Gas shortage stalls diversification in Oman

20 July 2010

Muscat’s plans to broaden its industrial base are being hampered by a shortage of gas. The complexity of exploiting tight gas reserves is compounding the problem

Oman’s oil and gas in numbers

$3.5bn: Value of petrochemical schemes that have been cancelled or are on hold in Oman

$10bn: Amount spent by Oman to arrest declining oil production

3 billion cf/d: Oman’s estimated gas requirement

cf/d=Cubic feet a day. Source: MEED Projects; MEED

Oman has placed the diversification of its industrial base at the heart of its economic development programme for the next decade. The country’s Vision 2020 includes plans to invest in the petrochemicals sector in particular, but a severe shortage of gas feedstock has caused several major projects to be shelved.   

Oman has a serious gas issue and until they get more gas, I can’t see these projects getting off the ground

Industry source in Oman

According to regional projects tracker MEED Projects, six petrochemicals schemes worth a total of $3.46bn have either been cancelled or are on hold in Oman. Problems in securing finance have been blamed for a couple of the projects stalling, but failure to secure gas allocations from Oman’s Oil & Gas Ministry is the reason for lack of progress on other schemes.

Gas supply shortage in Oman

“Oman has a serious gas issue and until they get more gas, I can’t see these [petrochemicals] projects getting off the ground,” says an industry source in the country.

Oman is now undertaking thermal, chemical and miscible gas injection projects to enhance recovery

Abdulla al-Lamki, Petroleum Development Oman

“It only takes one hiccup in the supply chain and Oman would have a serious problem. This is why it erring on the side of caution with new [petrochemicals] projects at the moment.”

Among the projects on hold are Oman Methanol Company’s proposed $500m methanol plant in Sohar and the $210m polyethylene terephthalate facility planned by France’s Centuria Capital. The $5-10bn Sohar Petrochemicals Plant megaproject planned by a consortium led by the US’ Dow Chemical Company is making slow progress and is still in the early stages of planning.

Oman oil production (barrels a day)
Source: BP

The petrochemicals schemes that are moving ahead are smaller and require less gas. India’s Oswal Group is due to complete the front-end engineering and design on its planned $350m world-scale caustic soda plant at Salalah in southern Oman.

The 365,000 tonne-a-year facility has already been allotted 150MW of power. The caustic soda will be sold within the region, and in other key markets in Asia and Australia. 

Oman gas production (billion cubic metres)
Source: BP

Given the slowdown in the Omani projects market, many engineering, procurement and construction (EPC) contractors working in the country are looking elsewhere in the GCC for new business opportunities.  

“It’s not comparable with the rest of the region,” says a senior executive from an EPC contractor working in Muscat. “It’s a very difficult market for EPC in the sense that the size of the projects now tend to be [relatively] small, compared to Saudi Arabia or the UAE.

“There is also a lot of indecision regarding which projects should go ahead. There is always a lot of discussion and ideas, but the frequency of the bids is quite low compared with other markets.” 

The executive says that despite the promise of more gas coming on stream in 2010, the situation is unlikely to change in the near future.

“I don’t see any changes to be honest and I think they will struggle along with the limited amount of gas Oman has at the moment,” he says.

Securing gas in Oman

Oman currently sources its gas from several different suppliers. The state-owned Oman Oil Company supplies gas to domestic customers, as well as for export.

Abu Dhabi’s Dolphin Energy feeds about 200 million cubic feet a day (cf/d) of Qatari gas into the sultanate via its pipeline. This equates to about 10 per cent of Dolphin Energy’s capacity. 

Muscat recognises that securing new gas supplies is essential. State-controlled Petroleum Development Oman (PDO) controls the exploration, development and operation of the country’s non-associated gas fields. Other shareholders in PDO include the UK/Dutch Shell, France’s Total and Portugal’s Partex.

While the government has stated that the sultanate needs around 3 billion cf/d of gas to meet its requirements, no major new gas discoveries have been made recently.

Oman did produce about 1.097 trillion cubic feet of natural gas in 2009, a 2.2 per cent rise from 2008. State-controlled liquefied natural gas (LNG) companies Oman LNG and Qalhat LNG accounted for about 42 per cent of the gas produced, using it to service long-term export contracts.

