How Zayed’s vision for gas created a windfall for the UAE
Founding Father said there must be a better way to use by-products from pumping oil than burning them off. Today, Adnoc’s natural gas operation is one of its biggest successes,
It began with a bad smell but ended with a multibillion-dollar industry for Abu Dhabi.
The smell reached the nostrils of Founding Father Sheikh Zayed on a tour of the Western Region. It was acrid and unpleasant, so strong that it was hard to sleep. What was it, Sheikh Zayed asked.
The answer was more than 160 kilometres away. Burning gas from the offshore oilfields. The gas was a byproduct of oil extraction and useless, everyone said.
So it was burnt off in massive flares at the production centre on Das Island, sending huge clouds of foul smoke into the otherwise clear blue skies. The pollution it caused carried for miles.
Surely, Sheikh Zayed asked his advisers, there must be a better way? He ordered a feasibility study from Adnoc, the state energy company, which told him that while there was a possible buyer for liquid natural gas, the price was very low.
Sheikh Zayed’s response was that what might be sold cheaply today would be in great demand in the future.
And so a new industry was born, exporting liquefied natural gas as a highly valuable commodity, bringing billions of export dollars to the UAE and substantial profits for those who invested.
The company, ADGLC in the 1970s, then Adgas in the ’80s and ’90s and now called Adnoc LNG, was born in 1973, as the result of the intervention by Sheikh Zayed and his encounter with the pollution caused by burning oilfield gas.
Not everyone was convinced there was an alternative, says Fahim Kazim, a former chief executive of Adnoc LNG. Processing the gas was expensive, the experts said. There was no money in such a project and probably only heavy losses.
“The natural and logical response from Sheikh Zayed was, ‘You need to tell me and convince me which one is better – burning it with no value and harming the environment or to sell it, even cheaply, but you are getting some money out of it’.”
“That was his wise vision and confidence, that one day this gas was going to be very valuable and expensive.”
Sheikh Zayed was correct. In the five decades since it was founded, Adnoc LNG has more than returned the investment. Its contribution to the Abu Dhabi economy has been worth more than $80 billion (Dh293.84bn) in revenue.
Most of it goes to Adnoc and the government of Abu Dhabi, while the net profit to shareholders, which includes Adnoc, is more than $15bn.
But those profits to the country cannot just be measured in dollars, Mr Kazim says. Sheikh Zayed was also greatly concerned with protecting the environment and pushed ahead with the project even when told he would probably lose money.
“It has added more value to the economy of the country even if it was thought of as a waste of time,” Mr Kazim says. “Everyone is winning now. The environment is winning, the country is winning and the customers are winning. It is win, win, win.”
Hot work from flares to fair product
It was early October, 1975, when Victor Grech first arrived on Das Island from the UK.
After a night in one of the city’s few hotels, he was taken back to the international airport, now Al Bateen private airport, where a boxy Short Skyvan made the brief hop to what was his new home.
His first reaction, Mr Grech recalls was: “What have I done?” He was 32 years old and had accepted a post on Das Island after an interview in London that lasted barely 20 minutes.
There was a reason why it was so short. Few people had the skills then needed for the task ahead – to build and maintain a plant to produce liquefied natural gas.
Abu Dhabi was still burning its excess natural gas when Mr Grech arrived. He eventually became vice president of gas operations and retired in 2014.
The heat from the flares was so intense, he recalls, that vehicles were not allowed down certain roads when they were running at full blast. The air was full of black smoke and the acrid smell of burning gas.
Heat shields had been installed but they were burnt away by the intensity of the flames.
Mr Grech’s team had been sent to put an end to all this pollution, the result of burning of associated gas from oil production, and convert it into a valuable export product. It was not an easy task.
Life on Das, where Abu Dhabi’s offshore oil production is based, had most of the basics in those days but it was hardly luxurious.
Non-Emirati workers such as Mr Grech were required to spend more than two months on the island before being flown home for a three-week break.
These days, most workers spend at most three weeks on the island and some much less, but such a long time away from families and wives in those days could be a strain.
Omar El Komy, an Egyptian processing engineer, who arrived in 1979, remembers the leaving speech of one former colleague.
“He said it was hard for him to have five honeymoons a year,” Mr El Komy says.
Workers had their own rooms but phoning home was another matter.
“You had to book a call,” Mr Grech says. “Then at the agreed time, the operator would connect you to the exchange and the call home.”
