The downstream segment is rapidly growing its refining and petrochemicals capacity, while plans are under way to bring gas-to-liquids (GTL) technology to Oman for the first time. As a backdrop to these developments, the integration of the Oman Oil Company (OOC) and the Oman Refineries and Petroleum Industries Company (ORPIC) into the newly rebraned OQ has re-energised both companies and spawned value-added initiatives.
Refining & Petrochemicals
Oman celebrated a significant year for refining in 2018, with the $2.1bn Sohar Refinery Improvement Project increasing key product output from 171,000 barrels per day (bpd) in 2017 to 220,000 bpd as of end-2018, and boosting crude refining capacity from 116,000 bpd to 198,000 bpd. Total annual output is expected to continue the upward trajectory in 2019, given the refinery underwent maintenance in the third quarter of 2018. Part of the improvement project allows for fuel oil output from Muscat’s Mina Al Fahal refinery to be further refined at Sohar, resulting in lighter products such as petrol, diesel and jet kerosene.
Oman’s refining industry will receive its next major capacity boost when the Duqm Refinery and Petrochemicals Complex comes on-line in 2024. Project stakeholders announced its financial close in November 2018, having secured $4.6bn in funding from multiple sources, making it the largest deal ever signed in Oman, with contributions from 29 financial institutions from 13 countries and three export credit agencies. Funding from Kuwaiti and Omani banks represented 43% of the total.
At the financial close of the project Mubarak al Naamany, CFO at the refinery, said they had achieved a debt-to-equity ratio of 55% and uncovered facilities accounting for 70% of the total debt, reflecting the confidence placed in the project by international and domestic lenders. The project’s design has also been tendered, with Scottish energy services company John Wood Group winning the contract to provide front-end engineering design in June 2019. By that date the refinery was 25% complete. The technical specifications for the design, which will be completed by John Wood in the third quarter of 2020, include a steam cracker unit for the breaking down of crude oil by-products into gases and chemicals, as well as production facilities for hydrogen, synthetic gas, methanol and other petrochemicals. The site’s coastal location within an existing special economic zone (SEZ) and industrial area is intended to better enable industrial and manufacturing applications, as well as expedite export times.
Key to plans for the petrochemicals phase of Kuwait Petroleum International’s Duqm project is an natural gas liquids extraction plant in central Oman, which will process gas supplied by the Oman Gas Company and deliver it to the petrochemical complex via a new pipeline. The intention is for petrochemicals production in Duqm to satisfy both local and international consumption for diversified industries by ensuring a high quantity of feedstock for the plastics and textiles industries.
Improvement projects at one of the country’s main refineries saw output of key petroleum products grow from 171,000 barrels per day (bpd) in 2017 to 220,000 bpd as of end-2018, while crude refining capacity was up from 116,000 bpd to 198,000 bpd It is also expected that the Duqm refinery will play a primary role in transforming the surrounding area into an important centre for energy-related industries in the region by supporting new projects in the SEZ. The area is estimated to receive up to $15bn in investment over the next 15 years.
Delivery of the Duqm project will be assisted by the integration of OOC and ORPIC. As a result, ORPIC’s experience at the recently completed Sohar improvement project will be better transferred to the OOC and Duqm. Speaking at a media briefing in March 2019, Musab Al Mahruqi, then-CEO at ORPIC and now group CEO of OQ, said that the newly formed group’s intention was “to transfer as much knowledge as possible from Sohar to Duqm”. Value addition is not only important to the wider diversification aims but also a key tenet of the integration. Ahmed Al Jahdhamy, the group’s downstream CEO, told the Oman Society for Petroleum Services (OPAL) in mid-2019 that the group aimed to increase added value to processed crude from $15 per barrel to $25 per barrel by 2030. “A lot of this will be focused on downstream and further down into petrochemicals and specialty chemicals,” Al Jahdhamy told OPAL. In the case of OOC and Orpic Group subsidiary Oxea, this value addition can reach up to $90 per barrel on the upstream price, according to Salim Al Huthaili, CEO of the Duqm Refinery and Petrochemicals Industries Company.
