The UAE wants Royal Dutch Shell to step in as its partner at the $10 billion Shah gas project after US major ConocoPhillips withdrew, industry sources in the UAE said on Wednesday.

Agreeing terms would be the biggest issue in coaxing Shell into taking on the project to produce sour gas in the UAE, the world's third-largest oil exporter, sources said.

Shell lost out in the auction for the project in 2007-2008, after long being regarded as the frontrunner and spending substantial resources on preparing its bid.

"Adnoc approached Shell," a UAE-based industry source said. "Shell might not take on the project as a pride issue because they were rejected before. But if there is a talk of money... I think there will be a compromise."

Discussions so far were informal, sources said. A Shell spokeswoman in the UAE declined to comment.

The UAE had previously said it would go ahead with Shah regardless of Conoco's exit and that it was looking for another international partner to help execute the complex project.

"The project is proceeding... and we are still discussing with partners," Abdullah al-Muhairi, depeuty senior vice president of projects at Abu Dhabi Gas Development Company (ADGDC) told reporters on Wednesday at a news conference.

Muhairi declined to give details on the potential partners. ADGDC is the subsidiary of state run oil firm Adnoc tasked with developing Shah.

The cost estimate for the project was unchanged at around $10 billion, he said, and the final amount would only be known when all contracts were awarded.

Conoco pulled out of the project in April, part of a global company strategy change to focus on oil and gas exploration and production and move away from refining and processing.

The Shah project is to produce gas, but it also requires multi-billion dollar investment in gas processing facilities of the type that Conoco wants to avoid. The plant would process about 1 billion cubic feet per day (cfd) of raw gas to pump around 540 million cfd of gas fit for consumption to the UAE's grid.

Shell was one of four companies that bid for the contract, which Conoco won in February 2008. The others were the US companies Exxon Mobil and Occidental.

Shell was seen as the favourite for the deal until just weeks before Conoco won, as the Anglo-Dutch firm had carried out extensive studies at Shah and played a part in gas production in the UAE for over 30 years.

Shell is a 15 per cent shareholder in state-run Abu Dhabi Gas Industries (Gasco). Gasco holds the concession to produce and process natural gas produced at the UAE's onshore fields.

Shell comeback?

When Conoco withdrew from Shah in April, Shell was lukewarm to the suggestion that it may participate.

"Our own porfolio of opportunities has moved on a bit," said Shell's Chief Financial Officer Simon Henry told a conference call with reporters in late April. "We've got some great stuff elsewhere in the world now."

Agreeing terms that would make the project profitable for Shell and cheap enough for the UAE would be tough, sources said. The UAE subsidises most energy prices to consumers, so the more it pays Shell, the more expensive the subsidy.

"Shell has all the experience, technology, and knowledge of the field," said a second industry source. “Shell of course is playing coy now, that's part of its negotiating tactics. But I think if they do come back to the table there would be an option there for them."

The UAE would either have to raise the price it was willing to pay for the gas to bring Shell on board, or improve the terms in some other way, sources said. To make the project profitable, the UAE would have to offer around $5 per million British thermal units (mmbtu) of gas, the second industry source said.

That would be a lot more than the UAE was willing to pay Conoco. The Gulf Arab state wanted the gas for free, leaving Conoco to recover costs and make profit through sales to international markets of condensate, a light oil produced with gas, he said.

Offering that sort of internal price for gas would mark a big change in the way gas production and costs in the UAE are perceived, he said.

On Wednesday, ADGDC signed contracts with Honeywell and Al Jaber Group for work at Shah. Jaber would undertake early works at the sites, while Honeywell would provide technology services. – Reuters