Tuesday, April 8, 2008

More on Oman’s Gas and Oil

I can tell this is going to be a long post… And sorry about the delay in posting, been working hard on some legal and contracts stuff. But Anons comment on the previous post raises some issues. Also, Sue Hutton from News Briefs Oman sent an interesting link to a recent MEED article on Oman’s oil and gas. Thanks Sue! I’ve included some interesting quotes from MEED below. The link to the full article is Oman faces up to depleting reserves.

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.


  1. reminder: could I ask anonymous commenters to use a nickname (still posts are anonymous). It makes it easier and more fun to follow the dialog.


  2. Your admiration for a certain Anglo-Dutch company bears the marks of blind faith. So I suppose "shell shocked" would be a good pseudonym for this discussion thread. While we're on the record, I should also identify the Dolphin comments made a few days back as being mine.

    Once again, facts are presented in a manner to establish a version of The Truth which exists only in retrospect. However, I have to admit you're not doing badly for an outsider to the trade. You won't replace Wood Mackenzie (and company) for sound and timely market intel. On the other hand, your service comes with no cost to the reader, and it's more amusing. Not so on geopolitics, but let's stick to today's story.

    MEED article: it's a good background piece. Nothing ground breaking, but good enough to pass over to a curious friend. I did find their total investment figure of $7 billion per annum to be interesting. It may indicate how expensive running PDO has become. A few years back it was already up to a massive $2 billion plus per annum. Presumably the $7 billion includes heavy capital outlays required for the Sohar petrochems. (Here's an amber nectar discussion for you: PDO's unit cost. Last year I was shocked to hear it was creeping towards $15/barrel. Let's hope $50+ price is here for good.) Anyway, don't trust the figures on gas reserves shown in the article. They seem to have pulled those out of various reports and press releases, with some basic arithmetic applied to obtain a sum.

    Who owns the gas: Yes, Oman does. Every molecule. When the gas discoveries were made in the 90s, Shell did demand a share. Fortunately for Oman, the existing concession agreements weren't favourable for Shell's demand. Legally, the state was the sole owner of the gas. It may be the greener fuel choice today, but gas was generally the ugly duckling up until 2 or 3 decades back. The industry didn't know what to do with it besides pump it back into oil reservoirs or fire up power stations. And that's what we did before Saih Rawl, Saih Nihayda and Barik were discovered. We pumped it from Yibal to Muscat and onwards to the Batinah coast. Power and Desalinisation. Shell probably conceded the stuff as a goodwill gesture. You know, make them look benevolent when they had no use for it anyway. But the game changed with all those TCFs discovered in central Oman. Within a few years, there was enough discovered to ship it liquified to Korea. So yes, they surely wanted to negotiate a piece of that upstream cake. For once we held ground, and offered them only downstream participation (LNG). They had no right to upstream. That belongs to Oman according to our time honoured contracts. Again, they attempted to swindle out the gas condensate, claiming it's liquid oil so should fall under the crude oil terms. To continue with the cake analogy, condensate would be the expensive icing. Good try Shell. Unsuccessful, they settled for the downstream share as well as an upstream service fee where PDO operates the fields as a contracted party. Sort of worked, until the government were informed that proven gas reserves were over estimated by something like 30%. By that stage, the projected gas feedstock had already been committed to 3 LNG trains and all sorts of power hungry petrochem projects in Sohar. You can imagine how much havoc that caused for our long term economic planning. Not only had PDO/Shell messed up on the mature oil reserves, but the newly born gas was a in a similar state of mess as its ageing liquid sibling. Trouble is gas doesn't trade on the spot. It needs to be locked into long term commitments for the economics to work. But sorry, Oman... we don't have as much as we earlier said. Imagine, all those cakes promised to all those customers, and now our store keeper tells us he messed up while counting the flour bags. Thank god we booked an option on Dolphin gas a while earlier. And Iran, we need to talk - you have gas and we want it.

    Tight gas and Shell's advice that it will be risky and expensive: There was a huge hoopla in PDO when Khazzan was found to contain gas. After all, it is a massive structure. Recovery to surface was another issue - they couldn't make it happen. The government finally wised up and decided to rip out all the tight gas plays out of the gas exploration programme managed by PDO (yet fully funded and owned by Oman). Shell couldn't make them happen after years of dormancy, so let's hope the others succeed. Certainly if Shell had a choice in this matter, those fields would still be managed within the framework of PDO, not outside it.

