At all costs: Spending plans keep pace with a rise in unconventional projects

One of the achievements of Oman’s national economic strategy in recent decades is the successful utilisation of its hydrocarbons wealth to bring about societal development in successive five-year plans. Revenues from the sultanate’s oil and gas industry have been diverted towards health care and education initiatives that have brought about significant improvements. As budgets for the plans are outlined in detail, the breakdown of this spending and its impact can be easily assessed. However, creating a similar outline for the oil and gas industry is a less straightforward process – in large part because of the more complex mix of private sector and state-funded development, which characterise the energy sector. Given the central importance of oil and gas extraction activity to the nation’s balance sheet and its socio-economic development, any announcement on the subject of spending plans is greeted with considerable interest, and industry watchers were granted a useful insight into the government’s spending objectives in the second half of 2012.

Increased Spending

In August of 2012 Oman’s Ministry of Oil and Gas (MOG) announced details of a 10-year strategy aimed at sustaining oil and gas production in the long term. According to the MOG’s statement, investments in the oil sector will be in the region of $60bn-70bn between 2013 and 2022, while spending on exploration and production in the gas sector is anticipated to be around $40bn. The gross anticipated spending total of between $100bn and $110bn over the next decade is broadly in line with spending levels seen in recent years, with the higher estimate a possible allowance for increased annual spending as the industry pursues more unconventional hydrocarbons. “Historically we've been spending from $8bn-10bn per year on exploration and production. In the future, we will have to pump in a lot more into the industry than that as we go after unconventional resources of gas and oil. We’ll have to spend more on capital intensive enhanced oil recovery (EOR) projects, for example, so we will cross the $10bn per year mark soon,” Sheikh Zaid bin Khamis Al Siyabi, director-general of exploration and production at the MOG, told OBG.

While details are scant, the MOG did provide some indications of its strategic priorities. On the oil side of the ledger, the ministry intends to continue with its ambition of tapping its estimated reserve of 60bn barrels in the most efficient manner. “Up to December 2011, we have only utilised 8.7bn barrels, so there is still a lot of oil in the ground. With the price of oil over $100 per barrel and with new technology constantly becoming available we will be able to develop more of our fields,”

Ali bin Thabit Al Battashi, the advisor to the minister for strategic planning and investment at the MOG, told the local press at the time of the announcement.

New Technology

According to Petroleum Development Oman (PDO), the largest oil and gas exploration and production company in the sultanate, EOR techniques accounted for 3.5% of its total production in 2011.

Abdulhameed Al Hamadani, a partner at oil field services provider Gulf Energy, told OBG, “Oman is incorporating greater use of EOR techniques to create efficient and cost-effective methods of extraction.” As the more accessible component of Oman’s oil reserves approaches its maximum recovery level this will incrementally rise, and a larger proportion of spending will be directed to the advancements of EOR. Speaking on the sidelines of the Oil, Gas, Refining and Petrochemicals Exhibition and Conference in Oman in April 2012, the managing director of PDO, Raoul Restucci, suggested EOR will account for 33% of PDO’s total production by 2025. “Three of PDO’s EOR projects – Harweel, Qarn Alam and Marmul – are on-line. There will be more and more EOR production as we go forward. Next year we will have the Amal steam project ready. We have Al Kalafa, which will be on-stream as a pilot project in 2014, and more EOR projects are in the design stage in Habhab in the south of Oman,” he told local journalists.

Exploring Tight Gas

Similarly, a rising proportion of spending on gas exploration and production is likely to be directed towards challenging, technologically advanced processes. According PDO, around $300m has already been invested as part of a five-year gas exploration plan centred on the company’s large concession in the centre of the country – Block 6. This tight unconventional gas is expected to account for an increasing amount of total production in coming years and will play an important part in the extraction of Oman’s challenging oil reservoirs. “The potential for shale and other tight gases is there. However, firms investing in their exploration and extraction will only act if government raises its purchase price for the gas. Producing these types of gas is almost twice as expensive as producing the same unit of natural gas. Before investing it needs to make financial sense,” Cristian Donnet, the country manager of gas compression services firm Exterran Middle East, told OBG.

Private Investment

The MOG’s total spending estimate of $100bn-110bn for the next decade includes anticipated PDO expenditure as well as that of private companies operating in the sector. The search for and production of tight gas by private operators will account for a sizeable component of overall future spending, and hydraulic fracturing will underlie this investment.

The most significant of these private sector developments is BP’s Khazzan tight gas project in Block 61, a small concession to the north of PDO’s Block 6. Interest in this area dates back to the 1990s, with the discovery of a number of tight gas reservoirs located at depths ranging from 4500-5000 metres. However, the more recent appraisal and development of the 2800-sq-km area began in earnest in 2007, when the UK firm inked an agreement with the government of Oman for the Khazzan and Makarem gas fields. By 2008 BP had commenced its drilling programme, starting with an extended well test project. In tackling Block 61, BP has awarded many major contracts that include: select stage engineering (including the evaluation of options for the appraisal phase of early production) to Worley-Parsons Oman; seismic acquisition services to US firm Global Geophysical Services; seismic reprocessing to PGS Data Processing ME; and the supply of two drilling rigs to Oman’s Dalma Energy.

Big Picture

The very nature of hydrocarbons projects, which are characterised by significant investments and long timelines, means that the MOG’s long-term strategy stretches far beyond the period covered by the recent announcements. Ministry statements suggest that its development horizon extends to at least 2044. However, the spending revelations of 2012 serve to underline at least one important fact: the government is in a position to raise budgets to maintain production levels, despite the challenges presented by increasingly unconventional sources. “Of course there are many challenges. But I believe that the 800,000-900,000 bpd production target in the long term is a viable proposition. I am very comfortable with that, and provided there is continued investment, management and application of new technologies the published production target is sustainable,” Battashi told OBG. This is good news for both the industry and the wider economy.