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Oman sees renewed optimism in its energy landscape

Jun 24, 2019
7 min read
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Oman, the largest oil and gas producer in the Middle East who is not a member of Organization of the Petroleum Exporting Countries (OPEC), is heavily dependent on hydrocarbon production and is also a major exporter of oil and gas to Asian countries such as China, Japan and South Korea.

While domestic consumption has seen a steady increase in recent years, putting pressure on exports, the sultanate’s perceptive use of enhanced oil recovery (EOR) techniques, combined with a renewed focus on develop refining capacity, is stemming new optimism among industry stakeholders.

The country’s oil and gas accounted for 30 per cent of gross domestic production in 2017, supplying over 75 per cent of government revenue and over 60 per cent of export revenue in 2018, according to the Central Bank of Oman.

Oman’s total production capacity currently stands at 1 million barrels per day (bpd) of oil in crude and condensates and 110 million cubic metres of natural gas per day. As hydrocarbons are expected to continue to dominate the economy, and are of significant importance to the sultanate, a number of megaprojects are planned in the sector.

Way forward

Oman’s top oil and gas producer, the state-controlled Petroleum Development Oman (PDO) announced earlier in the year that, having achieved the highest oil output in 2018 of 610,170 bpd since 2005, it plans to further boost production to 670,000 bpd over the next five years.

As natural gas grows in importance within Oman’s energy mix, a production-sharing agreement on the development of the Mabrouk gas-field in north-east Oman is expected in late 2019. The sultanate is expected to make steady progress in achieving its production-capacity targets by 2023. While there are a total of 19 international and local companies engaged in exploration and production in 2019, PDO (in which the government owns a 60 per cent stake, Royal Dutch Shell 34 per cent, Total 4 per cent and Partex 2 per cent) remains by far the most important player, accounting for about 70 per cent of the sultanate’s total oil output and the bulk of its gas production.

PDO’s production levels were well above the 550,000 bpd mark to which PDO committed itself over the past decade. PDO had a virtual monopoly on Oman’s gas production until BP’s huge Khazzan project came on stream in late 2017. PDO remains the largest producer of gas in Oman. The completion of the Rabab Harweel and Yibal Khuff mega-projects over 2019-21 will ensure that it remains so.

Rabab Harweel, the largest gas project in the company’s history, is due to come on stream in mid-2019 according to PDO’s managing director, Raoul Restucci. Once fully operational, the project is expected to deliver 60,000 bpd of oil and 212 million cubic feet per day of gas.

Increasing oil output in recent years has given PDO the confidence to announce a planned increase in oil capacity to 670,000 bpd in the next five years.

The application of enhanced oil recovery (EOR) technology since the mid-2000s has enabled the company to successfully halt a rapid decline in production that affected Oman’s ageing oil fields such as Amal.

GlassPoint Solar’s EOR project, which uses solar thermal technology to generate steam for well injection, is one example that has been paying off. Despite the high cost of the technology, PDO said in 2018 that it expects that over 23 per cent of its total output will be from EOR-based production by 2025.

Meanwhile, a timeline for the development of Mabrouk North East, a major gas field in the Greater Barik area of northern Oman, was revealed for the first time in March.

The gas field, which has potential reserves of 4.5 trillion cubic feet, was one of the largest hydrocarbons finds in the world in 2018. According to Restucci, the energy majors Shell and Total, both shareholders of PDO, are expected to sign a production-sharing agreement with the oil and gas ministry for the project later in 2019.

An initial agreement was signed in May 2018 by the parties and an interim agreement covering the funding and work programme for 2019 was signed in late February.

Plans for Mabrouk North East follow the successful development of the Khazzan gas field by BP which came on stream in 2017. The second phase of the project, known as Ghazeer, is currently under way and is expected to increase gas production from the Khazzan field from the current level of around 1 billion cubic feet per day to 1.5 billion cubic feet per day.

BP expects to invest US$4 billion in the Ghazeer project, which was 33 per cent complete in late October 2018; production is expected to start in early 2021. Once complete, the projects will provide a boost to the economy and increase the in-country value of natural gas as the oil and gas sector continues to dominate the Omani economy.

Production and consumption

Oman’s natural gas supply has risen over the years to reach 21,087 kilotonne of oil equivalent (ktoe) in 2016. At the same time, oil supplies were just 3,024 ktoe, according to data from International Energy Agency (IEA).

Meanwhile, gas also accounts for the majority of energy consumption, at 11,448 ktoe in 2016, with oil products at 6,277 ktoe and electricity at 2,610 ktoe. Natural gas has risen in importance, accounting for 68 per cent of Oman’s domestic energy consumption.

Oman had 5.4 billion barrels of estimated proved oil reserves as of January 2018, ranking Oman as the seventh largest proved oil reserve holder in the Middle East and 23 trillion cubic feet (Tcf) of proved natural gas reserves, according to the Oil & Gas Journal.

Natural gas production has recently picked up again, growing to a high of 1,100 billion Bcf in 2017. Meanwhile, consumption has also risen to 775 Bcf, using up more than 70 per cent of the gas produced, citing the U.S. Energy Information Administration.

Downstream projects tied to gas field development

Despite being within PDO’s huge Block 6 concession, the Mabrouk gas field will be operated by Shell, and its development is tied to the creation of two integrated downstream gas projects. Shell, which will have a 75 per cent share in the field, is to build a gas-to-liquids plant at Duqm with the Oman Oil Company, while Total, with the remaining 25 per cent share, will develop a liquefied natural gas (LNG) bunkering service for vessels calling at Sohar port.

Although this minimises the amount of investment that state-controlled companies have to raise for the project, it will also, ultimately, reduce the pace of revenue growth for the government.

Given the squeeze on public finances and the downgrading of Oman’s credit rating by major ratings agencies, further agreements of this sort are likely. The government is keen to develop the downstream projects to maximise in-country-value and create job opportunities for Omanis. However, with relatively few Omanis working in the construction sector and the low number of jobs created by large scale industrial projects, the direct benefit in terms of employment is likely to be limited.

Downstream capacity

Oman processes oil at the Mina Al Fahal refinery in Muscat and at another facility in the Sohar Port Industrial Complex. In 2017, the two plants had a production capacity of 222,000 bpd split between 106,000 bpd at Muscat and 116,000 at Sohar, according to the Oman Refineries and Petroleum Industries Company (ORPIC), which operates the plants.

BP statistics show throughput standing at 204,000 bpd that year, up from 178,000 bpd in 2016 and representing 0.2 per cent of the global total. In April 2018 a new refinery project at Duqm got under way, with the plant set to significantly increase refining capacity when it comes on-line in 2022, while an expansion was completed at Sohar in May 2018.

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