    Concession relinquishment: Yes, it happens once every ten years or so. Through the decades, PDO's concession area has shrunk down to around 50% of the country's area. Fifteen years back, for example, they had more than 70%. Usually relinquished areas are those on the fringes where the exploration guys have the least hope of finding something. The 2004 concession renewal agreements went a lot further. To name a few: Mukhaizna was fenced out, tight gas fields in the middle of the concession area were shaded out, and PDO/Shell were made to swallow their pride and partially give up day-to-day management of certain clusters of semi-neglected small fields. This is what I previously referred to as the disembowelment of Block 6. And it's an ongoing process.

    Shell cares for Oman, Shell's tax returns vs others, $600 million handshake loan: The first statement is subjective. That is to say, it's simply an opinion. Companies are not charities, and they generally have no room in their lexicon for concepts like "caring". They do in the rare circumstances when mutual interests exist. More often they don't. What's good for the sovereign is often harmful to the corporate, and vice versa. Next, the tax return stuff. I suppose you mean that PDO returns a larger revenue percentage to the government than do the other production sharing contracts. Well, there's a simple reason: The government owns 60% of PDO. After it takes away all the royalties and tax as the "lessor" of the concession, it's still has a 60% share of the profits as the majority shareholder in the LLC. Total government take (tax+share of profit) probably works out to more than 90% of revenue, but that still leaves Shell, Total, and Partex with an extremely sweet deal. Here's another amber nectar conversation for you: ask how the private shareholders are remunerated under the PDO concession agreements. I'm not sure how much changed after the 2004 renewal, but prior to that it was dazzlingly complex. It all boiled down to a relatively risk free venture for the foreign partners. Yet they were handsomely rewarded. I'll leave it as an exercise for you to dig out the details and numbers. As for $600 million on a handshake, if indeed it happened I'd be interested how Shell explained a hit of $600 million on their earnings reports to the various regulatory bodies. Remember, during 1998 such an amount probably constituted 25% of their yearly earnings.

    But definitely keep it up.. you're getting better.

    shell shocked

  3. Hey Shell Shocked,
    Glad for the in depth coments, and for the debate. (note, I would never claim to be a source of any reliable market intelligence! Maybe I need to add that to my disclaimer tho'…)

    But having talked to my oil sources on both sides of the fence, they say you're mistaken (or mislead/misleading?) about a few things…

    Firstly tho', My accused admiration for 'a certain Anglo-Dutch company' isn't blind faith. In fact, in many ways, Shell clearly has had huge failings as a company, especially under the recent Phil Watts era, but even now in Nigeria, Sakhalin, etc etc. No, I'm not defending the huge mega-IOC that is Shell, it's just that I meet a lot of Expats here, working for the Government, Army, Shell, Oxy, Trowers, BP, the power companies, Schlumberger, Haliburton, etc etc. And the vast majority are working with incredible dedication for the good of Oman, and because of their professional pride (and certainly not for their companies profits back in the West). And, I have to say, many of them are not too complementary about the goings on in the corridors of power in the Government (as are many of my connected Omani sources).

    OK, perhaps there is a bias as some of my friends who do work for Shell are very nice and straight-up people. But, there is firm evidence that the relationship between Oman and Shell is a very special one in the general scheme of such relationships between sovereign and mega-company, and I think you're incorrect (and a classic sort term-ist) if you dismiss that as a good thing. Facts: (1) The Government take on Shell's return is huge, and bigger than on any other oil or gas concession in Oman and just about anywhere on the planet. (2) The $600 mln loan happened. I have excellent sources on both sides, Shell and Government, who were there at the time. How it happened, I don't know, perhaps they borrowed it themselves, or did their own wink, wink deal with some friendly bankers. Shell's market cap and credit rating (still AAA back then) would have been higher than Oman’s GDP and Sovereign bond ratings, that’s for real. (3) The SAS and Royal Airforce came here in the early 70s to help HM The Sultan out. You think that was out of the kindness of their hearts? They helped him create what is the modern state of Oman, at a time when he was facing fierce and internecine rebellion in Nizwa and the Jebels, in a so-called country fragmented by centuries of petty tribalism and feudalism, plus defending against the invasion from the communists in Yemen. Geopolitics? Get real.

