CEO of Sohar Steel reported as saying Oman's gas is relatively cheap and abundant. Really?

Nice article, widely read Steel Guru talks about the great plan to build a big steel industry in Oman.


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."

Its time for renewable energy in Oman!

Still the gradually ebbing waves of statements from officials are being publsihed, emphasising how great it is to be an expat in Oman. Which for expats like me, and most semi-skilled NRIs etc, I fully agree with. But this issue's been well dealt with, and you know where I stand. Instead I'll mention renewable energy.

The international consultants to the Authority for Electricity Regulation have completed their report on renewables and their potential for Oman’s energy needs. It’s a pretty comprehensive report. A really short summary is copied below from the Oman Observer today. What they don’t say in the paper, of course, is what I think are the really interesting bits from the report on the costs and subsidies in the Oman Electricity market...

Highlights of the study commissioned by the Authority for Electricity
Regulation, Oman on the potential of renewable energy resources
Solar: The level of solar energy density in Oman is among the highest in the world. There is significant scope for developing solar energy resources throughout Oman and solar energy has the potential to provide sufficient electricity to meet all of Oman's domestic electricity requirements and provide some electricity for export. High solar energy density is available in all regions of Oman: areas of highest density are desert areas. Areas of lowest density are coastal areas in the southern part of Oman.

Wind: The study identifies significant wind energy potential in coastal areas in the southern part of Oman and in the mountains north of Salalah. Wind speeds in these areas are comparable to recorded wind speeds at inland sites in Europe where large numbers of wind turbines are installed and operational. Wind speeds are observed to be highest in summer months which coincide with peak periods of electricity demand in Oman.

Electricity is currently generated in Oman using domestically produced gas, in gas turbine fired generators. They are very efficient, can be turned on or off relatively quickly, and don’t cost that much to build (compared to say, a coal fired plant). Plus you can combine them with water desalination.

There’s 3 problems to getting going with renewables in Oman however:
1/ The price of electricity is highly subsidized in Oman, and is sold well below the actual cost of generation. The price of power is hence a very politically sensitive issue.
Update: On average, the report says that the Batinah coast's power is subsidised by 38% (costomers pay on average 16baisa/kWh, average true cost is ~25baisa/kWh). In the remote areas, the subsidy is naturally such higher, over 80%, (customers pay ~14 baisa/kWh, costs ~82baisa/kWh).

2/ The actual cost of existing generation is already quite low, as its based on a gas price of $1.50 per million BTUs [approx the same as 1000 cubic feet of gas (1 MCF)] with no inflation component. While this is more than the Government pays to produce it (that would be around $0.50), that gas could be sold at a much higher price to the LNG plants to supply spot cargoes of LNG, (say around $4/MCF). In Europe and the USA, market gas prices lately have been $8, although right now the US price is over $13/MCF (the highest its ever been).
Update: If the cost of gas to the power companies was was increased to $3, those true costs above would go up another 50%.

Plus, because the gas is sold without any inflation component, and renewable energy is relatively capital intensive, that hurts the economics too.

3/ In theory there could be a partial subsidy for renewables through carbon trading, but the Omani Government has not (yet??) set up the required internationally recognized authorities to allow trading in carbon offsets under the Kyotot protocol (currently worth at least $20 per tonne of CO2 saved). At that price, this could then be used to lower the effective ‘gas price equivalent’ by more than $1.20 per MCF.

Update: I just did some maths, and I figure at the momemnt the Government spends around 120 million rials per year* subsidising the price of power. If you assume gas is actually worth $3, the effective subsidy is roughly double that, say 250 million rials

Wind is the most mature global renewable electricity generator. And in parts of Oman wind would almost be economic right now, although wind can never be a big part of your supply, as it is too unreliable. But, its obvious to anybody that if solar power is to work anywhere, it would work in Oman! Huge amounts of sunshine through a generally clear sky, vast empty areas of flat desert to place solar collectors, and in case anyone didn’t notice, in the summer it gets rather hot anyhow. Using solar to generate electricity has some problems, naturally, because at night its rather dark… but you can get around that by storing heat to use at night in massive insulated hyper-saline tanks. Also, using steam to generate electricity is not very efficient (compared to directly generating it through photovoltaic panels). This system in Spain, already in actual operation, uses a combination of photovoltaic cells and thermal mirrors.

And check out this one in the USA Mojave Desert called Solar 2.

Don't they look totally cool? Of course, they were totally uneconomic when built, but at current oil prices... what a winner. And effectively zero greenhouse gases once built.

So, if the price of gas was calculated at its ‘true’ present and future value, given the conditions in Oman, I’m a big supporter of getting going with solar right now. It certainly makes me feel better about a subsidy compared to the Government's current practice of giving gas away to big businessmen at $0.80 to make methanol and aluminium... Plus, setting up a local industry to manufacture these solar systems would be a great long term regional export business for Oman too I think.

Economic comparisons versus gas fired are only valid if you have enough gas to burn anyhow. Which in the end, we don’t. So long term, this sort of system should be the way to go, if people could actually afford to pay for the electricity it would generate, and I would think much more attractive than going nuclear.

For lots of nice stuff, see Wikipedia Solar power

* The report doesn't say what the Government subsidy actually is. But it states the Oman Power and Water company bought ~11 Terra Watt hrs in 2006 (page 38), at an average subsidy of ~10 biaisa per kWhr (page 42) gives 100 million rial, plus I've thrown in a bit for the rural areas and subsequent inflation in demand.