New energy developents are planned to retain more value from hydrocarbon in-country

Hydrocarbons play a vital role in the Omani economy, comprising almost 50% of GDP and accounting for the large majority of government revenues. While 15 years ago it seemed this contribution was set to decline irrevocably – with production dropping from 970,000 barrels per day (bpd) to 710,000 bpd in the space of just seven years – careful custodianship and international partnership have instead seen output hit new records, with an average of over 1m bpd produced in July 2015. This resurgence has seen Oman become a testing ground for some of the most advanced extraction techniques currently in use, not to mention a host for new investment in downstream industries, while the same commitment to technology will soon see production in natural gas also hit new records. However, as the commodities bull market of recent years gives way to what is now becoming a prolonged slump in oil prices, the sector faces the challenge of both cutting costs and maintaining investment. “The oil price drop has only forced operators to optimise processes. We must use the best technology to extract the oil at the lowest cost possible,” Gong Changli, CEO of Daleel Petroleum, told OBG. “Furthermore, the government is also committed to maintaining more value from the sector within country, and an in-country value (ICV) scheme tailored towards achieving this is currently under implementation.”

In Figures

According to preliminary figures from the Central Bank of Oman (CBO), in 2014 the oil and gas sector directly contributed OR14.84bn ($38.4bn) to the Omani economy, equivalent to 47% of GDP at market prices. This makes petroleum-related activities the largest sector of the economy, followed by services at OR12.8bn ($33.1bn). However, whereas in 2014 Oman’s services sector saw robust growth of 13.1%, the petroleum sector shrank by 2.4% as a result of falling international oil prices and a reduction in exports. This decline means that the share of the Omani economy that is represented by oil and gas has steadily fallen in recent years, from 52.3% in 2012 and 50.6% in 2013 to the present level of below 50%. Furthermore, 2015 is expecting to see this share fall yet again, as net oil revenues for the first five months of 2015 were down by 46.3% year-on-year (y-o-y), falling $6bn to OR4.34bn ($11.2bn).

The falling revenues came despite record levels of oil production, with Oman producing a total of 344.4m barrels in 2014 – an increase of 0.2% on 2013. The increase may see Oman reach the rank of a top-20 global oil producer, with the sultanate standing in 21st position in 2014, according to research by the US Energy Information Administration, marginally behind India. Exports, by contrast, declined by 3.9% to 292.2m barrels, while average prices across the year fell by $2.28 per barrel to $103.23, down 2.1%. Although prices were disappointing, the industry could at least welcome good news on the exploration front: 2014 saw Petroleum Development Oman (PDO), the national oil company, registering a cumulative stock tank oil initially in place (STOIIP) figure of just over 613m barrels, its exploration directorate’s most significant booking since 1994. Overall, PDO saw an 8% increase in STOIIP from 61.9 bn barrels in 2014 to some 66.6bn in 2015.

Exports

The key market for Omani oil remains China, which in 2014 imported a total of 210.5m barrels of Omani crude, equivalent to 72% of the sultanate’s aggregate oil exports. China was followed by Taiwan, which accounted for 11.6% of the total, or 33.9m barrels. Indeed, all of Oman’s significant oil export markets are east of Suez, with Thailand, Japan, South Korea, India and Singapore following in order as principal markets for Omani crude. The sultanate earned a total of OR11.6bn ($30bn) from its crude exports in 2014, which were down 6.1%, while refined oil products declined by 9.2% to OR310m ($802.6m).

Natural Choice

According to preliminary figures, Oman’s natural gas sector witnessed a decline in output of 3.8% in 2014, falling to 37.7bn cu metres for the year. This decline was most clearly seen in the sultanate’s non-associated fields, where production fell by 4.5% to 29bn cu metres, while output from associated fields was more stable, dropping by only 0.9% to 6.8bn cu metres. Provisional figures for 2014 place Oman’s total aggregate gas reserves at 24.31trn cu feet.

