I find it a very nice article too. The last quote below sums it up.
Mr Suresh K Goswami CEO of Sohar Steel said that "Steel production is an energy intensive industry, so the availability of relatively cheap gas in Oman contributes to the location's attractiveness."
I sometimes wish I was able to understand the Oman gas market. With gas prices contracted to the big 'export/diversification/regional development' industry seeming to be below the marginal cost of gas supply (both imported and domestic) or the unrealised profit of LNG export equivalent; while 'true' domestic gas consumption is used increasingly to produce heavily subsidised electricity and water. Its difficult to see the detail, but there must be effective cross-subsidisation, certainly of the LNG, but perhaps by taking into account the domestic condensate production (about 15% of Oman's daily 'oil' production comes from Government Gas fields)?
The difficulty with the gas market is that it is both a short and long term industry where upstream (supply) and downstream (customers) are interdependent, and much more so than the oil business which is treated as a commodity. Gas is effectively sold forward in Gas supply agreements [GSAs] that last up to 20 or 25 years. Thus, you could say that gas in the ground has been sold (and its never easy to know accurately what is in the ground, or how much will be produced).
Installation of the capacity to deliver gas often requires significant over-capacity, so as to maintain essential supply if case of the unexpected and to meet peak, not average, demand. That means there is always the temptation to produce tomorrow's gas today, and let tomorrow look after itself. Either find more gas, or increase imports, and meanwhile cut back the LNG supply to contractual minimum.
So the underlying costs/benefits of gas supply all depend on how you want account for it. Do you take into account the whole value chain, from all gas supply compared to profits from all sales, tax, % interests owned by the State anyhow, income to locals + muliplier effect, etc? Or do you treat new projects as truly incremental, stand alone decisions based on marginal costs?
And over what time period? 1 yr? 5 yr? or 30 years? Your answer will be different, depending on all these key assumptions. And the uncertainty becomes huge. What's the potential impact of Iranian imports? Or a big increase in Oman gas discoveries and production from existing and big marginal fields at a low enough price? Do we factor in coal for replacing domestic gas demand increases for electricity? You would hardly want to commit to a long term high investment high cost take or pay supply deal with say, the Iranians, only to find that you had more than enough gas of your own all along. Doh!
So for the long term economics of the Oman gas market, timing is everything. The strategic decisions that rapidly loom ahead for the Oman Gas market and the Government, are:
- Coal. Yes or no? This will be a long term commitment, once done, very hard to undo. Yet the decision has to be made 5-8 years ahead of when the power capacity will be required, a sizable gamble. And associated with coal is the choice of gasification (clean, expensive) vs traditional (cheap and dirty) design. But it will save you gas.
- The quantity and terms of new long term gas import contracts from Qatar, Iran, or perhaps even Saudi. Plus the associated political and strategic ramifications of these investments and the pipeline grid/supply dependency that results.
- Making medium term contracts for increased domestic gas production (and investment), as just announced for the Oxy/UAE consortium.
- What to do wrt Kyoto, CO2 and greenhouse gas emissions?
- Do we produce gas at the expense of oil production?
The short term brings questions like:
- How much should be allocated to use the 20% spare LNG export capacity?
- How much gas to forward sell and at what price, to big industries?
- How much gas will be allocated to big existing customers, like PDO and cement companies?
- How to increase the price of electricity without causing domestic customer riots or limiting new SME business growth, and adhering to privatisation/liberalisation?
All these decisions are inter-related, and cut across Ministries. This is not an easy problem. But I'm sure the Majlis and the Energy council are right on top of it, making sure these decisions are made well, with eyes open to the risks, implications and economics. A pity that that assessment has to based on trust, as all discussions are (perhaps as expected), done in camera. It will be interesting to see what path unfurls over the coming years as Oman tries to solve these strategic issues.
