Importance of Khazzan-Makarem gas field for BP

When the Oilholic paid a visit to Oman couple of years ago, natural gas was not atop the list of ‘crude’ industry intelligence gathering activities, one must admit. The Sultanate perhaps has the richest quality of all Middle Eastern crude oil varieties but there’s not a lot of it around, nor is Oman's reserves position anywhere near as strong as that of its neighbours.

Nonetheless, oil matters took up much of this blogger’s time and effort, including an excursion to the Musandam Peninsula, where Oman is in the process of having a decent crack at its first offshore exploration. The crucial subject of Omani natural gas largely slipped under the radar there and then, and largely up until now. 

That’s until this blogger recently met David Eyton, Group Head of Technology at BP, for a fascinating Forbes interview (click here) on how the oil major is using digital tools such as 4D seismic to reshape the way it operates both upstream and downstream, and the subject of Oman came up.

The country's Khazzan-Makarem gas field is in fact among the many places benefiting from BP’s research and development spend of around two-thirds of a billion dollars per annum towards digital enablement of surveying, and more. What’s at stake for BP, and for Oman, is Khazzan’s proven reserve base of 100 trillion cubic feet. Unlike Shell, its FTSE 100 peer, BP isn’t digging for oil in the Sultanate, making the gas field – which it discovered in 2000 – a signature play.

At its core is Block 61, operated by BP Oman and Oman Oil Company Exploration and Production in a 60:40 joint venture partnership. Eyton says some of BP’s patented digital tools, including 4D seismic, are being deployed to full strength with a drilling schedule of approximately 300 wells over a 15 year period to achieve a plateau production rate of 1.2 billion cubic feet of gas per day.

“Khazzan has massive potential. It’s not shale in the strictest sense, but pretty tight gas and mighty difficult to crack owing to the low porosity of the reservoir rock,” Eyton said.

Invariably, BP has brought the full works into play to realise Block 61’s potential, drilling horizontal wells and using hydraulic fracturing technologies. "Advanced seismic imaging has played a huge part in understanding where the best bits of the reservoir are, and how to unlock them. Ultimately, that’s enabling development to proceed at a far better pace."

Construction work on Khazzan has commenced and first gas is expected in late 2017. Implications of Block 61 yielding meaningful volumes, as expected, cannot be understated. For Oman, the projected 1.2 bcf in daily production volume would be equivalent to an increment of over 30% of its total daily gas supply.

Concurrently, BP would look back in satisfaction at a Middle Eastern foray on business terms few oil and gas markets, bar Oman, would offer in an age of resource nationalism. As for the technology being deployed, it is already a winner, according to Eyton. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: David Eyton, Group Head of Technology at BP © Graham Trott / BP

A festive spike, ratings agencies & Omani moves

It's the festive season alright and one to be particularly merry if you'd gone long on the price of black gold these past few weeks. The Brent forward month futures contract is back above US$110 per barrel.

Another (sigh!) breakout of hostilities in South Sudan, a very French strike at Total's refineries, positive US data and stunted movement at Libyan ports, have given the bulls plenty of fodder. It may be the merry season, but it's not the silly season and by that argument, the City traders cannot be blamed for reacting the way they have over the last fortnight. Let's face it – apart from the sudden escalation of events in South Sudan, the other three of the aforementioned events were in the brewing pot for a while. Only some pre-Christmas profit taking has prevented Brent from rising further.

Forget the traders, think of French motorists as three of Total's five refineries in the country are currently strike ridden. We are talking 339,000 barrels per day (bpd) at Gonfreville, 155,000 bpd at La Mede and another 119,000 bpd at Feyzin being offline for the moment – just in case you think the Oilholic is exaggerating a very French affair!

From a French affair, to a French forex analyst's thoughts – Société Générale's Sebastien Galy opines the Dutch disease is spreading. "Commodity boom of the last decade has left commodity producers with an overly expensive non-commodity sector and few of the emerging markets with a sticky inflation problem. Multiple central banks from the Reserve Bank of Australia, to Norges bank or the Bank of Canada have been busy trying to mitigate this problem by guiding down their currencies," he wrote in a note to clients.