The majority of the sultanate’s gas production goes towards industrial use and power generation, which accounted for 29.2bn cu metres in 2014, equivalent to 77.4%. However, as a result of a number of long-term contracts Oman also exported a total of 7.9m metric tonnes of liquefied natural gas (LNG) in 2014. Revenues for LNG sales declined by 10.6% y-o-y to OR1.49bn ($3.85bn). Rising demand for gas resulted in Oman importing 5.4m cu metres per day in 2014; however, much of this was used for re-injection in oil wells to increase recovery as part of enhanced oil recovery (EOR) techniques.

The oil and gas sector is a significant source of skilled employment within Oman. According to figures published in 2013, total direct and indirect employment in the sector reached 55,000 posts, of which 22,000 were taken by Omanis. Direct employment in the sector adds up to an Omanisation rate of approximately 63%.

Sector Formation

Prospecting for oil in Oman began as far back as the 1920s. It was not until 1962, however, that the first commercially viable oil deposits were discovered at Yibal by PDO. This was followed in the course of the next two years by the discovery of giant fields at Natih and Fahud. By 1967, following the construction of a 279-km pipeline to the port of Mina Al Fahal in Muscat, Oman had begun exporting crude oil.

In 1974 PDO became Oman’s national oil company (NOC) following the government’s acquisition of a 60% stake in the firm, with the remaining shares divided between Shell (34%), Total (4%) and Partex (2%). By the mid-1990s oil production in the sultanate had reached over 800,000 bpd thanks largely to the addition of new capacity in the south of the country, which now represented almost half of production. Meanwhile, following significant non-associated gas discoveries in central Oman in the early 1990s the sultanate began adding sizeble LNG facilities to its portfolio, as well as considerably expanding its gas-fired power generation capacity. All of Oman’s power generation is now provided by domestic natural gas.

By the turn of the millennium Oman’s conventional oil production had begun to enter into steady decline, with production falling from a peak of 970,000 bpd in 2000 to 710,000 bpd in 2007. The drop-off prompted PDO to begin an ambitious long-term growth strategy in 2002 based on the utilisation of EOR technology. PDO was followed in 2005 by Occidental Oman, which began working on a large-scale steamflood project at Mukhaisna. In recent years Oman has successfully implemented steam injection, steam cycling, miscible gas injection and polymer flooding EOR, with the result being an increase in oil production above previous historic peaks to reach a new high of an average 1m bpd in July 2015.

As of 2015 a total of 15 companies were operating in concession blocks throughout the sultanate. Alongside PDO (and its shareholders Shell, Total and Partex) and Occidental, other international oil companies (IOCs) in Oman include BP (which is working on a tight gas project at Khazzan), Norwegian firm DNO, Petrogas, CC Energy Development, Medco and PTTEP. Other significant upstream government-owned or part-owned ventures in the sector include Daleel Petroleum, a joint venture between China National Petroleum Corporation and the Omani government, and Oman Oil Company Exploration and Production (OOCEP), a subsidiary of Oman Oil Company (OOC), a wholly owned commercial company founded by the government in 1996 to pursue investment opportunities in the sector both at home and abroad.

Regulation

Responsibility for regulating the oil and gas sector falls under the Ministry of Oil and Gas (MOG), except for environmental factors which are covered by the Ministry of Environment and Climate Affairs. The MOG works within the framework of the Oil and Gas Law (Royal Decree 8/2011), which replaced the two previous laws on Oil and Minerals (42/74 and 2/99). The main responsibilities of the ministry are providing overall policy guidance for the sector (including preparation of legislation), supervising exploration and production within the sultanate, negotiating petroleum agreements (or exploration and production sharing agreements [EPSAs]) with oil and gas companies and overseeing their implementation, and marketing Omani crude oil and natural gas. The MOG also has responsibility for increasing the employment of Omani nationals in the sector, as well as improving their skills and training.