    Now, the technical remarks you made, and excuse any errors as the amber nectar can get in the way of my memory (I did make some notes tho):

    PDO's unit cost $15.
    Apparently it depends how you define 'unit cost'. My buddies tell me the operating cost at PDO per barrel is around $4, not $15. At 15 you're including the upfront investments currently being made in the big 'EOR' projects, and even then at likely forward oil prices that seems a pretty great return on investment for the Government. [Oh, don't worry, I don't trust the figures on gas reserves shown in the article. But its hard to get 'public domain' data that's anywhere near accurate, and the MEED's close enough for the points I was making.]

    Shell did demand a share / wanted to negotiate a piece of that upstream cake
    Hey, who can blame them! However I think your use of the words demand, conceded, swindle, messed up, etc is indicative of blind mistrust,tho'. ;-) . I'm pretty sure that at the time of the big gas discoveries (made by Shell even though they had no equity) there was no way Oman could have funded, technically tendered and managed, nor found markets for, a 2 train LNG project without their help. And no-one is going to help you for free.

    Proven gas reserves over estimated by something like 30% / By that stage, the projected gas feedstock had already been committed to 3 LNG trains and all sorts of power hungry petrochem projects in Sohar.

    Now, the change in the expected gas reserves was only around half that (less than 15%), an equivalent amount was subsequently discovered by PDO after the write down, and they say the change in expectation reserves was well within the range of reserves presented in the books (and was an estimate after all). [Plus, as I'm sure you know, proven reserves is a specific SEC definition that does not form a basis for how to run an oil and gas business (and is best suited to small simple on-shore oil fields in Texas)].

    now our store keeper tells us he messed up while counting the flour bags.
    I think your rather simplistic analogy is completely misleading of the true situation, but may be an accurate reflection of how the non-technical arms of the Government viewed the very complex topic of gas reserves. My sources say that whenever a range of volumes was presented by the technical (Shell or Omani) experts, it was always the highest number that was used by the commercial government arms (lower estimates or qualifications being discarded), and sometimes senior Government officials were even confusing in-place volumes with recoverable volumes (very different), or even mistaking ultimate recovery volumes with remaining reserves (the former includes gas already produced and could even include so-called fuel gas!). Unfortunately, a common theme in my dealings with the Government is whenever something goes wrong, it's by definition someone else's fault. This seems a classic example.

    Shell Shocked, I think you’re being fed excuses created by the Government officials who really screwed up. Just check the dates when the various gas supply agreements were signed vs the reserves reports to the MOG. And check the prices of those gas supply agreements compared to marginal cost of importation/development of tight gas!

    And Iran, we need to talk - you have gas and we want it.
    Oh yes, there I fully agree with you. Cooperative development of the Hormuz fields should have started already, and a pipe across the Gulf shouldn't be too hard. Who cares if it annoys the Americans. Why haven’t the Government made this happen already? Why give away long term gas before you've fixed a price with the Iranians?

    Shell couldn't make them happen after years of dormancy, so let's hope the others succeed.

    Indeed, and that's why I agree getting the others in was a good decision. The best thing for Oman is that they succeed. But from what I hear, I’m glad the Government are not the ones paying for the trying.

    What's good for the sovereign is often harmful to the corporate, and vice versa.

    That's been one of the big problems historically with PDO. It has been treated as a Government department; increasingly micromanaged by the Government, and by the same body of the Government that has been responsible for being both shareholder and sovereign regulator, a significant conflict of interest.

    Tax. I already did my digging as you suggested, see my earlier post, but what counts at the end is total Government take of the revenue stream. I'd lay dollars to donuts that sweet as the private shareholders deal in PDO might be at current oil prices, it is no-where near as sweet as the other PSCs like Daleel, Oxy, Petrogas, PTTEP, etc. You get me the PSCs % Gov takes, and I'll compare with the block 6 terms. Deal?

    Don’t believe everything you’re fed by your friends in the same government departments that are, as it happens, officially accountable for the cock-ups. Everyone loves a whipping boy. Especially Government Officials.


  4. Shell Shocked, Dragon,

    you both are brilliant. I am loving this discussion. keep it going?

