The Dolphin Project: the beginnings of an Arab natural gas grid

CGES | NOVEMBER 2007 | SOURCE: Global Oil Insight

Although the Dolphin project is Qatar’s first major pipeline-based gas export project, it was initiated by the United Arab Emirates’ Offsets Group (UOG) to supply Qatari gas to the UAE and Oman.

The UOG was created to boost the economic development of the Emirates by providing investment opportunities stemming from the leveraging of the UAE’s defence contracts, whereby part of the contractor’s profits is invested in a productive project inside the Emirates.

The $3.5-billion Dolphin project, however, is not considered one of the UOG’s offsets projects, since it is not funded by this program but by private investments.

In March 2000 the UOG concluded an agreement with Enron and Elf, a subsidiary of TotalFinaElf, on a strategic partnership to implement the Dolphin project. With 51% owned by UOG and the rest split evenly between the other two, the initial goal of the partnership involved bringing up to 3 billion cubic feet per day (bcf/day), or 31 billion cubic metres per year (bcm/yr), of gas from Qatar’s North Field to Abu Dhabi, Dubai and Oman.

The initial phase of the project entails upstream, midstream and downstream development, with the partnership lasting for a minimum of 25 years.

The upstream phase involves development of a block in Qatar’s North Field as well as direct gas purchases from existing sources. The midstream entails building an 800-km, 48-inch underwater pipeline, stepping down to a 36-inch line as the pipeline goes to Oman.

This pipeline is intended to link Qatar (Ras Laffan) with a landfall in Abu Dhabi, and thence to proceed to Dubai and Oman, together with onshore infrastructure and distribution systems (see Figure 1).

The downstream part of the project encompasses gas-using initiatives, comprising power generation, LPG, petrochemicals, fertilisers and ammonia, and other basic industries in all the territories covered by the project.

Although all partners are involved in all phases of the project, Elf’s primary focus is on upstream development while Enron’s focus is principally on pipeline development, gas marketing and project risk management.

In March 2001, a 'term' sheet was signed by Qatar Petroleum and UOG, setting out the commercial terms of the development and production sharing agreement, to be followed by a gas transportation and gas sales agreement to deliver up to 2 bcf/day of gas to the UAE as a first stage.

Two months later Enron decided formally to withdraw from the Dolphin project and sell its 24.5% stake back to UOG. In May 2002, Occidental Petroleum was chosen as the second strategic partner of UOG, replacing Enron in Dolphin Energy Limited (DEL), the joint venture company created to be in charge of implementing and operating the Dolphin project.
Commissioning the project

In the first phase, the submarine pipeline was laid from Qatar’s Ras Laffan to Taweelah in Abu Dhabi and another pipeline was constructed between Taweelah and Jebel Ali (Dubai). Most of the initial 2 bcf/day of gas were earmarked for use in Abu Dhabi and the remainder was expected to go to Dubai.

Gas deliveries were initially scheduled to reach Abu Dhabi in late 2004 or early 2005. However, the project experienced delays until June 2007, when first gas was fed into the system for testing and commissioning from the Dolphin Energy block in the North Field to the Stream One units — comprising two trains — of the Ras Laffan processing plant, which is made up of four gas processing trains. Finally, in July 2007, natural gas was pumped to the landing terminal in Taweelah and from that point the Dolphin project started supplying gas to Fujairah and the Northern Emirates.

According to its contract with Dolphin Energy, the Oman Oil Company (OOC) will start receiving an average of 200 million cubic feet per day (mcf/day) — equivalent to 2 bcm/yr — of natural gas as of March 2008, when Stream Two, comprising the remaining two trains of the processing plant, is scheduled to start up.

Gas-rich and yet gas-hungry

According to the Oil & Gas Journal, the UAE’s proven reserves of natural gas stood at 214.4 trillion cubic feet (tcf) on the 1st of January this year and with these reserves the UAE ranked fifth among the world’s gas-rich countries, after Russia, Iran, Qatar and Saudi Arabia. However, it is noteworthy that the UAE’s domestic consumption of natural gas has been increasing at a rapid rate, albeit from modest beginnings, growing at 8.2% per annum during the period 1980-2006; last year the UAE’s domestic consumption reached 41.7 bcm, more than India’s consumption in that year (see Figure 2).

The UAE also exported in 2006 atotal of 7.1 bcm of LNG, of which over 98% went to Japan and the rest to India. With a marketed production of 47.4 bcm (according to OPEC), the UAE was obliged to import 1.4 bcm from Oman.