It was an expensive business but eventually coin-operated phone boxes were installed and then direct dialling, with phones in each room.
The catering was excellent, Mr Grech says, with barbecues and seafood supplied by local fishermen.
“For breakfast and lunch you could wear casual clothes, but in the evening you had to wear a collar and tie, or national dress if you were Emirati,”
As a reminder of home, one of the restaurants and bars even replicated the feel of a traditional British inn.
It was an all-male environment but with plenty to entertain, especially in the cooler winter months.
Sailing and fishing were popular, as was golf, with a nine-hole course that had “browns” rather than greens, made from sand hardened with sprayed oil, a technique also used to build roads around the island.
Two shops, including a Jashanmal, supplied the basics of life, along with a barber and a tailor who made shirts and heavy duty shorts, until the later were banned for safety reasons for leaving too much skin exposed to possible injury.
When television arrived, it was a single Abu Dhabi channel that was, as Mr Grech puts it: “Like looking at a screen of snow.” Video cassettes duly arrived and eventually DVDs.
But life on Das revolved around work and the responsibilities of building the gas plant and maintaining it safely. For all those involved, it was a 24-hour challenge.
Adnoc’s ‘university of natural gas’
Hydrogen sulphide is unpleasant stuff. It smells of rotten eggs but that is the least of it. It is poisonous, corrosive and very flammable.
It is also present in large quantities in the gas removed from the oil produced at the fields near Das Island.
Sour gas, as it is called in the industry, must be removed after oil is pumped out of the underground reservoirs, so that the crude can be stabilised and stored as a sellable product.
For years, the industry had a simple solution to the disposal of this highly toxic by-product. It was flammable so they burnt it in a process known as flaring.
The huge yellow and orange flames billowing into the air became a common site at refineries and storage centres such as those on Das Island,
It has added more value to the economy of the country. Everyone is winning now. The environment is winning, the country is winning and the customers are winning. It is win, win, win FAHIM KAZIM Former chief executive of Adnoc LNG
the base for Adnoc Offshore and Adnoc LNG.
And yet, as the Founding Father Sheikh Zayed pointed out in 1973, remove the impurities and you could convert this waste gas into a product that someone would gladly pay for.
The energy lost by Abu Dhabi when it burnt this gas was equal to 60,000 barrels of oil every day.
“We were burning dollar bills,” an employee from those days says.
Omar El Komy arrived on Das Island in 1979 to work for what is now called Adnoc LNG. A chemical engineer from Cairo, he would stay with the company for more than 20 years, rising to become acting plant manager.
It was, he says, “the first of its kind to be built”. Over the years, the skills learnt on Das “made it the university of natural gas”.
To be taken over long distances, natural gas must be progressively cooled down to about minus 160°C, at which point it becomes liquid and about 600 times less its original volume.
The final product, liquefied natural gas or LNG, can then be pumped into special tankers and taken anywhere in the world.
It is technically difficult and potentially hazardous. An early attempt to store LNG in Cleveland in 1944 resulted in the deaths of 131 people and destroyed 2.5 square kilometres of the US city, in a series of explosions when a tank ruptured.
It was only in 1964 that Algeria became the first country in the world to successfully export LNG, pumping it into specially designed tankers.
The UAE became only the third country, after Libya in 1971, to export LNG.
On April 29, 1977, three years after Sheikh Zayed laid the foundation for the production plant on Das Island, gas tanker Hilli set sail with the first cargo to Tokyo Electric Power Company, which signed a purchase agreement for 20 years, later extended to 25 years in 1994.
Investment proved a clean winner
While the environmental case for liquified natural gas was clear, the economic value, at least in the early years, was much less so.
By the end of the 1970s, losses on the project were so high that some of the company’s shareholders were concerned it was no longer viable.
Ahmed Bamadhaf, finance manager of Adgas at the time, recalls that the London Financial Times had called the venture a “white elephant” and, more insultingly, a “ceremonial project”.
Mr Bamadhaf says that in early 1980, staff were called together and given a bleak message by the chief executive, Dr David Horn.
“He said that the company was closing down and your employment will be terminated,” he says. “It did not happen and he left the company few months later.
“In 1980, two significant factors happened – a higher production from a stable plant after teething problems and an increase in LNG prices.
“These two factors not only wiped out the accumulated losses of $230 million (Dh844.8m) but also allowed the company to set aside from the net profit a 10 per cent reserve of the authorised share capital. A sum of $35m was also declared and paid as dividend to the shareholders.”
