US embassy cable - 03ABUDHABI1663

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 001663 
 
SIPDIS 
 
DEPT FOR NEA/RA, NEA/ARP, INR/EC, EB/IEP, EB/CBA 
USDOE FOR INT'L AFFAIRS -- COBURN, ALSO CALIENDO 
USDOC FOR 4520/ITA/IEP/ONE 
USDOC FOR 4530/ITA/MAC/ONE/DGUGLIELMI 
4500/ITA/MAC/DAS/WILLIAMSON 
3131/CS/OIO/ANESA 
 
E.O. 12958: DECL 04/07/08 
TAGS: EPET, PGOV, BEXP, ENRG, ECON, EINV, TC 
SUBJECT:  ADGAS ADMITS QATAR UNDERCUTTING LNG MARKET; PLANS 
EXPANSION INSTEAD INTO LPG 
 
 
1.  (U) Classified by DCM Richard A. Albright for reasons 
1.5 (B) and (D). 
 
ABU DHABI CONCEDES LNG MARKET TO QATAR 
-------------------------------------- 
 
2.  (C)  The managing director of the Abu Dhabi Gas 
Liquification Company (ADGAS), Hassan Al-Marzooki, told 
Econchief April 2 that his firm is considering a major 
expansion into the Liquid Petroleum Gas (LPG) business. 
ADGAS, which currently operates three Liquified Natural Gas 
(LNG) trains at Abu Dhabi Emirate's Das Island, is finding 
that competition from Qatar is squeezing margins in the LNG 
business.  "The Qataris are desperate for investment and 
production, so they are willing to take very cheap prices," 
Al-Marzooki lamented.  Despite excellent working 
relationships with its primary LNG customer -- the Tokyo 
Electric Power Company (TEPCO, which is also a major equity 
stakeholder in ADGAS) -- ADGAS still must renegotiate its 
sales contract every six years.  ADGAS has about 18 months 
to run on the existing contract, and is very concerned that 
increased competition from Qatar (and to a lesser degree 
from Iran) will result in sharply lower prices.  ADGAS has 
paid off its sunk costs (the first LNG train was installed 
in the 1970s), but LNG plants require extensive maintenance, 
which is costly.  "We will still have a good business," Al- 
Marzooki admitted, "but it is clear that LNG is no longer a 
growth business for us." 
 
THE FUTURE LIES IN LPG 
---------------------- 
 
3.  (C)  The ADGAS official said his firm is currently 
considering a major expansion into the LPG field.  ADGAS 
currently produces about 1.5 million tons per year of LPG 
derived from the associated gasses resulting from oil 
production by the Abu Dhabi National Oil Company (ADNOC). 
ADGAS shareholders are now contemplating investing several 
hundred million USD into effectively doubling that output. 
While no final decisions have yet been made, the venture 
looks highly promising, Al-Marzooki noted, and the LPG 
market is stable and attractive.  Expanding LPG production 
would also dovetail nicely with ADNOC's ongoing projects to 
increase sustainable oil production capacity, the ADGAS 
official noted.  One of the current major constraints on 
additional oil production is how to dispose of the extra 
associated gas.  GASCO, Abu Dhabi Emirate's other gas 
production company, has limited surge capacity -- which is 
the primary constraint on extra oil production.  The UAE 
does not want to flare gas, so currently must limit oil 
production to that capacity of associated gas which can 
either be re-injected or processed.  This oil production 
bottleneck is partially being addressed through the 
expansion of condensate processing by GASCO (via OGD-3, the 
third phase of GASCO's Onshore Gas Development scheme), and 
ADGAS would take its feed for the LPG plant directly from 
GASCO, thereby helping extract maximum benefit from the 
feedstock.  Residual dry gas (after removal of sulphur) 
would mostly be re-injected. 
 
COMMENT 
------- 
 
4.  (C)  ADGAS officials had told us a couple of years ago 
that they were studying the LNG market in order to determine 
whether it would be worthwhile to make the multi-billion USD 
investment necessary to add a fourth LNG train at Das 
island.  It appears that, having looked at the rapid 
development (and razor-thin margins) of the Qatari LNG 
sector, ADGAS has decided to let discretion be the better 
part of valor.  Abu Dhabi's associated gas, quite simply, is 
not as economically attractive to develop for LNG purposes 
as Qatar's huge non-associated deposits.  LPG, which can be 
used either as a fuel or a petrochemical feedstock, 
represents a much more attractive (and less hotly contested) 
market for Abu Dhabi.  Since Abu Dhabi's aging oil fields 
are experiencing an increasing Gas-to-Oil Ratio (GOR), the 
LPG processing facility -- when combined with GASCO's 
ongoing OGD-3 project -- will help maintain current levels 
of oil production in the out years, while more immediately 
removing gas handling bottlenecks that impede any increase 
in sustainable oil production capacity.  With a FEED (front- 
end engineering and design) contract already awarded, we 
would bet that the ADGAS shareholders will shortly give 
final approval for this venture. 
 
Wahba