The Oil and Gas Law provides the MOG with a fairly wide latitude for negotiating EPSAs depending upon the nature of the players involved. It is this flexibility which has helped the sultanate attract significant interest from foreign IOCs, a number of which have been prepared to engage in capital-intensive investments to access some of Oman’s more difficult reserves. However, while Oman’s legal framework allows for EPSAs to be negotiated, enabling the sale of oil in the open market, under the current law all gas production must be sold to the government.

Alongside individual agreements with oil and gas companies, since 2013 the MOG has begun implementing a re-vamped policy designed to maximise the amount of value from the sector maintained within the sultanate. This policy, designed around the recently released ICV Blueprint Scheme, has identified a total of $64bn of additional opportunity in the hydrocarbons value chain that could be maintained within Oman through 2020, alongside the potential for 36,020 positions for Omanis within the sector (see analysis).

Exploration & Production

According to the latest available information, as of mid-2015 there were a total of 25 blocks being operated under concession in Oman. This figure is four down on 2014, with Circle Oil relinquishing blocks 52 ( offshore) and 49 (onshore), Total relinquishing block 41 (offshore), and DNO and MOL relinquishing onshore blocks 31 and 43B, respectively. One new concession, Medco in onshore block 56, was added in late 2014. In early 2015 the MOG announced it hoped to add one new block that year, which would contain both oil and gas deposits. In the course of 2014 Oman’s oil companies drilled a total of 49 exploration wells, with PDO drilling 29, followed by Occidental with 10 and CC Energy Development with six. As previously mentioned, the exploration was largely successful, with the addition of 613m barrels of STOIIP – the largest increase in 20 years. PDO also completed the largest seismic survey to date in the sultanate in September 2014, when it finished the mapping of the 8000-sq-km Yibal/Al Huwaisah region.

PDO remains Oman’s largest producer of crude oil by some margin. In 2014 the company produced an average of 570,534 bpd, the highest figure since 2006 and 60.5% of the Omani total. Combined average production (which includes oil, gas and condensate) reached 1.23m barrels of oil equivalent per day (boepd), the third highest in the company’s history. Current operations on the exploration and production front for PDO include plans to develop a number of smaller prospects on the east flank of the Rima-Marmul field, with an estimated ultimate recovery of 200m barrels, and the Upper Shuaiba project, expected to begin production and see first oil in 2017.

Beyond PDO’s operations, two new EPSAs signed in 2014 with Petrogas and Medco for onshore concessions located in the Al Wusta governorate – blocks 55 and 56, respectively – are expected to add additional bookable reserves to Oman’s STOIIP, while OOCEP is planning to drill two new exploration wells in block 42 to test for the presence of hydrocarbons in the Rimal Al Sharqiya structure. These wells follow on from seismic mapping that was conducted by OOCEP, and represent a starting point for the government-owned company’s exploration operations in Oman.

In total the government has budgeted OR1.5bn ($3.9bn) of spending on investment in oil and gas for 2015. This represents an increase of 9.35% on the budgeted figure for 2014 of OR1.4bn ($3.6bn), although preliminary figures released by the CBO indicate actual spending reached OR1.4bn ($3.6bn). Actual spending on oil investment was 8.4% higher than anticipated, while spending on gas was 4.2% lower. Meanwhile, current spending on oil production for 2014 was 42.5% higher than budgeted at OR484.5m ($1.2bn). In total, government spending on oil and gas for 2014 reached OR1.99bn ($5.17bn), while budgeted spending for 2015 is expected to reach OR2.1bn ($5.4bn). The largest budgeted increase is set to be for current spending on gas production, which is budgeted to rise by 128.3% to OR210m ($543m).

Gas

As of 2014 there were a total of 33 gas-producing wells in Oman, with total output reaching 6.8bn cu metres from associated production, and 29bn cu metres from non-associated production. Oman is currently estimated to have gas reserves of slightly over 680bn cu metres, and exploration continues to be undertaken to improve the sultanate’s total gas initially in place. In 2014, 18 exploration wells were drilled, with PDO testing and fracking five wells at locations including Khulud west, Mabrouk south and Tayseer. In particular, hydraulic fracking is being used at Khulud, which is thought to contain one of the deepest tight gas developments in the world.