    Dragon, great sources, you are like a secret agent. You suggested that SS is working for the government, but I've rarely encountered a government employee that sharp. SS is too well spoken to be working for the MOG, but maybe he/she should be.

  5. You guys crack me up. Anon/Shell Shocked, whoever you are, what have you bin’ smokin man?

    I used to work in the PDO Gas Dept. We told the MOG about the revisions to Gas reserves years before any firm commitments had been made to a third train and def. before the Sohar stuff etc. The Government continued to sell spot cargoes of LNG to the Japanese, when it was made explicitly clear in our reports and presentations to them (and was known even to outsiders) that the gas just wasn't there. The Government outside the MOG pretended to be unaware of the fundamental difference between our daily production capacity (of which there was plenty) and gas deliverable volumes (which were already committed far into the future). It seemed to me the MOG were remiss in their duty, and just kept telling the other Ministries what they wanted to hear. Low-side estimates, technical risks or uncertainties were just dismissed and downright hidden.

    As for the Sohar deals Dragon, you wanna know why were they made? Follow the money man, follow the money. Who gained from those deals? Who are the local partners in the Methanol, Fertiliser, etc? Who are the sponsors of the foreign companies? Thats where your answer is. Its no accident that the gas was given away at 80 cents per MCF, fixed for ever and ever and without even a basic tie to oil price or even basic inflation. Shit, that’s so stupid, so Gas Deal 101. It can not be a simple mistake. It must have been deliberate.

    I could go on and on. Most Omanis or even PDO staff don’t have a clue. On Mukhaisna, Shell did Oman (and HE the Minister) a big favour. The Government had no legal right to carve out Mukhaisna and give it to Oxy and the UAE crowd, even under those precious new concession agreements of yours, but that’s what the MOG had advised his Majesty. So he went ahead and did a handshake deal with the UAE. Ooops. Shell agreed to retrospectively honour HM's agreement. They didn’t have to do that legally. Its not what Exxon would have done!

    Until Shell developed the oil in the 70s Omanis were only known as houseboys in the UAE, street sweepers in Kuwait, or infamous as Colonial ex-slavers making money by exploiting Africa. Its amazing how quickly we forget after a few years of easy money huh.


  6. "Until Shell developed the oil in the 70s Omanis were only known as houseboys in the UAE, street sweepers in Kuwait, or infamous as Colonial ex-slavers making money by exploiting Africa. Its amazing how quickly we forget after a few years of easy money huh."

    I don't know from which shitty place you fucking decsended, but it's fucking obvious that you're not Omani and you weren't here before what you called 'easy money'.

    When are you leaving my country shit parasite?

    Shell, Partex?? Total? what the hell do those parasites do in my country?

  7. Suburban,
    I'm sure Shell Shocked is pleased to be part of the debate. And I think you're right about where he works, unlikely to be Ministry - Oxy or MB perchance?

    GasMan, interesting info, especially on the Mukhaisna deal. But I think you're more than a bit stereotypical on that last part and not really helping. [Although I do notice the role Oman played in the slave trade (a couple of centuries ago) is seldom, well, never, discussed in Oman.]

    Anon (Mr Angry), I think you do a huge dis-service to Omanis with the level of your comment. Either channel that anger into some coherent arguments or go somewhere else. You sound like a total idiot I'm afraid.

  8. You too shithead, when're you leaving my country? parasite shit fuck dumb people

  9. Anon, my angry friend, it sounds like all you need to do is get out of this sin-city, head as far up a wadi as you can, and get re-used to living on a diet of goats and dates and riding donkeys. That seems to be what you're looking for.

    And I'm leaving it soon. But fortunately the people who run this country know that, in order to actually have a country worth living in, they need people from overseas with significantly more elevated levels of education, skills, professionalism, competence, good taste and politeness than people like you (I unfortunately must presume you're Omani).

    I'd even go out on a limb and say you're male, not a university graduate, and unmarried (and therefore not getting any sex). You'll be thrilled to know that not only am I a (rather tall and good looking) foreigner and am paid a nice tax free sum by your Government to work here, I also get to have loads of incredibly hot sex with my very hot wife. A lot. Doesn't that just float your boat?

  10. "But fortunately the people who run this country know that, in order to actually have a country worth living in, they need people from overseas"

    The same people whom you blame for what this country is heading to, well put. The rest is too superficial.


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