Zadco close to awarding Upper Zakum contract

The Zakum Development Company (Zadco) awarded the contract worth as much as Dh3 billion (US$816.7m) to France's Technip and the UAE-based National Petroleum Construction Company (NPCC). Courtesy Adnoc

Abu Dhabi's push to increase its oil production capacity is gathering momentum with the impending award of a major work contract for one of the world's largest oilfields.

After a lengthy tendering process, the Zakum Development Company (Zadco) is close to awarding the first of two large engineering, procurement and construction contracts to boost capacity at the Upper Zakum field from 500,000 barrels per day (bpd) to 750,000 bpd by 2016.

Three contractors - J Ray McDermott, Saipem and Technip - are preparing bids ahead of the deadline on Sunday. A fourth bidder, Hyundai Heavy Industries, has been disqualified.

The field has been recognised as one of the world's major hydrocarbon deposits since the 1970s, but was initially seen as a non-commercial proposition because of the technical challenges of extracting oil from the rock formation when it was first discovered in 1963.

Production reached its current levels after ExxonMobil joined Zadco, a joint venture led by Abu Dhabi National Oil Company (Adnoc), and committed its technology to the extraction of the crude in 2006.

Upper Zakum is the largest part of a reservoir that is now classed as the second-largest field in the Gulf and the fourth-largest in the world.

Most of the new facilities will be housed on artificial islands, which are already being built.

A second contract to complete the expansion is scheduled to attract bids next month.

The upgrading of Upper Zakum is the most significant step yet by Adnoc to fulfil its long-held target to increase Abu Dhabi's production capacity from 2.8 million bpd to 3.5 million bpd. Such upgradings help to maintain the emirate's position as Opec's fourth-largest producer, and to protect its market share in the growing economies of Asia, the recipient of the bulk of its crude.

Abu Dhabi is "protecting relative strength within Opec", said Samuel Ciszuk, a consultant with KBC Energy Economics.

"Without expansion, Abu Dhabi would effectively be in decline … and would become a smaller player relative to other countries."

Saudi Arabia and Iraq are both engaged in major capacity expansions. Such work is also welcome news for oil-importing countries.

The International Energy Agency, which represents 28 oil consumers, has long warned that insufficient production increases would lead to a supply crunch that could undermine the global economy.

Crude prices have surged in recent weeks as sanctions on Iran combined with reduced or interrupted exports from South Sudan, Syria and Libya heightened fears of an impending supply impasse.

The deadline for Abu Dhabi's production rise to 3.5 million bpd has been pushed back several times, moving from 2006 to last year, to the current target of 2018. Since 2009, Adnoc subsidiaries have started to award contracts to raise capacity at existing developments, and to tap undeveloped fields.

The award of the first Upper Zakum project was originally due to be made at the end of last year, but was delayed because companies had to resubmit their technical bids to accommodate changing technical specifications, according to sources involved in the process. The upgrade of Upper Zakum capacity will be developed in three phases. The first phase will boost production capacity by 100,000 bpd, and a further 150,000 bpd will be added in the second phase.

A final phase will ensure that production can be maintained over a 25-year period.