Gas scheme is crucial to Oman

10 October 2011

BP will want assurances that gas from the Khazzan field is sold at market prices and not subsidised

If it goes ahead, the $15bn Khazzan tight gas project in Oman will be one of the largest foreign investments ever made in the Middle East. The UK’s BP has already spent $700m on the scheme and says that it will pass the billion-dollar mark by the end of 2012.

Oman needs a company that has both the financial muscle to pay … and the technical expertise

What is interesting about BP being so candid about the scheme is the fact that before it decides to go ahead with the full exploitation of the gas it needs to agree terms with Oman that are suited to both parties.

The gas will be used to fuel Oman’s industrial diversification plans, but there is one possible stumbling block ahead.

Oman like most other countries in the Middle East subsidises its sales gas. BP will want assurances that the gas it produces from the Khazzan project will be sold at market prices, not at the subsidised price. There has been no indication that either party has had any disagreement on price. Nonetheless, both parties will be angling for the best deal available.

There is no doubt that Oman needs gas and the Khazzan scheme. Exploiting tight gas reserves is not easy and Oman needs a company that has both the financial muscle to pay for it and the technical expertise to execute it. Alternatives to the Khazzan scheme would be to import more gas and possibly building a liquefied natural gas (LNG) receiving terminal.

Oman already exports LNG on long-term contracts to countries in Asia so the idea of building a LNG-receiving terminal adjacent to an export terminal is one that Muscat would only consider as a last resort.

Most other countries in the region have got similar diversification plans to Oman, but not many share the same advantages. The geographical location coupled with a strong local workforce makes it an attractive proposition.

To move on the Khazzan scheme, the sultanate needs to agree a deal with BP.

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