Further use of advanced extraction techniques is likely to be the future for PDO’s gas production strategy. In 2014 gas production at the Omani NOC declined by nearly 3% y-o-y, falling by an average 2.5m cu metres per day, while condensate production also fell by around 1% or 8000 boepd. PDO’s annual report put the declines down to compressor performance challenges.

Beyond PDO, first gas was achieved in 2014 at OOCEP’s Abu Tubul tight gas project in block 60. The project, which is effectively the sultanate’s first commercial tight gas development, involved investment of an estimated $1.1bn, with peak production at the facility expected to reach 2.5m cu metres per day. OOCEP’s $600m gas processing facility at Musandam is also scheduled to begin operations in the fourth quarter of 2015. The gas plant will service well fluids from the existing Bukha offshore field platforms, and alongside commercial natural gas will also produce oil, liquefied petroleum gas (LPG) and sulphur. The authorities will no doubt hope that the presence of the facility will also spur further interest in potential offshore drilling prospects in the area.

Khazzan Play

The largest greenfield project currently under way in the gas sector is the Khazzan-Makarem (block 61) tight gas development. The Khazzan play, which was discovered in 1993, is under development by BP in a 60:40 joint venture with OOCEP. BP acquired the concession in 2007, and after conducting appraisals of the site signed an EPSA in December 2013. The project is expected to involve total investment of around $16bn, which will include the drilling of some 300 wells over a 15-year period and the construction of a 34m-cu-metre-per-day processing plant.

Despite the company announcing it would be cutting back on global capital expenditure in 2015 in light of falling oil prices, BP nonetheless committed to continuing its investments in the Khazzan project. By the end of 2015 the firm is expected to have completed 16 exploration wells and have at least nine rigs in place. Production from the site is expected to ramp up quickly to approximately 28m cu metres per day, which will comprise almost one-third of domestic production. In addition to gas, the site is expected to produce in the region of 25,000 boepd of condensates. “Even though BP globally has decided to cut capital expenditure due to the drop in oil prices, the decision will not affect the Khazzan project due to its national importance,” Dave Campbell, the chief operating officer of BP Oman, told OBG.

The additional gas supplies provided by the Khazzan project will be vital to Oman’s economic diversification strategy, with significant downstream investments currently planned in the sector (see analysis), and domestic demand for natural gas expected to rise by 10-15% per year. Despite a doubling of the retail price of gas to industrial users – to $3 per million British thermal units (Btus) at the beginning of 2015 – the sultanate was nonetheless required to reschedule 5-10% of LNG exports to later years owing to shortages. Gas pricing remains a sensitive issue. “The government must revise upward the selling price of LPG to distributors; this price has been fixed for many years,” Nalin Kumar Chandna, general manager of National Gas, told OBG. “Due to the increasing cost of operations, the bottling company’s margins have been squeezed. The change may be a phased one since LPG is a social utility product, and a sudden change may cause social unrest. A free market is the best option in the long run.”

Technology

With many of the sultanate’s hydrocarbons resources contained in challenging or depleting formations, Oman has become a global leader in recent years in the commercial usage of EOR techniques. The main EOR techniques currently used in Oman are miscible flooding, which involves pumping natural gas into the reservoir to maintain pressure; polymer flooding, which involves mixing a polymer with water to improve its viscosity; and steam injection, which reduces the viscosity of heavy crude deposits and the permeability of rock formations. More recently the sultanate has been leading the world in the adoption of solar EOR technology, which uses solar thermal energy to drive steam injection.

A prime example of the versatile approach of Oman’s oil industry to EOR can be found in block 6, operated by PDO. Block 6 contains examples of all four technologies being used, with production at Marmul in the south – a mature, heavy crude site – having been revitalised by the use of polymer flooding: Harweel using miscible flooding of sour gas injected at up to 500 atmospheres; Qarn Alam using steam injection in a fractured carbonate reservoir; and Amal west utilising solar EOR.

