 2002).

Meanwhile, a leading industry analyst has assessed prospects for the Dolphin project and asserts that all the lingering questions over marketing the project's gas have now been resolved.

Project details

The DEL partners will collaborate on the project, which consists of two parts:

• A development and production sharing agreement with Qatar to develop and produce natural gas and condensate in North gas field.
• The rights for DEL to build, own, and operate a $1.5 billion export pipeline to transport 2 bcfd of dry natural gas to markets in the UAE for a period of 25 years or longer. The 48-in. pipeline will extend 260 miles from the Ras Laffan terminal in Qatar to Tawilah in Abu Dhabi. The pipeline system initially will carry 2 bcfd, with final capacity designed for 3.2 bcfd. Dolphin will supply natural gas to Abu Dhabi, Dubai, and, eventually, to the UAE's northern emirates.

Production is scheduled to begin in late 2005. The project is already under way, with development drilling proceeding in North field and engineering studies for both the upstream and pipeline segments in progress.

Construction on production and processing facilities and the pipeline is expected to begin in 2003.

Pipeline deliveries can be expanded to a total of 3.2 bcfd at a later date, as additional gas supplies become available.

"When the (Dolphin) project was first discussed a few years ago, very few thought it could happen," said Fereidun Fesharaki in a FACTS Inc. analysis of the Dolphin project prior to Occidental's selection as a project partner.

"Its sheer size, costs, and complexities put Dolphin in a class of its own, but the project is being accomplished by vision, hard work, and political backing based on a real economic need," he said.

Qatar and Abu Dhabi provided the primary momentum behind the project.

The Qataris had succeeded in launching world-class LNG export projects and were anxious to establish and dominate a gulf-wide pipeline network as well.

For Abu Dhabi and UOG, the momentum came from the execution of a project big enough to satisfy UOG program requirements, Fesharaki said.

But for the deal to go forward, it was necessary for the leadership of both countries to provide political commitment for the project, Fesharaki emphasized.

Once this was done, the subsequent steps fell on the Dolphin participants based on economics and best practice concepts.

"A rarely known, but important, component of the Dolphin project concept is the fact that Abu Dhabi is short of gas-at least in the short-to-medium term," Fesharaki said. "Although Abu Dhabi is a gas exporter, gas discoveries have not kept up with rising demand."

The Honolulu-based FACTS reported that Abu Dhabi's condensate production also has fallen short of expectations, resulting in only partial utilization of a second 140,000 b/d condensate splitter. Discovery of new oil reserves, meanwhile, has made it possible to consider adding production capacity.

LNG and pipelines

Abu Dhabi exports gas both via pipeline and as LNG, with the Adgas consortium handling LNG exports. These are long-term, well-established projects that have a life of their own.

Some 500,000 tonnes/year of LNG capacity committed to the Dabhol project in India remains available, and an additional 200,000-300,000 tonnes/year can become available later through debottlenecking, Fesharaki said.

Pipeline exports are flowing to neighboring Dubai.

"The Dubai government is a very tough buyer," Fesharaki said. "Many companies, government-owned and private, have endured long, torturous negotiations with Dubai, sometimes giving up in frustration. In a political gesture, the leadership of Abu Dhabi offered Dubai pipeline gas.

"The initial volume of 500 MMcfd was slated to rise later. The price-$1/MMbtu delivered-was very generous, and Dubai accepted the offer," Fesharaki said.

That pipeline was completed in summer 2001, and the delivery volume is expected to rise to 800 MMcfd by late 2002 or early 2003.

However, the export project to Dubai further strained Abu Dhabi's already-lean gas supply. In fact, it became necessary to import some gas into the UAE. "That the Dolphin project came about was not just a dream based on politics. There was also a real need for it," Fesharaki said.

Although the marketing aspects of Dolphin have been a major challenge, with much negotiation and many discussions, Fesharaki believes all market aspects are resolved.

Of the gas exports, 800 MMcfd will go to Dubai, 200 MMcfd to the Fujairah desalination project, and 1 bcfd for the power sector and other areas in Abu Dhabi.

Dubai will buy the gas directly from the Dolphin pipeline system, and the existing gas pipeline between Abu Dhabi and Dubai may be converted to other uses.

