Anon (an Omani from the MOG, MONE or MOF perhaps?) also commented on the frustration of the Government with Shell, and that the Mukhaisna deal was not about the Qatari gas, and that new players are coming in because the Government is irked at Shell. But there are some misconceptions in parts of Anon's comments, according to my sources, having discussed them over the amber nectar in the past few days.
Firstly – Gas.
Petroleum Development Oman [aka PDO] (in which Shell is a 34% shareholder, with the Government with 60%) has never had ownership of the gas fields. The Government owns 100% of the gas fields (those not associated with oil) and always has. The reason the Government got BP and BG in, to attempt to develop these 3 potentially large fields PDO discovered on the Government's behalf (BPs Khazzan and Makarem fields, BGs Abu Butabal), is because the fields are deep and highly risky, and need a lot of upfront capital investment. This is because, unlike the Governments 'star' gas fields of Saih Rawl, Barik, Saih Nihyda and Kauther, the gas in these other fields is held in very low permeability rock and is difficult to get out at reasonable cost. The test wells were all very disappointing. Trust me, if the gas was clearly commercial, the Government would not be paying foreign companies to develop them!
BP's concession, won in early 2007, covers the long-term development of tight gas reserves from the central Khazzan and Makarem fields. With the two reservoirs estimated to contain 20 trillion cubic feet (tcf) of gas – more than 55 per cent of the sultanate's total proven gas reserves of 35 tcf – the project is an integral part of Oman's plan to ramp up its gas production.
Its important to realize that the 20 TCF referred to above in the MEED article for BPs Khazzan and Makarem is not a part of the 35 TCF figure for Omans gas reserves. The gas in BP and BGs fields is there in large volumes, and that’s where the 20 TCF is (+ about 9 TCF for Abu Butabal I’m informed) – in the ground. The 35 TCF reserves figure quoted by MEED is gas that is already shown can be produced, and there is even more in the ground than that.
I think it was a great initiative for the Government to get BP and BG into the country. Rumour has it BP committed more than $600 million in spending on wells and new gas processing plants, plus a big (maybe $100 million) signature bonus, all before the field is even declared commercial. This means the Government gets someone else to take all the risks up front, trying to develop fields that were far from obviously commercial. The decision has little to do with being irked at Shell, but everything to do with Shell’s advice to the Government that the development was going to be risky and expensive (and the fact money at risk would have been 100% Government money).
Secondly - Oil
In addition, the Government wisely wants to diversify the upstream with more players. It stimulates employment, gets new competition in the upstream, and helps accelerate activity (and thus hopefully faster oil and gas production). And at current oil prices over the past few years, there were a lot of companies willing to pay upfront to get into the game.
Instrumental to the changing fortunes of Oman's oil production was the decision in 2005 to split off several new concessions from acreage controlled by Petroleum Development Oman (PDO). While PDO, in which the UK/Dutch Shell Group is the main foreign shareholder, still produces more than 80 per cent of the sultanate's oil and nearly all its gas and condensate, the move is paying off.
Again, this removal of acreage from PDO is totally normal. The agreement between Shell and the Government in 2004 agreed that parts of the block 6 concession would be relinquished at regular intervals, as is common practice in oil concessions all over the world. What made the difference in how interested new companies were is the oil price. But I've been told that already Sinopec have asked to get out of their commitment to drill a deep well near Yemen, and Encana sold out of their eastern blocks after a few dry holes. OilEx are right now trying to develop a small heavy oil field in South Oman (PDO discovered it ages ago and concluded was not worth it at the time). Current prices make it much more attractive now. This would not have a big impact on Oman, but its a good sign and every bit of extra oil helps.
More than a dozen foreign oil companies are exploring and developing the sultanate's hydrocarbons assets. This is most notable on the Mukhaizna field, where work is being carried out by the US' Occidental Petroleum. The multi-billion-dollar enhanced oil recovery (EOR) scheme will increase capacity from 8,000 b/d currently to 150,000 b/d by 2011. The increase will come through the use of thermal injection techniques, one of several advanced oil production technologies being used in the upstream sector.
However, speculation has increased in recent months that Mukhaizna is falling behind schedule. Worse still, there have been suggestions that it will, at best, have a peak output of 100,000 b/d, rather than the target of 150,000 b/d. However, Al-Jashmi rejects this. "Every project has its own challenges but there is no change in Mukhaizna's original targets," he says. "There has been a delay in some project milestones because of contracting difficulties, and the [initial production] rate was not as high as we wished. But Occidental plans to make up for it."
Well, let’s see. But my friends in Oxy say they are significantly behind, and the new steam boilers are only working at 50% of design capacity due to allegedly poor design. Plus there are those 27 wells that collapsed. And their costs are skyrocketing.
To summarise Anon, the grass is always greener on the other side. I think Oman is realising that all international companies (see earlier posts on SinoHydro and the waste water project) are out to make as much money as they can, and care little for the Omani people, Actually I think the most senior levels of Government think that Shell has been a bastion of support through thick and thin for Oman. Yes, Shell over promised on production and proved reserves in the late 90s. But relationships last longer than that. And the deal Shell gave Oman on the tax they pay on their oil share is a fantastic one for Oman (I posted on this earlier) and much better than they are getting from anyone else (like Daleel or Oxy).
Shell has a history of being there for Oman. For example, I’ve been told by several sources that in the dark days of 1998, when Oman was close to defaulting on its international loan obligations (as oil was less than $10/bbl and income was much lower than budgeted), Shell actually loaned Oman on a handshake $600 million dollars cash on the very day they asked for it, with nothing in writing. Shell also negotiated an excellent deal with the Koreans on behalf of the Government to buy the LPG from Sur, with LPG take or pay contract linked to the oil price. That LPG price is one of the interesting parts of the gas issue.
OK. I'm sure the above has bored the pants off you, if you've gotten this far. More on the LNG, gas supply and demand issues mentioned in MEED soon. It’s an interesting tale.