Even in those difficult years, what sustained the company was the government’s view that it brought important environmental benefits and Sheikh Zayed’s confidence in the long-term future of LNG as a valuable export.
The Founding Father also saw that by enticing foreign shareholders with an offer of 80 per cent of the company’s shareholding in 1973 it would ensure their commitment and participation in the project, Mr Bamadhaf says.
The remaining 20 per cent was the Government’s shareholding. By 1977, the shareholding was changed to 51 per cent for the government and 49 per cent for the foreign shareholders.
The company had other advantages. It enjoyed a free supply of the gas from 1977 to 1994 and was granted a five-year tax holiday. The result was huge profits over the years to the shareholders.
With the construction of the third production train in 1994, the shareholding changed again, with 70 per cent to Adnoc and 30 per cent to the shareholders. The company also now had to pay for the gas it was converting to LNG.
The Adnoc LNG model has remained unique in the group of companies, which provide a product without the responsibility of marketing it.
It is a limited liability company that buys the raw gas from the government, produces and sells the refined products, pays taxes, sets aside reserves and declares profits that are distributed to its shareholders.
As such, Adnoc LNG would easily feature as a Forbes top 500 company.
At the core of the operation is a process that takes a highly volatile and dangerous substance and converts it into something that is clean and valuable. It is complex and requires the strictest safety standards.
Even routine maintenance is a huge challenge. The plants that clean and then chill the gas so it can be stored as a liquid are known as trains for a reason.
The gas moves through them in stages like a railway journey with stations or stops. Close down just one “station” for repairs and the whole network grinds to a halt.
Maintenance of trains on Das Island is like a military operation, with hundreds of specialists flown in to complete it as efficiently and as timely as possible. It is something that places a strain on everyone, from flight operations to catering and accommodation.
Das Island is undergoing an expansion that has almost doubled its size through land reclamation, and a new airport that can land larger aircraft.
The urgent need for more land is underlined by what happened at the turn of the millennium. As the existing plant began to age, its reliability and integrity began to become an issue that was costing the company millions of dollars every year.
A new, more holistic approach was adopted to address the reliability of the production process.
The necessary investment was made about the year 2000, and production brought back on target in a plan implemented over several years. The construction was all the more challenging because of the limited space.
More than 40 years after Sheikh Zayed laid the foundation stone, Adnoc LNG is preparing for major changes that are expected to consolidate and expand its value to the Abu Dhabi economy.
Fatima Al Nuaimi, its first female chief executive, was appointed at the end of April. She has returned to the industry after working for several years for a petrochemical company, and says the transformation has been so great, “it is hard to recognise”.
The old model of selling gas to a single customer under a single contract is all but dead.
“If you wanted to establish a liquefaction plant you would need a deal for 20 years,” Ms Al Nuaimi says. “This is not the situation today. People are building without long-term commitment.
“We are moving from seven to 10 years of thinking and planning to as quick as a couple years. You can have a floating terminal to receive the gas and pump it into your network.”
The scale of those changes can be measured against Prelude, the world’s largest vessel, operated by Shell off Australia. At 488 metres long it is twice the size of the Titanic and its decks are wider than the wingspan of jumbo jet.
Lacking engines, Prelude is not strictly speaking a ship, but a massive one-stop production system for LNG. These vessels can be towed anywhere in the world, bypassing years of expensive construction.
To compete in this newly agile market, Adnoc LNG is making fundamental changes to its operating model.
The original contract with the Japanese will expire early next year, bringing a new era. While maintaining ties with its Japanese customers, the format and duration of the relationship will change.
Several contracts have been signed allowing the company to maximise the value of its gas. It is an approach in line with Adnoc’s 2030 strategy to transform its business for future success.
A model that moves from a single client to several customers is a major transformation that will require increased productivity, performance and delivery of LNG to ensure a sustainable and economic gas supply.
At the same time, Adnoc has adopted a strategic approach that will increase its role as a supplier of energy for domestic use.
These changes are a reflection of the growing value of gas as an energy product, powered by global and regional economic growth but also by the rise of renewable energy sources, against which natural gas is highly competitive, being cleaner than other fossil fuels such as coal and oil.
“Today it’s the headline,” Ms Al Nuaimi says. “Even within Adnoc strategy you can see that gas is taking a priority. It’s not just a by-product any more.”