Profiling Oman's E&P and its wider market impact

The Oilholic has always been intrigued by Oman's oil & gas industry. The oil storage tanks atop the Al Wattayah cliffs of the Hajar Mountain range (see left) dominate the scenery behind Muscat and Muttrah's natural harbours. They also bear a silent but impactful testament to black gold's importance in this part of the world.

In a regional context, and from a geopolitical standpoint, Oman's 5.5 billion barrels of oil equivalent (boe) in proven reserves are the largest for any non-OPEC country in the Middle East. Admittedly, in this part of the world, there aren't that many non-OPEC players of significance in any case, let alone one with such a proven reserves position.

However, given that Oman does not have as much in terms of reserves relative to its regional oil exporting peers, is precisely why IOCs get better deals when it comes to oil & gas prospection here. The Petroleum Development Oman (PDO) holds around 92% of Oman's oil reserves. Aside from the government's 60% stake in PDO, Shell is the junior partner with 34%. Total (4%) and Partex (2%) make up the rest with minority stakes.

For all of that, it's actually Occidental Petroleum which has the largest operations of any IOC in Oman and is the country's second largest oil-producer! Chinese presence here is the shape of CNPC, while BP, Repsol and KoGas are meaningful industry participants as well.

The country has come a long way from signing its first export consignment of 543,800 barrels of the crude stuff delivered F.O.B Mina-al Fahal for a purchase price of US$1.42 per barrel (to Shell) way back on that historic date of August 8, 1967. PDO archives reveal that momentous invoice which was the harbinger of things to come (see right, click to enlarge).

The journey so far has not been without hiccups. A lot of soul-searching ensued when production, which at one point was above 950,000 barrels of oil equivalent per day (boepd) in the late 1990s, plummeted to an all time low of 714,000 boepd in 2007. However, initial anxieties about a general decline in oil & gas production have been replaced by renewed vigour and pragmatism with output rising steadily if not spectacularly in recent years.

Two key decisions taken by the administration of Sultan Qaboos bin Said Al Said have seen Oman turn a corner. As the Oilholic noted in an earlier blog post, the first move was to diversify Oman's economy away from oil & gas and promote transport, cargo & logistics, regional banking and, of course, tourism sectors. The plan was dubbed "Vision 2020" and initiated in 1998, when the oil price dipped below $10 per barrel.

The second move, kick-started in 2002, saw a strategic increase in petrodollars pumped into boosting oil production via enhanced recovery mechanisms at ageing oilfields. Miscible gas injection, thermal injection and polymer flooding were the techniques which found favour. Of these, thermal has proved most popular being deployed at Mukhaizna, Marmul, Amal-East, Amal-West and Qarn Alam fields. However, the PDO is employing traditional water-flooding at Yibal; the largest oilfield in the country.

The changes are tangible. According to the US EIA, Oman's average production came in at 923,500 boepd in 2012. Updating the figure, a PDO spokesperson told the Oilholic that H1 2013 production was in the region was around 944,200 boepd.

"All said medium term production expectation of over 930,000 boepd based on current investment and undertaking would be a realistic supposition for next few years," he added. The country's Petroleum Investments Directorate at the Ministry of Oil & Gas breaks this up as 900,000 barrels per day (bpd) of the crude stuff and 3.3 bcm of natural gas. The figure is based on 2012 data from seven – mainly onshore – production blocks.

PDO also looks set to pump additional funds, above and beyond what was budgeted in 2002, into improving production even further. Despite the best efforts of yours truly, a reliable figure was not forthcoming. But if one was to take a cumulative average of what local analysts say – we'd be looking at a minimum spend in the region of $6 billion per annum for the next 10 years.

While onshore prospects have historically been Oman's mainstay, as the Oilholic noted an earlier blog from Khasab – Bukha's offshore prospects are noteworthy. Norwegian independent upstart DNO International's 'Block 8' prospection off the Musandam coastline could well and truly shake things up. Some say it already is! The block is yielding 8,000 bpd, but reliable local sources say that once its full potential is realised, we could be looking at 20,000 bpd.

The big question is – could fresh Omani prospection coupled with the ongoing enhanced recovery programme – push production above the psychologically uplifting and headline grabbing figure of 1 million bpd?

Based on empirical and anecdotal evidence, thoughts of market commentators in Muscat and Abu Dhabi and the Oilholic's own calculations – sadly no! However, Omani production will be tantalisingly close to the magic mark as early as Q1 2014, and this blogger would be delighted for the country were he to be proved wrong, however briefly.