Dubai has agreed to a price level that Fesharaki said is believed to be acceptable to the projects, "but exact details have not yet been announced."

The UAE's northern emirates have potential need of several hundred million cubic feet per day of gas to back out the burning of diesel in power plants there, but this may come later in Phase II.

Because Abu Dhabi now supplies most of the diesel to the northern emirates, its displacement by gas makes good sense, Fesharaki said.

Phase II

Phase II of Dolphin, involving an additional 1.2 bcfd, will be accomplished gradually.

Dubai demand for gas will continue to rise, and conversion of industrial facilities from burning oil products to gas is continuing throughout the UAE, so there may be a need for another 300-500 MMcfd in the UAE, FACTS reported.

"As is the case with many gas pipelines, once the pipeline is there, new demand will be generated over time," Fesharaki said.

In addition to increased UAE needs, there are long-term plans for exporting gas to Pakistan and India via Oman. These projects will have to wait until the first phase is successfully executed, however.

Other pipeline projects

Qatar also plans to export gas to Kuwait and Bahrain in two other important pipeline projects outside of the Dolphin project, the report said.

Kuwait already has a gas pipeline from Iraq, closed since the ouster of Iraqi forces from Kuwait in 1991, which prior to Iraq's invasion of Kuwait in 1990 delivered gas at 50¢/MMbtu.

Although Kuwait is not interested in buying gas from Iraq, it is hard to beat the price. Kuwait and Qatar have now reached an agreement in principle on price and a supply volume of 500-700 MMcfd.

Although Bahrain has had a long history of disagreement with Qatar on border issues, with their resolution and a warming of relationships, there is a big push by Qatar to finalize a deal with Bahrain, centering on a volume of 300-500 MMcfd.

Meanwhile, both Bahrain and Kuwait have kept open the channels with Iran for a pipeline supply deal, but "realistically, Qatar gas may be a done deal," Fesharaki said.

Price negotiations between the two sides are sensitive and affected by Dolphin project prices and Dubai purchase prices.

Although Dolphin gas prices remain confidential, they are likely to be about $1.30/MMbtu, Fesharaki speculates.

It will be a while before prices are announced, as there is a desire not to let one price disclosure jeopardize other price arrangements.

This is the case even though the economics of Dolphin and non-Dolphin Qatari pipeline exports are completely different, he said.

Meanwhile, Iran is speeding up its process for utilizing offshore South Pars field gas with a massive investment program in the southern city of Assaluyeh.

"The Assaluyeh complex is one of the largest gas construction projects in history," Fesharaki said, "It includes pipelines, liquids separation facilities, petrochemical projects, and upstream planning and execution.

"Some $15-20 billion will be spent in a 5-7 year period. The city has grown so fast that there is no longer room for an LNG terminal. New locations must be considered. Still, Iran finds itself far behind Qatar in terms of LNG and is facing difficulty in catching up.

"The Dolphin project and UOG have high-quality managers and staff that are supported by the Abu Dhabi government at the highest levels. Their purpose is not just to build the pipeline and stop there."

This is the birth of a company with an important vision beyond the project at hand, Fesharaki said, adding, "The vision may ultimately take the company far beyond the existing projects, both nationally and internationally in the oil and gas sector."

Occidental view

Ray R. Irani, Occidental's chairman and CEO, apparently agrees.

"Dolphin is more than a project," he said. "It is the foundation of a business enterprise that expects to pursue additional investment opportunities in the region.

"This is a very attractive project in view of the large volume of proven reserves in Qatar's North field, the support of both the UAE and Qatar governments, and the growing demand for both power and water in the UAE that ensures an excellent, long-term market for Dolphin gas," Irani added.

Irani also said that the project would result in the addition of about 900 bcfe of gas-or 150 million boe-to Occidental's proven reserve base.

"When Dolphin becomes fully operational, this project will add incremental production of about 125 MMcfd of natural gas and 9,000 b/d of liquids net to Oxy-equal to approximately 30,000 boe/d," Irani said.

The partnership will benefit Occidental in another way as well.

"The partners anticipate securing project financing, which will limit Oxy's net cash exposure at any point during the project," said Irani. "We look forward to a long and mutually beneficial association with the United Arab Emirates and the opening of a new phase in our strong relationship with Qatar."