Of the UAE’s total amount of energy consumed in 2006 around 66% was met by natural gas and the rest by oil. There are several reasons for the UAE’s high rate of gas consumption. Apart from the fact that natural gas is preferred in domestic use because it is cleaner and friendlier to the environment than oil, and cheaper in power generation, and that gas displaces higher-earning oil, making the latter available for export, the UAE’s population is growing at the very rapid rate of 5% per annum.

What is more, the Emirates' economy has been expanding at a relatively high rate and therefore requires ever more energy to fuel strong economic growth and industrialisation. As a result, the gas shortage experienced by the UAE this year led to the use of liquid fuels for power generation and water desalination, and this shortfall is expected to intensify in 2008.

The UAE’s gas shortages beg the question — how can the country experience gas shortfalls when it claims it has the fifth largest gas reserves in the world? The answer lies in the fact that, beyond the growing need for power generation, water desalination and petrochemicals, gas is also required for re-injection in the Emirates’ oilfields in order to maintain reservoir pressure.

As shown in the table, around 23% of the gas produced in 2006 was re-injected for reservoir pressure maintenance and only 68% was marketed (i.e., consumed and exported as LNG), the rest being lost to flaring and shrinkage.

Another factor contributing to the UAE’s gas shortage is Abu Dhabi's increasing reliance, with the help of major oil companies, on non-associated (free) gas that is ultra-sour (very sulphurous) and costs a lot to sweeten.

The Shah gas field, for example, contains 20-35% hydrogen sulphide and its gas is up to three times as costly to produce as Abu Dhabi’s sweet natural gas. It, therefore, makes sense to import cheaper gas from Qatar, which is naturally sweet.

The nucleus for a large grid

Dolphin Energy is currently delivering over 1 bcf/day (10 bcm/yr) of Qatari gas to the UAE and is on schedule to increase the rate of supply to 2 bcf/day (20 bcm/yr) by March next year. Yet, Dolphin Energy wants to increase gas deliveries from Qatar up to the pipelines' capacity of 3.2 bcf/day (around 33 bcm/yr), but this is not possible at the moment, because a moratorium on new gas projects in Qatar continues to apply until 2010, when the North Field’s technical assessment is scheduled to end.

Indeed, the Dolphin project's CEO, Ahmad al-Sayegh, is even more ambitious and hopes that inthe long-run Dolphin Energy’s gas imports from Qatar will exceed 6 bcf/day (61 bcm/yr).

The Qatar-UAE-Oman gas pipeline could be the beginning of a gas grid connecting all the six GCC states. A more ambitious scheme would involve construction of a gas pipeline originating in Qatar and passing through Saudi Arabia, Kuwait, Iraq and Syria, where it would link up with the Arab gas pipeline bringing Egyptian gas to Jordan, Lebanon and Syria. From Syria it would then go north to Turkey and from there to Europe.

A Turkey-Greece pipeline to transport gas from Azerbaijan’s Shah Deniz gas field has been inaugurated recently. There is also the proposed $6-billion, 3,300-km Nabucco pipeline, which would carry gas from Turkey to Bulgaria, Romania, Hungary and Austria.

While there are not yet any definite suppliers of gas for this pipeline, Azerbaijan looks set to provide initial throughputs and the EU is keen to tie in other suppliers such as Egypt and Turkmenistan, if a way can be found to first move Turkmenistan’s gas to Turkey.

The EU would prefer the construction of a trans-Caspian gas pipeline to carry Turkmen gas to Azerbaijan and then on to Turkey, but such a project would currently require the unanimous approval of all five Caspian littoral countries and Russia and Iran are likely to continue to oppose such a pipeline, not least because it is strongly (and vocally) supported by the US.

Nabucco could also carry Iranian gas, although the European Commission has recently stated that Nabucco neither needs, nor has sought Iranian gas. However, should political relations between Iran and the West improve, Nabucco could indeed carry Iranian gas, or gas from other producers delivered to Turkey through northern Iran.

Given the potential for geopolitical problems between Europe and Russia and Europe’s rising dependence on imported gas, Europe’s energy security can only be bolstered by diversifying the sources of its natural gas imports. Gas from the Caspian region is such a source, in addition to the existing Russian and North African sources.

Another would certainly be gas from Qatar, and perhaps from Iraq, via the pipeline referred to above. According to a CGES gas study, Europe’s current dependence on imported natural gas exceeds 40% of its gas consumption and this dependence is likely to exceed 70% by 2030.

On the basis of this forecast, the likelihood of a Gulf gas trunk line materialising that crosses from Turkey to Europe is great.

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