Indeed, the Amal reservoir is currently home to one of the most ambitious EOR projects currently under way in the world. Since 2010 PDO has been working with US technology company GlassPoint Solar on a trial project for solar EOR. The project involves using glasshouses to protect parabolic mirrors, which are used to generate thermal energy, from the violent sandstorms that hit Oman’s deserts. The glasshouses are kept clean through an automated system which reduces water usage. The trial project, which was able to produce 7 MW of thermal energy, generated 50 tonnes of steam for use in EOR.

Mirror Project

The success of the trial unit has encouraged PDO to invest serious sums in rolling out the technology on a large scale. The project, which is called Miraah (meaning “mirror” in Arabic), will involve the investment of an estimated $600m in the construction of 36 glasshouses, covering a total area of 3 sq km – 100 times the size of the pilot trial. The first unit is expected to be operational by 2017, and the completed facility will eventually generate 1 GW of thermal energy, enough to produce 6000 tonnes of steam per day and save 5.6trn Btus of natural gas per year. At peak capacity the finished project will produce the largest amount of energy of any solar plant currently operating in the world. “We are using the scale of the oil industry to develop new solar technologies which will be applicable across a broad spectrum of industries,” Rod MacGregor, the president and CEO of GlassPoint Solar, told OBG.

Beyond EOR, the government’s various local content requirements have contributed to the emergence of a number of small and medium-sized enterprises servicing the needs of the oil and gas sector. Local community contractors (LCCs) are companies owned by the tribal communities or individuals that live in PDO’s concession area, while super-local community contractors are registered as closed Omani shareholding companies on the Muscat Securities Market. The ICV scheme – initially launched by PDO and since rolled out across the sector by the MOG (see analysis) – provides an incentive for the major oil and gas companies to work with these local companies and engage in knowledge transfer. In 2014 a total of 171 LCCs benefitted from PDO contracts, and currently local Omani companies are engaged in providing services across the sector, from manufacturing drill bits to oil well maintenance. In some cases the government has also stepped in to build local value in the sector. For instance, Abraj Energy Services, which is a subsidiary of OOCEP, is the sultanate’s largest drilling service provider, and the company is set to add four new drilling rigs to its fleet in 2015, bringing the total to 20 rigs.

Downstream

Oman’s downstream sector is dominated by the government-owned refinery company, the Oman Oil Refineries and Petrochemicals Company (ORPIC), which currently operates two refineries, a polypropylene plant and an aromatics plant. Current refinery capacity from these facilities stands at 220,000 bpd, and the plants are joined by a 266-km pipeline that supplies feedstock from Mina Al Fahal in Muscat to the polypropylene and aromatics plants at Sohar.

Plans are under way to significantly expand the sultanate’s downstream sector with major new investments at Sohar and Duqm. Three of these projects are being undertaken by ORPIC. The first is a $2.1bn expansion plan at the Sohar refinery known as the Sohar Refinery Improvement Project, which is expected to increase capacity at the plant by 70%, while also allowing for a reduction in naphtha imports and enabling bitumen to be produced locally for the first time. A tender for the project was awarded in November 2013 to a joint venture of Petrofac and Daelim, and the project is due for completion by the end of 2016.

The second project is a 280-km pipeline to provide an additional link between the Sohar and Muscat refineries, as well as Muscat International Airport. The $320m Muscat Sohar Products Pipeline project broke first ground in May 2015, and is set to be completed in three stages, with first commissioning due in 2017. It will link to a new $80m fuel terminal at Jifnain that will expand storage capacity in Oman by 171,000 cu metres.

ORPIC’s largest downstream project is the Liwa Plastics Industrial Complex (LPIC), which will be located in the Sohar industrial area. The $4bn project will comprise a natural gas liquids (NGL) extraction plant in Fahud and a series of plastics plants (see Industry chapter).