The increase in downstream production provided by Sohar, combined with reduced domestic demand, has meant substantial increases in downstream product exports. According to figures from majority-state-owned Oman Liquefied Natural Gas (LNG) and the National Centre for Statistics and Information, in the first nine months of 2018 exports of petroleum products increased by 210% year-on-year, bringing in $1.95bn.
LNG exports also reached new heights in 2018, surpassing 10m tonnes per year for the first time. As a result, LNG export revenue increased by 40% to $3.08bn in the first nine months of 2018, versus $2.21bn for the same period in 2017. The upward trajectory look set to continue into the near term, with Abdullah al Massan, CEO at Oman LNG Development Foundation, telling industry media in September 2019 that the sultanate was aiming to increase its annual exports of LNG from 10.3m tonnes to 11.3m tonnes by the third quarter of 2020.
Stakeholders are increasingly looking to the spot market to sell excess LNG. Oman LNG has a number of long-term LNG offtakers, with the largest being South Korea’s Korean Gas Corporation, receiving delivery of roughly 50% of Omani exports. Other contracted buyers include Spain’s Unión Fenosa and Japan’s Mitsubishi Motors. Regional media reported in June 2019 that Oman LNG’s spot tendering was occurring at a rate of around three or four times a month. It is estimated that 75% of the world’s LNG is delivered via long-term contracts while around 25% is sold on the spot market.
The long-term forecast for downstream export potential looks generally positive, though the sultanate’s products will face competition amid a global downstream supply increase. A report by consultancy McKinsey forecast that between 2018 and 2035 demand for fuel end-uses will gradually decrease, while demand for plastics and petrochemicals end-uses will remain robust. The report indicated that the increase in supply would outstrip demand growth globally, with European and North American demand for liquids falling by 0.3% annually between 2018 and 2035, with particularly strong declines in transport fuels. Developing markets in Asia, Africa and Latin America are expected to continue to see modest demand growth for some fuels. Thanks to its strong export links to Asia, Oman’s refining and downstream supply increase appears well positioned, with South and South-east Asia seeing the strongest growth in liquids demand at an average rate of 2% per year to 2035.
As part of the Mabrouk gas field project being developed in the north-east of Oman, multinational oil company Royal Dutch Shell is slated to develop the country’s first GTL project at Duqm. The company has experience converting natural gas into high-quality liquid products for use in a variety of specialist applications, having previously developed projects, such as the Pearl GTL plant in Qatar and the Bintulu GTL plant in Malaysia – the latter development representing the first commercial GTL facility in 1993.
Speaking at the Gas and LNG Middle East Summit held in Muscat in October 2019, Asje Tempelman, vice-president of Ventures East at Shell Integrated Gas, underlined that while establishing a GTL project would be capital-intensive, it would provided a solid return on investment thanks to the purity and quality of the liquids produced, which are devoid of the sulphur and aromatics found in similar products produced from petroleum. This means the liquids are able to be used in products such as transport fuels, motor oils and plastics.
The project would become the third GTL facility in the GCC, with Royal Dutch Shell having completed the Pearl GTL plant in 2011 and a GTL base oil storage hub at Dubai’s Jebel Ali in 2015. The project at Duqm would be smaller in size than the 140, 000-bpd Pearl GTL plant and is said to have cost around $18bn-19bn. Pitched at a more modest 45,000 bpd, the Duqm facility is likely to benefit from Shell’s learnings at the Qatar plant.
The proposed project’s go-ahead is expected to be contingent on the price at which Oman is willing to sell its gas feedstock to Shell, which in turn depends on the scale of reserves found at the Mabrouk oil field. The sultanate’s supply of gas has been boosted in recent years by output from BP’s Khazzan gas field, which will increase with the addition of supply from its proposed expansion, the $16bn Ghazeer field project. Oman’s gas consumption, including production and imports, amounted to approximately 45.9bn cu metres in 2018, an increase from an average of 40.5bn cu metres in the three previous years.
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