Galy adds that the bearish Aussie dollar view was gaining traction, though the bearish Canadian dollar viewpoint hasn't got quite that many takers (yet!). One to watch out for in the New Year! In the wind down to year-end, Moody's and Fitch Ratings have taken some interesting 'crude' ratings actions over the last six weeks. Yours truly can't catalogue all, but here's a sample.

Recently, Moody's affirmed the A3 long-term issuer rating of Abu Dhabi National Energy Company (TAQA), the (P)A3 rating for TAQA's MYR3.5 billion sukuk  programme, the (P)A3 for TAQA's $9 billion global medium-term note programme, the A3 rated debt instruments and the P-2 short-term issuer rating. Baseline Credit Assessment was downgraded to ba2 from ba1; with a stable outlook. It also upgraded the issuer rating of Rosneft International Holdings Limited (RIHL; formerly TNK-BP International) to Baa1 from Baa2.

Going the other way, it changed Anadarko's rating outlook to developing from positive. It followed the December 12 release of an interim memorandum of opinion by the US Bankruptcy Court, Southern District of New York regarding the Tronox litigation.

The agency also downgraded the foreign currency bond rating and global local currency rating of PDVSA to Caa1 from B2 and B1, respectively, and maintained a negative outlook on the ratings. Additionally, it downgraded CITGO Petroleum's corporate family tating to B1 from Ba2; its Probability of Default rating to B1-PD from Ba2-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B1, LGD3-43% from Ba2, LGD3-41%.

Moving on to Fitch Ratings, given what's afoot in Libya, it revised the Italy-based Libya-exposed ENI's outlook to negative from stable and affirmed its long-term Issuer Default Rating and senior unsecured rating at 'A+'. 

It also said delays to the production ramp-up at the Kashagan oil field in Kazakhstan were likely to hinder the performance of ENI's upstream strategy in 2014. Additionally, Fitch Ratings affirmed Shell's long-term Issuer Default Rating (IDR) at 'AA' with a stable outlook.

Moving away from ratings actions, BP's latest foray vindicates sentiments expressed by the Oilholic from Oman earlier this year. Last week, it signed a $16 billion deal with the Omanis to develop a shale gas project.

Oman's government, in its bid to ramp-up production, is widely thought to offer more action and generous terms to IOCs than they'd get anywhere else in the Middle East. By inking a 30-year gas production sharing and sales deal to develop the Khazzan tight gas project in central Oman, the oil major has landed a big one.

BP first won the concession in 2007. The much touted Block 61 sees a 60:40 stake split between BP and Oman Oil Company (E&P). The project aims to extract around 1 billion cubic feet (bcf) per day of gas. The first gas from the project is expected in late 2017 and BP is also hoping to pump around 25,000 bpd of light oil from the site.

The oil major's boss Bob Dudley, fresh from his Iraqi adventure, was on hand to note: "This enables BP to bring to Oman the experience it has built up in tight gas production over many decades."

Oman's total oil production, as of H1 2013, was around 944,200 bpd. As the country's ministers were cooing about the deal, the judiciary, with no sense of timing, put nine state officials and private sector executives on trial for charges of alleged taking or offering of bribes, in a widening onslaught on corruption in the sultanate's oil industry and related sectors.

Poor timing or not, Oman ought to be commended for trying to clean up its act. That's all for the moment folks! Have a Happy Christmas! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy.

The Strait of Hormuz & Omani moves

The view of the Strait of Hormuz (pictured left) from the Musandam Peninsula is amazing. Let's face it - it's easier for the Oilholic to check it out here from the Omani side, rather than the Iranian side as the latter is not the most welcoming place for bloggers in general 'crude' or 'refined'. Not that yours truly has as of yet requested the Islamic Republic to issue him a visa.

As the world frets about Egyptian problems affecting oil tanker (and other) traffic from the Suez Canal, the Omanis are doing their utmost to mitigate one other potential threat – the one from Iran to close the Strait to oil traffic, should it be provoked by the West. The country is investing heavily in improvements and new build of its ports infrastructure.

The idea is to challenge nearby Dubai's dominance as a port hub and that too on the 'wrong' side of the Strait and prone to the Iran effect. Were you to look at a regional map, you'd find that all four of Oman's sea-port hubs/developments currently seeing investment (Muscat, Sohar, Salalah and lately Duqm) won't be affected in the highly unlikely event of the Strait becoming strife and blockade marred.