Regardless of the final figures, what does it mean and for whom? Almost 760,000 bpd would be exported by 2014, according to the government. The Far East seems to be the preferred destination for Omani Crude – with China, Japan and South Korea being the buyers. Since 2005, India is also looking towards Oman, more so, since last year, as the availability of Iranian crude remains sanction hit. 

Well, it is nearly time to call it a day here in Muscat. But not before the Oilholic leaves you with a view of His Majesty Sultan Qaboos' Royal Yacht - its one magnificent floater (see above left) ! Additionally, see below, from clockwise from left to right – the Royal Opera House, a very Omani sunset, Muscat's answer to London’s "Boris Bikes" and the Marina Bandar Ar Rawdah. It's been a thoroughly memorable visit to this wonderful country, full of warm, gracious and welcoming people.

One is truly grateful to professionals and commentators from PDO to BankMuscat, from the Oil & Gas Exhibition Centre to local guides who spared their valuable time to discuss various aspects of Oman's oil & gas industry.

However, away from Oman and just before boarding the flight to London Heathrow, one has a bit of reading material to flag-up. First, here's a brilliant column in the FT by Victor Mallet discussing travails of the Indian Rupee, in the current climate of foreign investors wanting to pull their money of emerging markets. The second is a BBC report about Egyptian officials saying they had foiled an attack aimed at disrupting shipping in the busy Suez Canal. This is seriously spooky with on-going problems in Syria, Libya and Egypt itself.

To put things into their proper context, the Suez Canal sees 800,000 barrels of crude and 1.5 million barrels of petroleum distillate products pass each day through its narrow confines between the Red Sea and the Mediterranean Sea. Furthermore, it's not just the canal that should be of concern.

With nefarious characters lurking around, another supply route of concern might be the Suez-Mediterranean pipeline which ferries through 1.7 million bpd. Disruption to either could see the risk premium on Brent be hit for six! That's all from Oman folks! Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Oil storage tanks atop the Al Wattayah cliffs of the Hajar Mountain range, Muscat, Oman. Photo 2: Invoice of the first consignment of Omani oil exports, 1967. Photo 3: Sultan Qaboos’ Royal Yacht, off Muttrah coast, Oman. Photo 4: Clockwise from left to right – Royal Opera House, Sunset in Muscat, the city’s answer to London’s "Boris Bikes" and the Marina Bandar Ar Rawdah , Oman © Gaurav Sharma, August, 2013.

On Bukha’s oil & the beauty of Khasab

The Oilholic finds himself roughly 27 km west of Khasab, here in Oman in the wilayat (district) of Bukha on the Musandam peninsula. This area has its own 'crude' place in the history of Omani oil & gas production.

Not far off its coastline is what the government has designated as offshore exploration Block 8 – a unique prospection zone in a country whose main production hubs are largely onshore.

What's more, according to a roughneck based here, both are 'beautiful' fields. Split into Bukha and West Bukha, in 1994 Block 8 apparently yielded gas condensate that was so high in quality (64°API), according to a Petroleum Directorate of Oman (PDO) spokesperson, that you can pretty much use it to run a car without refining (a sample is pictured above left)! No exaggeration, if you get the 'purity' standpoint.

Norway’s DNO International, under a remit from Muscat, is a major player here with two production fields. Its data indicates that production from West Bukha 2 and 3 fields currently averages 8,000 oil barrels per day as well as 27 million cubic feet of dry gas. All of this is sent via a 34 km pipeline for onshore processing at a plant located in Ras Al Khaimah, UAE. Furthermore, two additional wells – West Bukha 4 and 5 are in the pipeline, no pun intended.

Exciting times indeed for the Musandam Governorate (split from the rest of Oman by the UAE), which has of late started enjoying the prosperity seen in the rest of the country. Recent prosperity aside, this peninsula oozes history from ancient to modern when it comes to global trade. Market analysts should find it quite gripping – at least yours truly did!

Musandam juts out into the Strait of Hormuz, with the Persian Gulf on one side and the Sea of Oman on the other. Turn the clock or sundial back 5,000 years and you would have seen ships from ancient Oman (then known as Magan) sail between Mesopotamia and India. Magan’s traders knew about (and traded with) India well before the British, French and Portuguese traders ‘discovered’ the country. A museum exhibit offers a model of the vessels and charts the route (above right).

Local historians even suggest that interaction via sea routes took place with the Indus Valley Civilization on one side and modern day Egypt on the other. Fast forward to 2013, and you can easily spot oil tankers from any high vantage point – of which the peninsula provides several. Views of the Strait of Hormuz include tankers carrying their crude cargo out to the world as it is a crossing point for 90% of the Gulf's oil due to be shipped overseas (see below left).

