Oman Oil & Gas Report Q2 2008

Regional Case Study

Conoco Strives Ahead In MEA

US major ConocoPhillips is active in the Middle East and Africa with operations in Saudi Arabia, Qatar,
Algeria, Libya, Nigeria, potentially in Iraq through its holding in private Russian company Lukoil and
most recently, Conoco re-entered the UAE when it was awarded a contract for the Shah sour gas field.
The sour gas project was one of the largest available recent opportunities for IOCs to enter the upstream
segment of the Middle East.

United Arab Emirates

Mid-February 2008 marked Conoco’s re-entry into the UAE as the company was awarded a contract
worth an estimated US$10bn to develop the Shah sour gas field, according to media reports quoting a
source at Abu Dhabi National Oil Company (ADNOC). Having emerged as front runner for the
contract in January, Conoco will be delighted to have emerged triumphant in the competition for the
lucrative contract, beating fellow majors ExxonMobil and Royal Dutch Shell as well as US independent
Occidental Petroleum. Conoco is expected to take a 40% stake in the project, with ADNOC holding the
remaining 60%.

The latest tender for the Shah field Middle East Main Gas Reserves, 2006
follows the cancellation of an earlier (tcm)
30
tender in July 2007 for both the Shah
25
and Bab fields, after a period of
escalating cost projections and a 20

downgrading of the potential output

15
volumes from the project. Together,
10
development of the two fields was
costed at around US$10bn. No estimates 5

for the costs of the Shah field

0
development alone have been released, Iran Iraq Qatar Saudi UAE
Arabia
but the high level of interest by IOCs in
Source: BP Statistical Review of World Energy, June 2007
participating in the development of
UAE sour gas demonstrates their positive assessment of potential returns in this area.

Although the UAE holds the world’s fifth largest natural gas reserves, with 6.6tcm at end-2006
(according to the BP Statistical Review of World Energy, June 2007) most of the gas is sour. The high
levels of sulphur in the gas make it more challenging and costly to develop owing to its corrosive nature,
which means it requires special handling and infrastructure. The gas in the Shah field has a content of
around 30% hydrogen sulphide, which is highly toxic, making production much more testing and

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expensive than conventional gas development. Despite this, as technology has improved over recent years
and oil and gas prices have risen, the exploitation of sour gas reserves has become economically
profitable.

Iraq
In February 2008, the Iraqi authorities announced that they were considering the revival of old oil deals
involving Russian companies that were agreed during Saddam Hussein’s time in power. Several major
field development projects had been planned using the leading Russian energy groups, but the
arrangements were abandoned after Hussein was deposed. Iraqi foreign minister Hoshiyar Zebari and
Russia’s finance minister Alexei Kudrin earlier in February agreed to write off most of Iraq’s US$12.9bn
of debt. They also signed a separate deal opening up Iraq for US$4bn in new investment from Russian
firms, including oil major Lukoil – which hopes to revive its US$3.7bn agreement to develop West
Qurna, one of Iraq’s biggest oil fields.

Lukoil has said that it would be ready to start Middle East Main Oil Reserves, bn bbl,
work on West Qurna within three to five years 2006
300
after getting all permissions from the Iraqi
government. West Qurna has the ability to 250

pump as much as 600,000b/d at peak output, 200

which should be reached three to four years
150
after development begins. The field could play
100
a key role in rebuilding Iraqi production to pre-
war levels. Most industry observers had 50

written off the Russian group’s chances of ever

0
developing the multi-billion barrel prospect. Iran Iraq Kuw ait Saudi UAE
Arabia
With Conoco being a 20% shareholder in
So urce: BP Statistical Review o f Wo rld Energy, June 2007
Lukoil, however, it is possible that the vital
Western relationship is influencing the Iraqi government’s attitude towards the integrated Russian major.
Zebari said Russia and Iraq will set up a working group to study the old projects. But he also repeated a
standard Iraqi government line that all companies will be treated equally and there will be no special
treatment for anyone.

Qatar
December 2003 saw Conoco and Qatar Petroleum (QP) sign a Statement of Intent (SoI) in preparation
for the construction of a gas-to-liquids (GTL) plant in Ras Laffan Industrial City. In the same year, QP
and Conoco had signed an agreement establishing a JV to further develop the North Field to support
another LNG train at Ras Laffan (Qatargas 3), which is slated for start-up in 2009. The final investment
decision for the projects was taken in December 2005. Qatargas 3 will have a capacity of 7.8mn tpa, most
of which will be sold to the US.

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 Oman Oil & Gas Report Q2 2008

Chemicals
Conoco is active in the chemical sector through a 50:50 JV with Chevron, namely Chevron Phillips
Chemical Company (CPChem). In the Middle East CPChem is active in Saudi Arabia and Qatar. In
Saudi Arabia CPChem participates in two 50:50 JVs with Saudi Industrial Investment Group. The
Saudi Chevron Phillips Company has been in operation since 1999 and Jubail Chevron Phillips
Company is due to start operations in Q208. A third project is currently under development. In Qatar
CPChem holds a 49% stake alongside QP with 51% in the Qatar Chemical Company (Q-Chem), which
started operating in 2003, and Qatar Chemical Company II (Q-Chem II), which is due to come
onstream in late 2008.