Of the four ports named above - Duqm, an erstwhile fishing village rather than a port, starts afresh complete with a new refinery, petrochemical plant, beachfront hotels and well, housing too. Billions are being invested in Duqm, with a figure nearing US$2 billion-plus being touted around.

Mitigating the Iranian threat is not foremost on Omani minds. This country has always maintained a balance between the West and Iran. In fact, the Sultan of Oman Qaboos bin Said Al Said is currently on a private visit to Iran and has announced fresh oil & gas sector co-operation between the two countries. However, diversifying Oman's economy away from oil & gas most certainly is on the nation's policy planning cards.

Aside from sea-ports, the government also wants Muscat International airport to rival Abu Dhabi and Dubai as an air transit point and aviation hub. The government's airport operator, Oman Airports Management, plans to award a dozen contracts this year and in 2014 to upgrade airport facilities in the capital city of Muscat (See above, click image to enlarge - for the current Muscat Airport terminal, ongoing construction work for the new one and an artist's impression of what it would look like in the future) along with Salalah. Additionally, the flag carrier Oman Air has ordered $2.5 billion worth of swanky new planes, according to a spokesperson.

However, the Oman government has made it abundantly clear that it wants to maintain the country's rustic charm, charcter and its points of differentiation from regional neighbours. So there won't be a mad Dubai-styled commercial rush. Afterall, standing out from the crowd is a unique selling point - so why ditch it? The Oilholic is certainly sold, blown away by the beauty of Musandam Peninsula and his first evening in Khasab before heading back to Muscat.

It's been an amazing experience from spotting oil tankers to mountain goats, soaking the sunshine to enjoying the mountainous views and beaches that are natural and not made of imported sand as is the case with Dubai. Even the Emiratis are suitably impressed, vindicated by the fact that UAE nationals are the biggest overseas buyers of Omani residential real estate, according to locals here. Officially speaking, Oman's Ministry of Housing said that of the 3,376 property sale deeds distributed to GCC nationals last year, Emirati buyers accounted for 1,694 titles.

Speaking of Emiratis buying things, Etihad Airways' sudden acquisition of a 49% stake in Serbia’s JAT and the latter's subsequent rebranding into Air Serbia has a strange ring to it. It's not that Etihad can’t make acquisitions and buy stakes! In fact, far from it – the airline already has stakes in Virgin Australia, Air Berlin, Aer Lingus, Air Seychelles and Jet Airways.

It's just that Abu Dhabi Crown Prince Sheikh Mohammed Bin Zayed Bin Sultan Al Nahyan has of late been professing his love for the Balkan country. The Emirate's investment vehicle Mubadala is also actively sniffing around all things Serbian from agricultural assets to hotels. However, its the timing the Oilholic is puzzled about and nothing else! For the record, Eithad denies any political pressure and or that either forays by His Majesty or the airline are related. That's all from the Musandam Peninsula for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Photo 1: Straight of Hormuz, Khasab, Musandam Peninsula, Oman. Photo 2: Muscat airport collage (Left to right – Muscat Airport Terminal, Ongoing construction work at Muscat Airport, Artist’s impression of new Muscat airport) © Gaurav Sharma, August, 2013.

Saudi’s ‘crude’ range, Fitch on Abu Dhabi & more

Petroleum economists are wondering if we have crossed a gateway to crude chaos? The magnificent one pictured (left) here in Abu Dhabi's Capital Garden is certainly no metaphor for the situation. Egypt is burning, Libya is protesting and US/UK/NATO are threatening [almost direct] action against Syria.

Add the US Federal Reserve's current stance on QE to the geopolitical mix and you get a bullish Brent price. Yes, yes, that's all very predictable. But when bulls run amok, all attention usually turns to Aramco's response. It is a well known fact that the Saudis like the crude oil price to remain within what economists prefer to describe as the "middle" ground. (You want your principal export to be priced high enough to keep you ticking, but not so high as to drive importers towards either consuming less or seeking alternatives).

Investment house Jadwa's research often puts such a Saudi comfort zone in US$80-90 per barrel price range. The Oilholic has been banging on about the same range too, though towards the conservative lower end (in the region of $78-80). The Emiratis would also be pretty happy with that too; it's a price range most here say they’ve based their budget on as well.

