Its now official - Oman importing gas from Qatar

It was finally announced yesterday by HE Dr Mohammed Bin Hamad Al Rumhy, Minister for Oil and Gas, that Oman would start gas imports from the Dolphin project in June, at a rate of 200 million standard cubic feet a day (around 5.6 million m3 per day). Tribune interview

The minister told Oman Tribune on the sidelines of a PDO function on Sunday that gas supplies to the Sultanate from Qatar under the Dolphin project could begin as early as May or June.

Gas through the pipeline will flow at the rate of 200 million standard cubic feet a day.

“We are working on a compressor station in Al Buraimi and as soon as that is finished, gas will flow and we hope it will be around May-June,” he said.

I tipped you off to this in February BTW Muscat Confidential archive.

Oman produces around 60 million m3 per day from its own fields, so this represents about 9% of gas supply volumes. Now, why is Oman importing gas from Qatar?

France's Total and Occidental Petroleum of the United States each hold a 24.5 percent stake in Dolphin, with the remaining 51 percent held by the Abu Dhabi-owned Mubadala Development Co.

(see the full article in the brilliant bastion of incisive journalism that is The Times of Oman Dolphin Gas article

So, as promised, the reason for the import of gas into a country that seemed to have lots of its own.

The key piece of info is to be found in the ownership of the Dophin project, which is now importing into the UAE around 3.5 billion cubic feet (99 million cubic metres) of gas per day from its concessions in the giant Qatar gas field. A couple of years ago, the Oman Government transferred the operations for developing the giant Mukhasina oil field away from Petroleum Development Oman to Occidental and Mubadala. The oil field is apparently a very heavy oil, and getting the most out of it means injecting steam to heat the oil. Now to generate that steam, you need to burn gas. Lots of gas. This is reason why the MOG awarded the field to Oxy – not because PDO couldn't do the job, but because Oxy promised that in return for getting the oil field they would provide the gas from their Dolphin project. I still haven't been able to find out the effective price Oman is paying for that imported gas.

As Oman is already facing more gas demand in future than they have in current reserves, this was a deal that Oman could not resist. It also helped justify the sale of gas to the Sohar and Salalah industries at give away prices (equivalent to just $5 per barrel oil price), which is why its attractive to refine Aluminum in Oman even though Oman doesn’t have any domestic bauxite aluminum ore).

The deal worked well in other ways. The cost of building the pipeline between UAE and Oman was effectively paid by supplying UAE with gas from Oman for a couple of years (around 125 million ft3/d) to help start-up the UAE gas-fired power stations before the Dolphin gas would arrive. Oman knew that the pipe flow could then be reversed later to enable Oman to import gas from Qatar indirectly.

My sources tell me the Occidental Mukhasina project is not exactly going to plan though. They are behind schedule, not producing as much oil as they promised, costs are rising, and even worse, around 27 of their new wells were totally damaged by injecting so much steam that they exceeded the maximum design temperature of the steel parts inside the wells, which then collapsed. My sources said this was done on the instructions of Oxy senior management in an attempt to try and meet their production targets, even though their engineers warned them of the risk.

So, thats the deal. Oman effectively gave a piece of the Mukhaisna oil field to Occidental and the Abu Ghabi Government, in order to have spare gas to sell at a huge discount to the Gas based industries. It would be interesting for the Majlis Al Shura committee to investigate the economics of all this, tying together the gas impriots, the Mukhasina deal, and the gas contracts to Sohar.

I'm sure its a great deal for Oman (for why else would it be done?), but it would sure be nice for the Government to be able to demonstrate that to an independent committee of the peoples representatives, wouldn't it?

How business works - part 2

Tip No. 2 Exploit your advantage

The tax laws in Oman are heavily biased toward local companies. A pure foreign company has to pay 32% company tax, whereas a local affiliate, or a fully local company, only pays 12%. This is a serious difference. The catch however, is that only Omanis can register a local company or affiliate.

So, all foreign affiliates [or expat workers] here have to have a person called ‘a sponsor’. Some Omani – actually pretty much any omani adult – who’s willing to act as your local sponsor. And you get an instant tax discount of ~66%.

Naturally, all foreign companies take advantage of this. And then question is: who do they want as a sponsor? Obviously, someone who can add value to the 5 – 10% they’ll have kick back to them for the privilege. Maybe even someone who can supply some of the things you’ll need easily, like Indian workers, a bank loan for working capital, premises, legal support, and business contacts.

This was and still is a key loophole the merchant families exploit to extend their reach into businesses across the board in Oman. It was also a perfect way to employ the rapidly accumulating numbers of sons, cousins, sons-in-law, and eventually their children too, getting them involved in business, without risking any capital and getting them nice paying jobs too.

Even better of course, if the sponsor [or their Dad, or Uncle say] are ‘connected’ to the sources of all the major cash in Oman that a foreign company wants to be a part of, ie the Government, especially a department with lots of projects going or lots of things they need to buy.

There is obviously nothing whatsoever illegal about this. Somebody has to be the sponsor, after all, it’s the law. And if the tender process is all above board, no problem.

Ministers and other senior officials are not allowed to be on the board of public companies, or companies that are tendering for Government contracts. But there doesn’t seem to be any law whatsoever against people very close to senior Government members being a sponsor to a private company.

But I’m also not sure this law has been extended to tenders associated with private companies, even where a significant participant is Oman Oil Company, a wholly Government owned investment vehicle in the upstream and downstream oil and gas business and acknowledged incubator of big projects, like Sohar Aluminum, but not actually a formal part of the Government itself.

None of this is strictly a problem either. The problem is that there is no public scrutiny of these dealings. To find the names of company sponsors, you have to physically go the register of companies and look. And it is trivial to have a chain of such companies interlinked, like YYY Holdings, SSS Trading, etc etc, and figuring out who the actual owners and sponsors are is not easy. They might even be a sub-contractor, or a sub-sub contractor to the actual winning company. Very very difficult to track, even for the State Audit Office [who do seem very very honest, by the way].

Plus, no newspaper in Oman is going to point out that the son of Minister X’s brother is sponsor of a company that just won an Oman Oil contract for $XXX. Or not that I’ve ever seen. And as they would not be able to prove anything illegal, even reporting it would itself be potentially illegal [see earlier post].

What I do know is that at the Government departments I deal with, the first question of the list of big foreign companies bidding for a tender is not how good they are, but ‘Who’s their sponsor?’…

Interesting isn’t it?

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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