By Melanie Lovatt in Muscat
Confronted with declining crude production and a growing shortage of natural gas, Oman is campaigning to increase output. This fight, which includes use of new technologies to exploit reserves of high geological complexity, while at the same time trying to keep a lid on costs, will be closely monitored by Omans Gulf neighbors, which are starting to face similar challenges.
Oman is fighting its production battle on a number of fronts. Shell-led Petroleum Development Oman (PDO), which produced its first crude 40 years ago, is moving forward with ambitious enhanced oil recovery (EOR) projects. But while PDO will remain Omans dominant producer for the foreseeable future, the government has encouraged the entry of other oil companies with different skills with the view that in todays market, as technology rapidly advances, one company is unable to specialize in every aspect of production. Occidental, for example, has a large research department in Houston and is successful in amassing and applying the technologies needed to enhance its operations, while more recently BP won its foothold as a result of its tight gas expertise (see report on page 5).
With the proviso that every little bit helps the government has encouraged smaller players to exploit fields that fall under the radar of oil majors. The ranks of companies now operating in Oman have swelled to over 20 (see map on page 4). In the bid to book reserves, new acreage is also being opened up with five new blocks in oil, and five in gas, to be awarded by the end of 2009. The gas block bids (all newly available in a re-fencing of parts of PDOs mammoth Block 6) are under evaluation, and some of the oil blocks have already been offered.
PDO Plateau
PDOs crude production this year will average around 550,000 b/d, and for many years will continue to stay at around this level. With PDO were working on the basis of a long-term plateau of around 550,000 b/d, plus 100,000 b/d of condensate, Sheikh ?Ali al-Battashi, Director General, Planning and Studies, at the Ministry of Oil and Gas, told MEES in an exclusive interview. While oil output will level off, production methods are undergoing a significant shift. Last year PDOs primary oil production was slightly higher than secondary, but by 2011, EOR will start to contribute. In 2016, this will account for one third, with primary and secondary also representing a third apiece (MEES , 18 February). We have many EOR projects in the pipeline and Oman today proudly stands at the forefront of this type of technology in the GCC states. Ultimately all of these countries will have to employ methods applicable in Oman to enhance their recovery factor, said Mr Battashi, noting that a foothold in this type of activity in Oman would bring advantages to companies trying to secure new acreage in the GCC and beyond.
Production from Omans second largest crude producer, Occidental, is forecast to climb to 150,000 b/d in 2010, with 80,000 b/d coming from the Mukaizna heavy oil development, 70,000 b/d from Sunaina and 10,000 b/d from new concessions. Other producers are also gearing up, such as local firm Petrogas, which in January added the PDO service contract for the management of the Rima small fields (nine producing blocks and nine accumulations) to its current production. Adding estimated production of Petrogas and other producers, such as Daleel (a 50:50 joint venture between Petrogas/Chinas CNPC) and Thailands PTTEP, to PDO and Oxy output brings Omans total crude production (plus condensate) on paper to 890,000 b/d by 2010. But Mr Battashi suggests that such high levels are unlikely: I believe the authorities may rationalize production and cap it at a reasonable level to extend the life of fields. Maybe a rate of about 850,000 b/d could be reasonable.
Oxy is planning to produce 150,000 b/d from Mukhaizna alone by 2012, but there are some doubts whether it will achieve these rates (MEES , 28 January). Last year Mukhaizna only managed 12,000 b/d. Production climbed to 22,000 b/d at the end of February and is expected to reach 50,000 b/d by year end, MEES understands. As Mukhaizna, which is 15 API, ramps up production, Omans crude will become heavier, Mr Battashi says. PDOs production is 33.5 API. Oman wants to maintain its status as a light producer (at levels of over 33 API), so will add condensate to stay above the 33 API threshold. New condensate production will therefore prove beneficial and BP Oman, for example, may produce condensate as early as Q4 2010 or Q1 2011. The government is still leaning towards processing heavy Mukhaizna crude at the proposed al-Duqm refinery (MEES , 14 April), in addition to importing crude, and this step is advisable, otherwise, as Mukhaizna production increases, it will require yet more condensate to prevent blend deterioration, one Oman oil and gas expert said.
Gas Shortfall
In addition to the efforts being expended to maintain oil production, Oman is aggressively trying to boost gas output. Like other Gulf countries, it is facing a shortfall due to the increase in domestic demand. This results from use of gas as feedstock for the expanding petrochemical industry, and increased consumption by the power sector, which in turn is expanding to keep up with rapid industrial demand and population growth. Priority is given to the power sector, but unless Oman is able to boost gas supplies, and thus power output, the second phase of expansions planned across a number of industries, such as petrochemicals, fertilizer, aluminum and cement, will be stalled, warned one expert.