A scheduled (or "ordinary") OPEC meeting is not due until December and in any case the Saudis care precious little about the cartel's quota. Hints about Saudi sentiment only emerge when one gets to nab oil minister Ali Al-Naimi and that too if he actually wants to say a thing or two. As both Saudi Arabia and UAE have spare capacity, suspicions about a joint move on working towards a "price band" have lurked around since the turn of 1990s and Gulf War I.

Aramco's response to spikes and dives in the past, for instance the highs and lows of 2007-08 and a spike during the Libyan crisis, bears testimony to the so called middle approach. Recent empirical evidence suggests that if the Brent price spikes above $120 per barrel, Aramco usually raises its output to cool the market.

Conversely, if it falls rapidly (or is perceived to be heading below three digits), Aramco stunts output to prop-up the price. The current one is a high-ish price band. Smart money would be on ADNOC and Aramco raising their output, however much the Iranians and Venezuelans squeal. For the record, this blogger feels it is prudent to mention that Aramco denies it has any such price band.

Away from pricing matters, Fitch Ratings has affirmed Abu Dhabi's long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' with a Stable Outlook. Additionally, the UAE's country ceiling is affirmed at 'AA+' (This ceiling, the agency says, also applies to Ras al-Khaimah).

In a statement, the agency said, oil rich Abu Dhabi has a strong sovereign balance sheet, both in absolute terms and compared to most 'AA' category peers. To put things into perspective, its sovereign external debt at end of Q4 2012 was just 1% of GDP, compared to Fitch's estimate of sovereign foreign assets of 153% of GDP. Only Kuwait has a stronger sovereign net foreign asset position within the GCC.

With estimated current account surpluses of around double digits forecast each year, sovereign net foreign assets of Abu Dhabi are forecast to rise further by end-2015. Fitch also estimates that the fiscal surplus, including ADNOC dividends and ADIA investment income, returned to double digits in 2012 and will remain of this order of magnitude for each year to 2015.

Furthermore, non-oil growth in the Emirate accelerated to 7.7%. This parameter also compares favourably to other regional oil-rich peers. Help provided by Abu Dhabi to other Emirates is likely to be discretionary. Overall, Fitch notes that Abu Dhabi has the highest GDP per capita of any Fitch-rated sovereign.

However, the Abu Dhabi economy is still highly dependent on oil, which accounted for around 90% of fiscal and external revenues and around half of GDP in 2012. As proven reserves are large, this blogger is not alone in thinking that there should be no immediate concerns for Abu Dhabi. Furthermore, Fitch's conjecture is based on the supposition of a Brent price in the region of $105 per barrel this year and $100 in 2014. No concerns there either!

Just a couple of footnotes before bidding farewell to Abu Dhabi – first off, and following on from what the Oilholic blogged about earlier, The National columnist Ebrahim Hashem eloquently explains here why UAE's reserves are so attractive for IOCs. The same newspaper also noted on Friday that regional/GCC inflation is here to stay and that the MENA region is going to face a North-South divide akin to the EU. The troubled "NA" bit is likely to rely on the resource rich "ME" bit.

Inflation certainly hasn’t dampened the UAE auto market for sure – one of the first to see the latest models arrive in town. To this effect, the Oilholic gives you two quirky glimpses of some choice autos on the streets of Abu Dhabi. The first (pictured above left) is the latest glammed-up Mini Cooper model outside National Bank of Abu Dhabi's offices, the second is proof that an Emirati sandstorm can make the prettiest automobile look rather off colour.

Finally, a Bloomberg report noting that Oil-rich Norway had gone from a European leader to laggard in terms of consumer spending made yours truly chuckle. Maybe they should reduce the monstrous price of their beer, water and food, which the Oilholic found to his cost in Oslo recently. That's all from Abu Dhabi, its time to bid the Emirate good-bye for destination Oman! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Photo 1: Entrance to Capital Garden, Abu Dhabi, UAE Photo 2: Cars parked around Abu Dhabi, UAE © Gaurav Sharma, August, 2013.

G7’s crude gripe, “Make oil prices dive”

As the Oilholic prepares to bid goodbye to Dubai, the G7 group of finance ministers have griped about rising oil prices and called on oil producing nations to up their production. They would rather have Dubai Mall’s Waterfall with Divers enclosure (pictured left) act as a metaphor for market direction! It is causing some consternation in this OPEC member jurisdiction and so it should.