In the centre of the country, at Duqm, plans are under way to build the sultanate’s third refinery, which will be owned by a joint venture between OOC and the UAE-based International Petroleum Investment Company to be called the Duqm Refinery and Petrochemical Industries Company. The $6bn refinery, which will be located within Duqm’s special economic zone, will have a capacity of 230,000 bpd. Foster Wheeler was awarded the front-end engineering design contract for the refinery in early 2014, with UK-based Technip E&C appointed as project management consultants. The tender for preparation works on the 800-900-ha site was awarded in May 2015 to Galfar Engineering, with the site expected to be ready for construction to begin in 2016.

The refinery will include hydrocracking, hydro-treating and delayed coking units, as well as sulphur recovery, hydrogen generation and merox treating units, while primary products will be diesel, jet fuel, naphtha and LPG. Commissioning of the refinery is expected by 2018, with full capacity before the end of 2019, while the combined additional capacity of the Sohar and Duqm works is set to more than double Oman’s current refinery capacity, increasing production by 312,000 bpd.

Looking further afield, the government has announced that it is also in talks to invest $7bn in a downstream project to be located in Indonesia’s Riau Province. The project, which will include a refinery, petrochemicals plant and storage facility, is expected to break ground in 2016, with the oil products to be purchased by Indonesia’s state-owned Pertamina. In addition to downstream oil developments, there are also significant plans to invest in new downstream capacity in the gas sector at Salalah and Fahud (see analysis).

Prices

Since 2007 Omani crude oil traded on the open market has been sold through the Dubai Mercantile Exchange (DME) in a two-month forward-dated futures contract. The DME contract has increasingly come to act as a third global benchmark for oil, after Brent and West Texas Intermediate, and has become particularly important to the Middle East and Asian markets, given that around 40% of oil traded on the exchange goes to China. This exchange-traded oil is in addition to term contracts purchased by China which the MOG also places through the DME. In statements made in 2014 by Salim Al Aufi, undersecretary at the MOG, the government said it was keen for more trades to be executed through the futures contract. Referring to additional Chinese demand covered by the DME futures contracts, Al Aufi told the press, “We are quite comfortable with that because we need DME to flourish and we need more contracts to be executed through the exchange.”

Futures

Indeed, a potential threat to DME appeared on the horizon in late 2014, following the announcement that the Shanghai Futures Exchange would be developing its own crude oil futures contract. The outgoing head of the DME, Christopher Fix, warned in April 2015 that the Middle East risks becoming “stuck” between Brent and the new Chinese benchmark, as China looks to gain more control over the pricing of the increasingly large supplies of crude it buys through open market operations. Fix was reported as saying that Middle East producers could be left behind if they do not take steps to significantly boost the liquidity of the regional benchmark crude contract. In an effort to increase monthly trade volumes on the DME, as well as reduce price volatility, Oman Tank Terminal Company announced in August 2015 that it had leased 2.1m barrels of crude storage facility to three customers – China Oil, Glencore and Oman Trading International – through a very large crude carrier owned by Oman Shipping Company.

Outlook

The Omani energy sector has been highly successful over the past 15 years in attracting international investment and boosting production through the use of new technology. While the current price climate for oil represents a challenge for future investment, a number of significant capital investments were completed during the bumper years before mid-2014, which should give the upstream sector some latitude for maintaining production at current prices. Meanwhile, PDO seems committed to pressing ahead with ambitious and innovative projects such as solar EOR development, despite the downturn in prices.

Looking downstream, the combination of major planned investments in new refinery facilities, gas processing and petrochemical plants will serve to keep more of the hydrocarbons value stream within Oman. It is possible that a reduction in oil revenues may delay some projects, but with the Khazzan tight gas play not anticipated to come on-line until 2017 there is room for flexibility in these capital investments. Finally, the implementation of the government’s ICV scheme is also providing a clear policy framework to ensure growth.