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Conoco Wins Deal to Help Develop Gas In Abu Dhabi

Conoco Wins Deal to Help Develop Gas In Abu Dhabi

July 9, 2008; Page B1

ConocoPhillips signed a multibillion-dollar natural-gas development deal Tuesday with Abu Dhabi National Oil Co., adding another major project to its global portfolio and gaining a rare stake in the energy-rich Middle East.

The deal — which involves an estimated $10 billion to $12 billion investment by the two companies, according to people familiar with the lengthy negotiations — is another step in the transformation of Houston-based ConocoPhillips into a global energy power. The company didn’t disclose terms of the transaction.


The Abu Dhabi project is the third major deal that ConocoPhillips Chief Executive James Mulva has landed in the Middle East in the past five years. He also brought the company back to Libya after an absence of roughly three decades, and he engineered its successful entry into Russia; both nations have abundant oil and gas reserves, but they have been tough places for Western companies to do business.

Mr. Mulva’s company is a far cry from the one he took over in 1999: the provincial Phillips Petroleum Co., based in Bartlesville, Okla. Outside of a few fields off the coast of Norway, its international holdings were insignificant, and it held few large assets to generate the cash flow to finance his ambitions.

But ConocoPhillips, which was formed in 2002 by the merger of Phillips and Conoco Inc., has entered the ranks of what are known in the energy industry as super majors — global companies with both exploration and refining operations.

“By Jim Mulva’s effort, ConocoPhillips has become the sixth super major,” said Robinson West, chairman of oil consulting firm PFC Energy. “The notion that Phillips would be the progenitor of a super major was laughable 10 years ago.”

Mr. Mulva’s moves also have catapulted ConocoPhillips into the top tier of global oil companies. In the 1998 Petroleum Intelligence rankings of major oil companies, Conoco was 26th and Phillips 34th. In the most recent ranking, ConocoPhillips was 8th.

Mr. West said the key to the company’s success has been Mr. Mulva’s ability to do deals in nations that are becoming increasingly closed to Western investment. “What I hear from foreign governments is that Jim isn’t high maintenance; CEOs of multihundred-billion-dollar companies tend to be high maintenance,” Mr. West said.

In the latest deal, ConocoPhillips outmaneuvered Royal Dutch Shell PLC and Occidental PetroleumCorp. for the contract to help develop the Shah natural-gas field in Abu Dhabi, part of the United Arab Emirates. The field has large reserves of what is known as sour gas, which is highly corrosive and requires special facilities, equipment and handling to process.

The Middle East energy market is controlled by state-run oil companies and, with a few exceptions, international companies aren’t allowed to acquire a stake in the region’s oil and gas deposits. But the deal with the Abu Dhabi oil company, known as Adnoc, is expected to allow ConocoPhillips to book new reserves from Shah, in line with similar agreements between Adnoc and other international oil companies like Exxon Mobil Corp. and BP PLC, an Abu Dhabi-based oil official said.

The project should go a long way toward meeting Abu Dhabi’s surging demand for natural gas for its expanding petrochemical industry, new gas-fired electrical stations and desalination plants. Despite their vast oil reserves, the sheikhdoms of the Persian Gulf are struggling to meet their own domestic energy needs, and they are becoming increasingly dependent on gas-burning power plants.

“This deal is something that Abu Dhabi absolutely needs,” said Dalton Garis, associate professor at Abu Dhabi’s Petroleum Institute. The emirate faces a shortage of natural gas this year, he said.

Elsewhere in the Middle East, ConocoPhillips is moving ahead with building a 400,000-barrel-a-day refinery with Saudi Aramco on Saudi Arabia’s Red Sea coastline. Industry estimates put the price tag of the refinery at more than $10 billion.

Next year, a giant liquefied natural-gas plant in Qatar, co-owned by ConocoPhillips and the state petroleum company, is expected to begin shipments to the U.S. and elsewhere.

Under Mr. Mulva, ConocoPhillips has succeeded in gaining a foothold in Russia while other oil companies have met scant success. The company acquired a 20% stake in OAO Lukoil and expects to begin pumping oil from a Russian field later this year. Meanwhile, BP is fighting with its Russian partners over control of a joint venture there, and Exxon Mobil is in a tense showdown over exporting gas from Sakhalin Island.

In the Kremlin, Mr. Mulva “is seen as someone they can do business with, a problem solver who is not out for glory,” said Alex Turkeltaub, managing director of Frontier Strategy Group, an emerging-markets consulting firm.

Though ConocoPhillips has grown swiftly and benefited from rising commodity prices, Wall Street analysts criticize it for delivering among the lowest returns on capital of its peers. And the company now faces many of the same problems as its giant peers, including BP, Exxon, Chevron Corp. and Shell.

A Deutsche Bank research note said that ConocoPhillips epitomizes the challenges facing the giant Western oil companies: lots of cash due to soaring oil prices, falling production and limited investment opportunities. Indeed, while landing the Abu Dhabi deal was a feat, it remains to be seen if developing the gas field will yield large returns for ConocoPhillips.

The company said Tuesday it expects second-quarter production to be down 10% from a year earlier, as it struggles to replace existing production, and that its refining margins have fallen to $14.19 a barrel, down 49% from a year earlier.

–Majdoline Hatoum contributed to this article.

Write to Russell Gold at [email protected] and Oliver Klaus at [email protected]

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