Furthermore, in similar style to its larger gas producing neighbor, Qatar, Oman is assessing the best ways to monetize its gas stream, and this process (in addition to the rise in construction costs) was behind the decision last year to postpone the Oman Petrochemical Industries Company (OPIC)/Dow Chemical multi-billion dollar olefins complex at Sohar (MEES , 23 July 2007). This project would have extracted most of the liquids from the gas, meaning that greater volumes of this depleted gas would be needed to supply LNG operations. The ministry decided that under current supply constraints this was unwise.
LNG operations have allowed Oman to rapidly monetize its gas by bringing in foreign exchange receipts, which provided funds to build industries and develop a shipping company. LNG has been good for Oman
because it is a cash printing machine, but it is not employing large numbers of local people, so to boost local content and employment we ultimately need to direct gas to other domestic industries, said one Oman expert. LNG operations are below their 10mn tons/year capacity, with OLNG having almost 1.2mn t/y idle, and this will climb to 2mn t/y when BP stops lifting LNG at the end of 2009, MEES understands. OLNG is currently supplying 4.1mn t/y to Kogas, 0.7mn t/y to Osaka, 0.8mn t/y to BP and 0.8mn t/y to Itochu. Qalhat LNG, which has a capacity of 3.5mn t/y, is producing 2.3-2.5mn t/y, but expecting to ramp up capacity by 2009, MEES further understands.
New Gas Producers
While some Oman oil industry sources believe the gas shortage will start to bite in 2010, the ministry is confident that it has sufficient supplies through to 2013, and thereafter new producers, such as BG and BP, will start to meet demand. BG plans to drill eight wells by the end of this year at its onshore Block 60 (including the Abu Butabel gas and condensate discovery) and BP has started its seismic program at the Khazzan and Makarem tight gas prospects in Block 61 (see report on page 5). In 2010, gas output will reach 420,000 boe/d which will be consumed by the LNG, power and industrial sectors, said Mr Battashi. Despite some industry skepticism, the government is hopeful that high-level talks between Muscat and Tehran will enable Oman to import 1bn cfd of gas from Iran. We are confident we will have the shortfall covered by BG and BP, and Iran would be the icing on the cake, said a government source. Oman will be hoping to leverage its strong ties with Iran, and Oman Shipping Company, which is expanding its fleet, is planning to supply oil tankers to Iranian National Transportation Company under long-term charters. Oman Oil Company has also proposed investing $2bn in the Iranian Kish Island gas field development.
Gas output would climb if Oman paid exploration and production companies more for their gas, producers say, and their complaints are being echoed around the Gulf. Industries in Oman, as in other Gulf countries, have enjoyed subsidized gas, based on low-cost associated reserves, with some pricing as low as $0.80/mn BTU. With the advent of more challenging, non-associated gas production, the ministry is paying more, but with gas prices climbing, some other producers are seeking price re-openers. The agreements between the government and producers, which are not disclosed, follow a formula which covers operators expenditure and profit. The ministry is realistic and realizes that the days of cheap gas are over and it is not fair to ask companies to subsidize our industries for ever, said one government source. An indication of current market rates has recently been provided by Ras al-Khaimahs deal to take Qatari pipeline gas, part of Omans 200mn cfd allocation of Dolphin gas, during low Omani demand in winter, at $5/mn BTU (see MEES Agenda, page 8).
Oil And Gas Spending Climbs
The challenges inherent in the recovery of more difficult oil and gas necessitate higher spending, and the ministrys 2008-12 business plan puts total spending on the oil and gas sector at $35bn, which is up from the $27-28bn for 2007-11. Of the $35bn, $28bn will be spent on oil and $7bn on gas. Mukhaiznas early development cost $3.5bn and over its lifecycle is expected to need $11bn (it was originally estimated at $9bn but climbed due to an increase in construction costs). To keep a lid on rising costs, Oman, which lacks the purchasing power of many of the larger Gulf producers, has actively courted second-tier engineering, procurement and construction (EPC) companies, including Petrofac, Dodsal, SNC Lavalin, Worley Parsons, Mott McDonald, Ramsgate, Tebodin, RWE and others. These are the companies involved today, and they are as good as the Bechtels but without a premium for the name, Mr Battashi said. We believe we have sufficient participation to create competition, achieve quality of execution and timely delivery at the right price. Expenditure will ramp up after the current 2008-12 business plan by billions of dollars if the BP and BG operations come on-line as planned, although forecasts further out are difficult and will depend on the dollar exchange rate and the cost of raw materials, which could vary by a wide margin. Such a large spending program is necessary because oil and gas production is the engine room of the economy and we therefore need to keep it healthy, Mr Battashi explained.
Oman Oil And Gas Concessions
Source : Ministry of Oil and Gas.
Copyright MEES 2008.