As if by divine convenience – the most navigable bit lies in Omani territorial waters. To say that Musandam bears silent testimony to the history of global trade routes would be an understatement – it has actually shaped them. Roman Empire’s logs from the 2nd century mention the Cape of Musandam, as do Marco Polo’s from the 13th century.

The Portuguese occupied Musandam between 1515 and 1622 and the imposing Khasab Castle (see below) was built during the occupation. For just over four centuries, it has overlooked regional territorial waters and formed the focal point of the modern city of Khasab. After the defeat and expulsion of the Portuguese in the 17th century, the locals modified the castle to suit their defensive needs. Today, it is a modern day museum featuring several exhibits depicting the way of life in this enchanting part of Oman (see below right).

Targeted reinvestment of regional oil wealth by the administration of Sultan Qaboos bin Said Al Said has improved links between Khasab and the rest of Oman via air and sea. A local ferry service links Khasab to Muscat, as does a daily Oman Air flight. Sand, sun and sea on one side and mountains on the other, leave everything from hiking to snorkelling as a leisure option. And should you wish to spot dolphins, get a local tour guide to take you out to the sea!

There are a few local hotels, but the Golden Tulip Resort (now Atana), Khasab is the most impressive one in the area with great views of the waterfront from a poolside balcony and most of its rooms. It is also only a few minutes away from the Bassa Beach. There is a huge supermarket right next to Khasab Castle, with the sea-port terminal for a ferry to Muscat and Khasab airport for a flight close by! Right, that’s that for travel tips and observations. (Click below left for the sights minus the sound)

One tiny and somewhat darkly funny footnote though! A different kind of trade is also flourishing here which speaks volumes about the prosperity in Oman and the lack of it in sanction-squeezed Iran, whose coastline is barely 45 km across the Strait.

Using a decent pair of binoculars, the Oilholic spent a good few hours this evening noting how Iranian smugglers dock off the Port of Khasab (see below right for an aerial view) and conduct a 'cash and carry' trade. First off, differentiating a decidedly tacky Iranian boat from an Omani Dhow or a local motorboat is quite easy. The smugglers' communication method is rather rudimentary including a signalling system involving a combination of torchlights and car headlights. As for the cargo, do not be alarmed – it includes things as non-sinister as western branded biscuits, stimulants such as tea, coffee and cigarettes and of course dodgy satellite TV recorders.

By playing the dumb tourist card, the Oilholic got a local boatman to reveal that the trade route used here is a 50 minute motor-boat ride between Khasab and Qeshm Island, Iran and then on to the Iranian mainland. Most of the activity takes place from sunset onwards. But this desperate activity, which is lucrative for some, is also mighty dangerous.

Cross-crossing one of the busiest shipping lanes in the dark with no lights to avoid detection is fraught with danger. Storms often claim lives, as do unreported collisions with tankers and containers ships. Yet, driven by the desire to make a quick buck out of the cravings of a sanction squeezed Iran, the smugglers keep coming. Warehouses hoard until the price of a particular commodity is high enough in Iran and lo and behold a buyer usually arrives in the dark of the night.

Surprisingly, some of the smugglers or "shooties" (as they would be called were you to translate literally from Farsi), happen to be women! The Oilholic can personally vouch for it with a fair bit of disbelief! One is all for gender equality - but this is something else. Don't know about the Iranian side, but not many on the Omani side seem to mind the shooties plying their trade. If caught offshore by the Omani authorities the pretext of "fishing" usually gets the shooties away!

The traders of Musandam have been a very resourceful lot for centuries. In the 21st century, legal or not, sanctions have driven Iranians to a different, dangerous kind of resourcefulness. While illegal, it certainly is tenacious. Speaking of a more formal dialogue between Iran and Oman, Sultan Qaboos has become among the first world leaders to interact with Iran’s new president – Dr Hassan Rouhani. The Sultan, who is often seen as a bridge between the West and the Islamic Republic, oversaw the signing of a memorandum of understanding between Tehran and Muscat, which would see the latter export natural gas to Oman in a 25-year deal with a US$60 billion valuation.

While further details are yet to be formally announced, the transportation of natural gas would involve pulling a pipeline from Iran to Oman under the Sea of Oman, east of the Strait of Hormuz. Local media reports suggest that the deal would be the largest (by valuation) between the two nations. Sadly that’s all from Khasab folks as the Oilholic packs his bags for a short overnight stay in Muscat before the flight home to London. More from Oman later, in the meantime keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Bukha oil on display in Khasab, Oman. Photo 2: Model of Mesopotamian ships. Photo 3: Oil tankers in the Strait of Hormuz. Photo 4: Khasab Castle. Photo 5: Collage of sights in Khasab. Photo 6: Port of Khasab as seen from Oman Air flight 917 © Gaurav Sharma, August 2013.