Oman short of Gas?

Everyone thinks so, but why then has Oman given away its gas?

It is common knowledge in the Sultanate and the region that Oman is ‘short of gas’. Given that Oman has always had relatively limited gas resources, this isn’t too surprising. Right now, for example, Oman is running its LNG refineries well under capacity, despite good LNG spot markets, because they do not have enough gas.

The actions from the Ministry of Oil and Gas to stimulate gas supply recently [see the article below] are designed to try to get more of the marginal gas out of ground without risking the Government’s money to do so, because these gas fields are neither easy nor cheap to produce. I think it’s a great idea to get External Oil Companies, like BG and BP, to risk their money to produce these gas fields and allow the Government to avoid any risk. However, to do that, they have to allow the companies to make a profit if it works, and it’s likely the price will have to be more than $2/mscf.

But, what has made matters worse for Oman are the deals done over the past few years by the Ministries of Commerce and Economy to create the ‘gas based industries’ in Salalah and Sohar. To get these projects off the ground they have commited to sell gas at incredibly cheap prices, often not even allowing for inflation. To put it into context, a gas price of $0.85/Mscf – the value apparently a lot of the Sohar industries got - is equivalent to an oil price of just $5/barrel.

$5 a barrel. No wonder it makes sense to ship Aluminum Oxide in from India, turn it into Aluminum, and ship it out. And often that price has been fixed. No link to oil price. Not even inflation. Wow. What a deal.

This is gas that the country could have sold elsewhere [as LNG] for much higher returns, or could have used in a few years time to produce electricity or desalinate water. Or used right now to make cement. And it is also going to cost Oman a lot more than $0.85 per Mscf to produce gas from these marginal fields.

OK, the Oman economy needs industry to make jobs for Omanis, and to sell things other than just hydrocarbons. The Sohar developments are stimulating a whole region of the country. So maybe it is worthwhile to spend some of the large amounts of money Oman is making on the LNG by subsidising the Sohar industries with below cost gas. Not that that argument is made explicit to the people.

Still, it would be interesting to know who the shareholders are that are benefiting from this give-away price of gas, wouldn’t it? More on that to come folks…
Next post: A primer on Omani Corruption.

The Undercover Dragon


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Report: WoodMackenzie Middle East Report Upstream Insights – October 2007

Oman considers its gas options.
The Omani Ministry of Oil and Gas is considering how to best promote gas exploration and development in its onshore acreage, and help address its looming gas deficit. It is considering plans to offer at least five more blocks for exploration and appraisal by international operators, following the success of similar awards to BG and BP in 2006. If the plans are implemented, successful bidders will have the right to explore and develop some of Oman’s most gas-prospective acreage, under Exploration and Production Sharing Contracts.

Until recently, PDO was wholly responsible for exploring, producing and supplying gas on behalf of the government. In 2006, major gas fields discovered by PDO – Abu Butabul and Khazzan-Makarem - were awarded to BG and BP. This new licensing initiative is still in the planning stage but it is considered that new partners will re-vitalise gas exploration and development, and support PDO’s efforts to address the country’s gas shortfall. It would also allow PDO to focus on implementing its many conventional and enhanced oil recovery projects, to stem the decline in Oman’s oil production. Although the block areas have yet to be defined, the opportunity to explore and develop gas resources in some of Oman’s more prospective areas would attract the attention of many international companies.

Most of the areas on offer have been extensively studied by PDO, which has been successfully exploiting gas resources in Oman since the late 1970s. PDO’s efforts have intensified since 2001, when it embarked on a five year gas exploration programme. A significant volume of reserves were added, following a strategy which focused on the most promising targets and by implication, current and future prospects are likely to be more subtle and potentially lower reservoir quality.

Given the technical challenges, the fiscal terms and pricing policy on offer will need to offer the prospect of commercial projects. This will only be achieved if producers can sell the gas to the government at a price considerably above historical levels. There is no gas price benchmark in Oman, although prices have been underpinned by gas sales agreements signed with major industrial projects in the early 2000s. Gas was sold on long term contracts for approximately US$0.85/mcf.

Oman urgently requires new sources of gas, but this new initiative is unlikely to deliver significant new production before 2013. Incremental supplies from Qatar and possible imports from Iran are also unlikely before 2012.

This latest initiative may be too little too late, and in the short-term, the Sultanate will remain dependent on PDO, BP and BG to deliver gas to maintain economic growth.
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