In 2009, Oman LNG and Qalhat LNG exported 9.9 million tonnes of liquefied gas. However, the Omani government stated that both companies exported 20 per cent less LNG than the previous year, due to the tightening of supply in the domestic market.

Oman’s tight gas reserves

The solution to Oman’s gas problem is more complicated than simply transferring LNG from the export market to domestic customers. Lower prices paid for domestic gas would adversely affect revenues of both companies.

Oman has been unlucky with its hydrocarbons endowment in that much of the natural gas in the country is what is known as tight.

Tight gas is locked underground due to the impermeability of the surrounding rock structure. This makes the gas extremely difficult and expensive to extract and in the past such deposits had been regarded as effectively unrecoverable. Muscat has been pinning its hopes for resolving its gas problems on exploiting these tight gas reserves.

In June, these plans experienced a major setback as the UK’s BG Group decided to relinquish its rights to an onshore concession – Block 60 – after deciding that the estimated $800m capital investment needed to develop the field could not be justified.

The company drilled seven appraisal wells and had expected as much as 17 trillion cubic feet of gas in the 1,500-square-kilometre Abu Butabul gas and condensate field.

Oil Ministry sources said at the time of the BG Group’s withdrawal that as little as 2 trillion cubic feet had been discovered.

“While the Block [60] was technically challenging, BG Oman drilled seven appraisal wells – all of which encountered gas and condensate,” says a spokeswoman from the BG Group. “All gas flowed at varying rates, although the production tests confirmed that Abu Butabul is a tight formation.

“Essentially, BG Group has decided to end its activity in Oman as it prioritises other new opportunities across our global portfolio for development.”

One tight gas project in Oman that has yielded better results is UK-based BP’s two concessions at the Khazzan and Makarem fields. The estimated combined reserves of the fields, which cover an area of 2,800 sq km, are believed to be around 30-40 trillion cubic feet. This will equate to about 200 million cf/d of gas when both fields come on stream in September.

It is not just gas production that is of concern to Muscat. Oman still relies heavily on oil revenues to support its development budget. Oil accounts for about 75 per cent of the country’s total exports.

At the end of 2009, Oman’s oil and condensate reserves were about 4.83 billion barrels and oil revenues recorded for the year were $11.67bn, but oil output is already in decline. Production peaked in 2001 at 960,000 barrels a day (b/d) before falling to a low of 715,000 b/d in 2007.

While PDO continues to fast-track gas exploration, it also continues to be a major pioneer in regards to enhanced oil recovery (EOR) techniques.

Oman has spent $10bn on arresting the decline of its oil production. In 2009, output was increased to more than 800,000 b/d. However, the figure is still 160,000 b/d short of peak production achieved in 2001.

Speaking at the Oil and Gas West Asia Conference, held in April in Muscat, PDO’s deputy managing director, Abdulla al-Lamki, said: “Oman has billions of barrels of oil that need EOR processes to enable production and sustain energy supply for the future. Oman is now undertaking thermal, chemical and miscible gas injection projects [to assist in] enhancing recovery.”

In February, PDO completed the successful commissioning of Oman’s first full-scale EOR project at Marmul, in the south of the country.

The project involved the construction of a water treatment plant, as well as polymer preparation and injection facilities. A water and polymer solution is injected into the mature Al-Khlata reservoir and PDO estimates that it will increase recovery from the field by 10 per cent.

New technology

If Oman is to succeed in implementing its ambitious industrial diversification programme, the country needs to increase its gas supply. While there is gas in the ground in Oman, the restrictive geological make-up requires expertise and full government backing to ensure that the fields are fully exploited.

The unique way Oman has pioneered EOR techniques on its mature oil fields will need to be emulated in its gas fields. The application of similar technologies and innovative ideas could give the country a much-needed breakthrough to extracting more gas.

“Until they secure more gas, Oman has a serious problem,” an Oman-based source says. “It won’t be for the want of trying by PDO, but the fact remains that most Omani gas is hard to get out of the ground.”

You might also like...

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications