Oman: Hitting the gas

In an effort to meet rising domestic demand and keep the cost of imports to a minimum, Oman is looking to boost its production of natural gas. However, the levels of investment necessary to exploit the Sultanate’s difficult-to-tap reserves, means that margins may be squeezed until gas prices rise – something analysts are already predicting.

Oman’s estimated gas reserves currently stand at more than 850bn cu metres, though experts believe this is a very conservative figure. A new concession being developed by BP – the Khazzan and Makarem gas fields in Block 61 – could on its own hold a further estimated 850bn cu metres. This agreement covers an area of some 2800 sq km in central Oman, which contains a number of reservoirs.

Last year, Oman produced 91m cu metres of gas per day, a 7% increase on output in 2009, with a similar rise in production planned for this year, according to Ministry of Oil and Gas data. While some of this was earmarked for the export market, mainly for clients in Asia (China and Japan are the main export markets), most was channelled into the domestic economy, particularly into power generation and the industrial sector.

This growing domestic requirement has led to an increase in exploration activities by both local and international firms. Petroleum Development Oman (PDO), for example, will invest around $1bn for gas projects and another $3bn for oil in 2011, Raoul Restucci, PDO’s managing director, told the press at a media briefing highlighting the firm’s progress in 2010 and future plans.

On 20 March it was announced that Oman Oil Company Exploration and Production (OOCEP) would invest $1bn to develop the Block 60 gas field in central Oman. The concession for the 1485-sq-km block had previously been held by British firm BG Group, which relinquished its interest in late 2010. The block is expected to yield 90m cu feet of gas per day in the first phase.

Estimates for the reserves lying beneath Block 60 have varied greatly, with BG initially saying there could be up to 480bn cu metres, though more recent assessments suggested the figure could be closer to 56bn cu metres. While a number of test wells sunk by BG produced promising results, the big test for OOCEP – a subsidiary of the state-owned Oman Oil Company – will not only be to develop whatever reserves the block holds, but also to do so in a cost-effective manner.

Many of the new deposits being identified may be sizeable but they are also classified as “tight gas”, meaning that the gas is hard to access as it is surrounded by compacted rock or sand. While improved technology will help, extraction costs for tight gas are likely to be higher than in conventional fields.

If, as some analysts expect, natural gas prices continue to increase, particularly on the back of growing Japanese demand, as the nation switches over to liquefied natural gas (LNG) to make up for lost nuclear capacity, this is likely to give new exploration and production efforts a boost by increasing the commercial viability of some projects.

“It’s a little too early to say how the market will be affected, but there’s likely going to be a tightening of the LNG market,” Simon Henry, Royal Dutch Shell’s chief financial officer, told the international press in mid-March. Any new commercially viable fields are of increasing importance to the Omani economy, not for the potential export earnings they could generate but for their capacity to power local generators. Since 2008 Oman has had to import gas to meet its domestic needs, which have grown dramatically over the past decade as a result of the increased level of industrialisation across the economy.

While the growth of a strong manufacturing sector has broadened the base of the Sultanate’s economy, it has also driven rising demand for electricity – which is mainly provided by gas-fired power plants – and for direct supplies of gas, which is used in many industrial processes. Add to this the increased pressure on the local power grid from consumers, especially during the hotter summer months, and Oman’s domestic gas production has been unable to meet demand.

Another issue for Oman is ensuring that locally produced and imported gas is accessible in the regions that most need it. In late February the government announced it was considering building a pipeline from Saih Rawl in central Oman to Duqm, on the Wusta Coast of the Arabian Sea.

With Duqm being developed as a major port, logistics and industrial centre, the demand for electricity and gas is growing, Nasser bin Khamis Al Jashmi, the under-secretary at the Ministry of Oil and Gas, told media on February 22. Initially the pipeline would feed a large-scale power station and water desalination plant there, with the line then to be tapped later to meet the needs of industry.

A guaranteed supply of gas to the industrial and trade centres being developed in Oman’s coastal regions, in particular at Salalah near the Yemeni border, Duqm, Sur and Sohar – as well as to the capital, Muscat – is essential for the future growth of the economy.