MEED: What are the reasons for the fall in hydrocarbon production, and what is being done to boost output?

Mohammed bin Hamad bin Saif al-Romhi:Back in 2001, we started losing production from PDO [Petroleum Development Oman] for a number of reasons, but mainly due to our fields getting older and the level of water production creeping up to unexpectedly high levels. We are producing just under 900,000 barrels a day [b/d], which includes condensate. That is where we are, but we are working hard to boost output. There is an ongoing programme in place and we are in discussions with our partners on ways of lifting production. I am confident that over the next few years we can build production back to a respectable benchmark of 950,000 b/d.

What is more encouraging from my point of view is the oil in place. We have over 40 billion barrels of reserves and when compared to our recoverable assets of 5.5 billion barrels we are talking about a very small recovery factor, roughly speaking 12 per cent of the total oil in place. We are continuing with exploration activities looking for new oil - the term we use is frontier exploration - but our main drive is to improve recovery through enhanced oil or improved oil recovery [EOR/IOR] methods.

What is the ministry's relationship with PDO and other major producers, and how do you see those relationships developing?

On a micro level of analysis, there were many flaws in the system at PDO that led to the fall in production. But it is our responsibility to sit down with the management of PDO and analyse everything, large or small. Everyone agrees that things could have been done a little differently, but that's the beauty of learning from experience, whether the lesson is pleasant or in our case unpleasant because of the loss of production and revenue for the nation. That doesn't mean it has damaged our relationship with PDO. It is a very historic relationship and we continue to talk frankly. As in any good mar riage, that's not a bad thing.

I don't think Shell [The Royal Dutch/Shell Group] has put less in either. It has done everything to provide the assistance requested by PDO. But these days when you seek technology you see what is available, it does not have to be monopolised by any one supplier. We have been looking around the world at what else can be provided for PDO and we do this in total co-operation with Shell. We sit down with them and ask them what is the best technology and supplier for the task at hand.

What specific plans do you have that are designed to increase oil production?

We have a programme called Target 50 (T50), which is aimed at boosting our recovery factor to 50 per cent of reserves using steam and other exotic recovery methods. The programme can be grouped into three: there is a steam area that will deal with our heavy oil; a gas injection area that is trying to increase recovery through gas gravity technology; and then we have water flooding, which is the traditional EOR method.

If you look at the map of block 6 at PDO, you could easily divide it into these three catergories. For example, the water flooding - the simplest of the three technologies - is ongoing but we plan to put more effort and investment into it. We have been pumping water for flooding for quite some time and this will continue, but on a more scientific basis and a larger scale. For example, we have 2 billion barrels of oil in place in the Mukhaizna field and if we can implement T50 there we could book another 1 billion barrels of oil, which is very significant. However, it is a long-term project that will take us beyond 2008.

What is the focus of your current investment plans?

It depends on how you define the project. We are going to require a lot of steam to pump into Mukhaizna and we are contemplating ways of re-using the steam to generate power that will be fed into the national grid. If you factor this into the cost of the scheme, then an investment of $ 1,000 million is too little. However, if we are talking about just injecting steam into the reservoir and drilling more wells, then $1,000 million is a reasonable figure. But anything up to $3,000 million could be the capital investment for Mukhaizna. We are going to require thousands of new wells in Mukhaizna, so there will be a lot of drilling activity and we are going to need plenty of water. Just supplying this and treating it for the steam generators will require considerable investment. It's a big job and that is why we are taking a cautious approach to it in order to make sure we get it right.

The Harweel cluster also has tremendous potential to produce up to 100,000 b/d of sweet oil with associated sour gas. How long it will take and what will be needed I don't know, but this is another potentially important area for the future. Investing in older fields in the north such as Yibal, Fahud and Lekhwair is also part of our portfolio and we are looking at them very closely.

The Omani oil fields produce large volumes of associated water. How are you dealing with this?

We are producing almost three barrels of water for every barrel of oil pumped from fields in the south, which is an 80 per cent water cut. In the whole of Oman we are producing close to 4 million b/d of water. The big problem we have is disposing of this water, which is very costly. We are stopping shallow disposal in 2004 and in the future we will have to drill very deep wells with huge pumps in order to get rid of our excess water. So you can see the magnitude of the water problem.

Taking water from over-producing fields in the south like Nimr and transporting it to areas that require liquid for re-injection is a cost-effective alternative. We are studying a proposed Trans-Oman water pipeline, which could transport this water over a distance of up to 1,000 kilometres, but this will be very expensive to build. However, using our excess water to produce more oil from steam and water injection projects in the north makes the pipeline an attractive option and I think we may go for it eventually.

Could you outline your planned exploration and marketing strategy in both the short and long term?

Our strategy for marketing offshore concessions has changed. We are running seismic studies on vacant blocks before we open our data rooms. This gives bidders an opportunity to review a more detailed picture of these blocks before they commit themselves. We are very optimistic that, over the next two months, we will see more interest in our open acreage and hopefully sign more exploration and production sharing agreements.

We have proven gas reserves of around 28 trillion cubic feet (tcf) and this is enough to meet both our domestic requirements and our export commitments. There is potential for finding more gas in Oman and we have set realistic targets for discovering an additional 1 tcf each year for the next 20 years. Our long-term plans require us to book at least 40-50 tcf before we can relax on gas reserve build-up in the sultanate.

Gas exports, and the construction of cross-border pipelines, are something that seems to be playing a big part in Oman's hydrocarbons strategy at present. How do you see that particular story unfolding?

Construction of the Buraimi-Al-Ain gas pipeline is a very important step, linking Oman with the GCC. Soon you are going to see Qatar, UAE and Oman connected, which is something we have supported for years. We are in discussions with Dolphin [Abu Dhabi-based Dolphin Energy] to import its gas but everything is dependent on pricing. This will finally determine whether gas eventually flows in this direction to Oman. Consumers could have a choice post-2007 whether to buy gas from the government or go to Dolphin. This is a good situation for all concerned and I see no contradiction in Oman being both an importer of gas and an exporter at the same time.

In the Gulf, gas will become a commodity; it has already happened in Europe and I am sur e it can happen in the GCC. We have dedicated certain fields to meeting our requirements for LNG [liquefied natural gas], so from that point of view I don't see Qatar gas being re-exported. But for industrial use and power generation, I want to introduce supply competition to Oman.