Algeria
Conoco holds interests in three fields – Menzel Lejmat North (MLN), El Merk (EMK) and Ourhoud –
located in Block 405a in Algeria. Prior to its acquisition by Conoco, Burlington Resources was
producing oil from Block 405a, with net production reaching 15,000b/d in early 2004. The MLN field
was discovered in 1996 and came onstream in 2003. In 2005, the company approved the MLN expansion
project, which is expected to increase field production and reserves through additional pressure
maintenance. As part of the project, development drilling continued during 2006 and concluded in 2007.
Development of the EMK area progressed with partners forming the EMK Oil Field Unit in July 2005.
Six development wells were drilled in 2006. The Ourhoud field, also discovered in 1996, began
producing in 2002. The drilling programme at the field continued, with eight wells completed in 2006.
Conoco produced a total average net output of 10,000b/d of oil in 2006.

Libya

Africa's Main Oil Reserves, 2006

Conoco first entered Libya in
Others Algeria
1956 under the JV Oasis Oil
15.53% 10.47% Angola
Company, with Marathon and 7.71%
Hess. When leaving the country
in 1986, the JV partners reached
an agreement with Libya which
allowed them to maintain their
ownership. In December 2005, Nigeria Libya
30.91% 35.38%
Conoco reached an agreement
with Libya’s National Oil
Corporation (NOC) regarding
Source: BP Statistical Review of World Energy, June 2007
the terms under which it will
return to its former oil and gas production operations in Libya. Under the agreement, Conoco, Marathon
and Hess have returned to their former E&P interests in the Waha concessions in Libya. Conoco and
Marathon each hold a 16.33% interest, Hess has an 8.16% stake, and NOC holds the remaining 59.16%.

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 Oman Oil & Gas Report Q2 2008

The concessions currently produce approximately 350,000b/d, encompassing nearly 52,609sq km located
in the Sirte Basin. Conoco expects to add up to 45,000b/d of net production to its output.

The re-entry terms include a 25-year extension of the concessions to 2031-34; a payment to the Libyan
NOC of US$1.3bn (US$520mn net to Conoco) for re-entry and the extension of the concessions; and a
contribution to unamortised investments made since 1986 of US$530mn (US$212mn net to Conoco).
These latter payments were agreed to be made as part of the 1986 standstill agreement to hold the assets
in escrow for the US-based co-venturers.

Nigeria
Conoco entered Nigeria’s oil sector in 1965 when its subsidiary Phillips Oil Company (Nigeria) became
a partner in the Nigerian Agip Oil Company (NAOC), in which Conoco now owns a 20% interest,
alongside Eni (20%) and Nigerian National Petroleum Corporation (NNPC) (60%). NAOC operates
four main onshore blocks – OML 60, 61, 62 and 63 – in the Niger Delta region.

Conoco also holds an interest in the Kwale-Okpai Independent Power Plant that came onstream in 2005.
The gas-fired combined cycle power plant has a capacity of 480MW and supplies electricity to Nigeria’s
national electricity supplier. Conoco supplies 396,438 cubic metres per day (cm/d) of gas of the facility’s
required 1.9mn cubic metres per day (Mcm/d). Conoco also supplies the LNG plant on Bonny Island with
3.4Mcm/d, but Conoco does not hold an interest in the plant.

Nigeria's Gas Production, Consumption

In 2003, Conoco, Eni and Total signed And LNG Exports
70 30
an agreement with the NNPC for the
Gas Production, bcm
60 Gas Consumption, bcm 25
establishment of the Brass LNG plant.
LNG Exports, bcm RHS
Under the agreement, Conoco, Total 50
20
and Eni each gained a 17% interest in 40
15
the project, alongside NNPC with 49%. 30
The Brass LNG facility will be the 10
20
world’s first offshore LNG plant. The 5
10
project is expected to export an initial
0 0
10mn tpa of LNG. Oil major BP in
2000
2001

2002
2003
2004

2005

2006

2007e
2008f

2009f
2010f

2011f
2012f

February 2006 agreed to buy LNG from

e/f = BMI estimate/forecast; Source: Historic data - BP Statistical
the new Brass project to help meet
Review of World Energy June 2007; Forecasts - BMI Research
growing demand in the UK and US. The
deal is for the annual shipment of 2mn tonnes of LNG for 20 years starting in 2010. UK-based BG
Group has also signed up to purchase gas from the project.

After the head of gas and power at NNPC claimed that a final investment decision (FID) on the flagship
Brass LNG project is expected in 2008, with LNG shipments scheduled to begin in 2013, Conoco rejected

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this schedule as being far too ambitious in December 2007. They were originally scheduled to make an
FID by end-2006. Continued violence in the troubled Niger Delta region has caused prolonged delays to
the project, however, and Conoco had hoped for an indefinite postponement while the security situation
remains fragile.

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