Steel Guru
Oman to invest USD 5 billion in steel
Oman Economic Review has hailed the announcement that Oman is set to invest USD 5 billion in building up its steel industry by saying that it looks a wise move. The focus on a growing sector in which Oman has some particular strategic advantages could prove an important part of the Sultanate's diversification program.
Earlier on September 29th 2008, the authorities outlined the investment package, part of broader plan to expand the manufacturing sector that it will eventually account for 15% of GDP by 2020. The export orientation of the steel production program fits well with the broader industrial program. The government has classified most steel products including tubes and bars as medium value, the second of its four export categories. This indicates that the sector is likely to grow rapidly and has been targeted for potential support initiatives.
...
Furthermore, Oman has several competitive advantages on which it aims to capitalize. Not least amongst these are a very favorable business climate and a growing pool of skilled labor. Also important is the abundance of energy resources.
Mr Suresh K Goswami CEO of Sohar Steel said that "Steel production is an energy intensive industry, so the availability of relatively cheap gas in Oman contributes to the location's attractiveness."
Kudos to UD, a very thought provoking analysis of Oman Gas market for the holidays.
ReplyDeleteHope the same level of strategic thinking is being done at the higher echelons.
As you correctly observed there is no clear picture about overall gas availability and commitment of the same. Apart from this initial assessment of quantity and quality is proved wrong when the production starts.
Being a comparatively small country, I don't think it will make a material impact if price of electricity and water is increased to consumers, who already are paying double amount due to surcharge by Oman waste water.
These companies are paying substantially higher salary than most other companies in Oman. Although all work is being contracted out these companies have bloated work force and labor cost is what weighs them down.
Government is doing the right think by giving cheap gas, electricity and water to the industry so that unemployment is reduced.
However there is no saving mentality and unsustainable life style amongst the nationals, who are neck deep in bank loans whether it is for high end cars or marriage, apart from large family size which they have to support.
I am not aware of Sohar Steel. There's a steel rolling mill in Sohar called Sharq Sohar, maybe that's the one?
ReplyDeleteUD, I know very little about gas but recently someone in the know told me the following: Oman is one of the few countries in the world that actually exports its best quality natural gas. As an example he told me that the gas that Qatar exports through the Dolphin project is very lean gas which can't be used for high demand projects such as steel plants. Lean gas is used mainly for electrical plants.
Is this true?
Anon,
ReplyDeletethanks for the kudos. The problem I have is the projects are all capital intensive - I'm not sure you need many people to run an aluminium smelter. So, cost/job seems really high.
And pick a nickname!
Muscati
Hmmmm. I asked around.
One would usually strip out as much liquid [condensate, and Natural gas liquids] as possible (as its so valuable), and the remaining gas thermal value does vary: with the amount of C2, C3 and C4 gases [ethane, propane etc] bringing up the heating value, and the amount of non-hydrocarbon gases like nitrogen reducing it. Most natural gas is mainly methane.
Oman exports the gas it has via LNG, and provides the feed gas to a certain specification after removing condensate and NGLs. The idea that Oman exports unusually high quality gas sounds like typical whining rumour where it's all about how Oman is somehow getting a bad deal. I know the LNG plant gets more liquids out of the gas as its cooled down for LNG, but then they paid for the gas (with its liquids entrained) to start with, so it seems fair enough to me.
The gas from Qatar would be super dry just to enable it to be piped such a long distance, and to make sure they squeezed every liquid drop out. I'd be surprised if you couldn't use it for steel, but it might be too lean for polypropylene manufacture.
As for BTU requirements for various uses, I don't know for sure, except indeed you can make electricity with about anything. But it makes some sense: steel probably needs high feed gas heating values to reach the temperatures they need, and pure methane doesn't burn hot enough. Whereas for electricity its being used as fuel to spin a gas turbine, and heating value is less critical (as long as turbine design and supply match).
Sohar Steel is the backward integretion project of Sharq Sohar Steel Rolling Mill with an annual capacity of 250,000MT steel Billet.
ReplyDelete