 

First the facts – in a communiqué released on the US Treasury’s website yesterday, the G7 ministers say they are concerned about the impact of rising oil prices on the global economy and were prepared to act. Going one step further the ministers called on producing nations, most read OPEC, to act and now.

 

"We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the statement notes. We have been here before back in March when American motorists were worried about prices at the pump and President Barack Obama was in a political quandary.

 

Now of course he is barely months away from a US Presidential election and here we are again. In fact the Canadians aside, all leaders elsewhere in the G7 are facing political pressure of some kind or the other related to the crude stuff too. Cue the statement and sabre rattling of releasing strategic petroleum reserves (SPRs)!

 

OPEC and non-OPEC producers' viewpoint, and with some reason, is that the market remains well supplied. Unfortunately plays around paper barrels and actual availability of physical barrels have both combined to create uncertainty in recent months.

 

On the face of it, at its last meeting OPEC – largely due to Saudi assertiveness – was seen producing above its set quota. Oil prices have spiked and dived, as the Oilholic noted earlier, but producers’ ability to change that is limited. Fear of the unknown is driving oil prices. As Saadallah Al Fathi, a former OPEC Secretariat staff member, notes in his recent Gulf News column, “prices seem to move against expectations, one way or another.”

 

Al Fathi further notes that the (West/Israel’s) confrontation with Iran is still on, but it is not expected to flare up. “Even the embargo on Iranian oil is slow to show in numbers, but may become more visible later,” he adds. While an oil shock following an Israeli attack on Iran could be made up by spare capacity, the room for another chance geopolitical complication or natural disaster would stretch the market. This is what spooks politicians, a US President in an election year and the market alike.

 

However, rather than talk of releasing SPRs for political ends now and as was the case in June 2011, the Oilholic has always advocated waiting for precisely such an emergency! While it has happened in the past, it is not as if producers have taken their foot off the production pedal to cash in on the prevailing bullish market trends at this particular juncture.

 

Away from G7’s gripe, regional oil futures benchmark – the Dubai Mercantile Exchange (DME) Oman Crude (OQD) – has caught this blogger’s eye. Oman’s production is roughly below 925,000 barrels per day (bpd) at present. For instance, in June it came in at 923,339 bpd. However, this relatively new benchmark is as much about Oman as Brent is about the UK. It is fast acquiring pan-regional acceptance and the November futures contract is seen mirroring Brent and OPEC basket crude prices. Its why the DME created the contract in the first place. Question is will it have global prowess as a 'third alternative' one day?

 

Elsewhere, the UAE has begun using the Abu Dhabi Crude Oil Pipeline (ADCOP). It will ultimately enable Abu Dhabi to export 70% of its crude stuff from Fujairah which is located on the Gulf of Oman bypassing the Strait of Hormuz and Iranian threats to close the passage in the process. However the 400km long pipeline, capable of transporting 1.5 million bpd, comes at a steep price of US$4 billion.

 

Sticking with the region, it seems Beirut is now the most expensive city to live in the Middle East according to Mercer’s 2012 Worldwide Cost of Living survey. It is followed by Abu Dhabi, Dubai (UAE), Amman (Jordan) and Riyadh (Saudi Arabia). On a global footing, Tokyo (Japan) tops the list followed by Luanda (Angola), Osaka (Japan), Moscow (Russia) and Geneva (Switzerland).

 

Meanwhile unlike the ambiguity over Dubai’s ratings status, Kuwait has maintained its AA rating from Fitch with a ‘stable’ outlook supported by rising oil prices and strong sovereign net foreign assets estimated by the agency in the region of US$323 billion in 2011.

 

Finally, on a day when the International Atomic Energy Agency (IAEA) says Iran has doubled production capacity at the Fordo nuclear site, Tehran has called for ridding the world of nuclear weapons at the Non Aligned Movement (NAM) summit claiming it has none and plans none. Yeah right! And  the Oilholic is dating Cindy Crawford! That’s all from Dubai folks; it’s time for the big flying bus home to London! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Waterfall at the Dubai Mall, UAE © Gaurav Sharma