Oman produces more natural gas than domestic demand for first time in recent history

Used as a primary fuel resource in power generation, water production, and upstream and downstream hydrocarbons activities, natural gas is central to Oman’s economy. The sultanate has always run at a natural gas capacity shortage and has historically relied on partially state-owned Petroleum Development Oman (PDO) to produce 70% of the country’s gas requirements. PDO produced an average of 82m cu metres per day in 2017, up from 80.2m cu metres per day in 2016, when the country also imported 5.5m cu metres per day via pipeline from Qatar.

Advancements in 2017 have significantly changed the sultanate’s resource profile, bringing on-stream enough domestic facilities to delay any future supply deficit for years. In fact, for the first time in recent history Oman is in the position of having more gas than it requires. New highs in domestic production levels will allow the government to prioritise domestic sources of supply and eventually phase out imports, upscaling or downscaling PDO wells as needed to manage fluctuating demand. Looking ahead, demand levels are expected to rise. Total gas consumption rose by 2.6% in 2016, largely driven by 4.6% growth in industry, according to the Oman Society for Petroleum Services.

Khazzan Tight Gas Field

The Khazzan tight gas field was forecast to increase the capacity of daily gas production by 1bn cu feet, or close to 25%, by the end of 2017. BP has projected an output of 1.5bn cu feet of gas and 25,000 barrels of condensate a day once phase two has been completed in 2021. BP is the operator of Block 61, which contains the Khazzan field, and holds a 60% share, with the remaining 40% held by state-owned Oman Oil Company for Exploration and Production.

It was announced that first gas from the Khazzan field came on-stream in September 2017, coming ahead of budget and schedule. In the first phase BP will drill a total of 200 wells, with gas then fed through a two-train central processing facility. A 1150-sq-km extension to the south and west of the original 2800-sq-km Block 61 concession will add a third train of gas processing to the facility. Regarding the second phase of the project, three wells had been drilled in the Ghazeer field by the end of 2017, with reportedly promising results. A draft field development plan for phase two was submitted to the Ministry of Oil and Gas (MOG) for review in 2017, which targeted adding capacity of 3.5trn cu feet of gas. BP has said plans are on track to be sanctioned in early 2018, with phase two gas scheduled to start operations by the end of 2021.

To date, some $6bn has been collectively spent on the Khazzan tight gas project between all partners, according to BP. The company has realised significant savings by progressing phase two within the original phase one budget of $16bn over the life of the field through 2043. Additionally, it is expected to yield 50% more gas than originally planned. Technological advances surrounding the issues associated with tight gas reservoirs will continue to be pivotal as the venture moves ahead.

Strategic Impact

Investment in the Khazzan tight gas field has directly impacted local firms. Omani companies have won drilling contracts worth 85% of total spend at Khazzan and 60% of overall oilfield services contracts, according to BP. The country’s gas industry also stands to benefit from knowledge transfer, as BP has extensive experience with hydraulic fracturing, unconventional gas, plan execution and the training of staff. The Khazzan tight gas reserves lie at depths of up to 5 km in narrow bands of extremely hard, dense rock. BP’s success in increasing production rates reflects its vast expertise in reservoir development. For example, the time required to drill and complete a well at Khazzan has reportedly dropped from 100 days at the beginning of production to 50 days by the end of 2017. Moreover, BP will use lessons learned from phase one to help increase efficiency over the coming phase. Khazzan is expected to provide a major boost to the national economy, transforming the sultanate into a swing producer, partly by contributing gas supplies that will provide feedstock for the development of downstream and petrochemical industries, and support incremental gains in the shipments of liquefied natural gas.

As per the terms of its exploration and production-sharing agreement and governing legislation, BP does not market produced gas, but rather sells it by pipeline to the government. Previously, the government has exported extra gas received through the liquefied natural gas (LNG) pipeline. The surplus expected to be generated by BP’s Khazzan field may unlock new opportunities for local energy-intensive industries, with most of this new gas likely to initially go to Duqm as feedstock for downstream consumers via a dedicated 36-inch Oman Gas Company pipeline that is currently under construction. BP has maintained a connection that is ready to tap into the pipeline when it is complete.

The expansion of the Khazzan field and improvements to liquefaction facilities may allow Oman to export more gas as LNG. Majority government-owned Oman Liquefied Natural Gas has forecast a 23.5% increase of exports in 2018 over 2016, with the production of three liquefaction trains at Qalhat topping 10.5m tonnes per annum. By comparison, Oman exported 7.9m tonnes of LNG in 2014.

Producer Coordination

More domestic gas production also means that BP and PDO will need to work closely to coordinate their output. At the moment PDO produces the bulk of Oman’s gas output and has been investing heavily in exploration, pursuing stratographic endeavours with large potential. The company works closely with contractors to reduce costs and maintain a swift pace of development for its projects, aiming to commercialise deposits within a year of their discovery.

To make space for volumes from Khazzan, PDO has been asked to ease gas production, according to the MOG, while retaining the ability to scale output to manage fluctuating demand. Promising PDO projects include the Mabrouk Gas Field in northern Oman, 40 km from Saih Rawl, where the volume of gas could rival the Khazzan-Makarem project under a base case scenario. Despite having different reservoir characteristics, the Mabrouk field has vast production potential and is projected to contribute substantially to Oman’s future gas production. Gas flow rates from the reservoir’s initial exploration well were found to be non-commercial decades ago and development was only revived in 2008. The latest round of exploration drilling took place in 2017. It is expected that PDO will announce the full scale of its latest gas finds at Mabrouk in February 2018.