Economic Update

Published 31 May 2018

The expansion of a major gas project, the announcement of new finds and investment in downstream oil infrastructure are expected to support fresh growth in Oman’s energy sector.

Oman Energy

In April BP announced that it, alongside partner Oman Oil Company Exploration and Production, would begin developing the second stage of the Khazzan gas field project, located 350 km south-west of the capital, Muscat, in the Ad Dhahirah Governorate.

The field’s operators have already begun drilling the first three wells and constructing rail and associated infrastructure.

Once completed in 2021 the second stage is expected to lift production from current levels of 1bn standard cu feet of gas per day (scfd) and 35,000 barrels per day (bpd) of condensate to 1.5bn scfd and 50,000 bpd, respectively. The first stage of production at the site began in September last year.

The development follows an announcement in March by Petroleum Development Oman (PDO) that it had discovered estimated recoverable reserves of more than 4trn scf of gas and 112m barrels of condensate in the Mabrouk gas field, located in the north of its concession in central Oman.

In its annual sustainability report released at the end of April, PDO pledged to invest $20bn in exploration and production activities by 2021. In comparison, the company’s capital budget for 2018 is $4.1bn. PDO, the sultanate’s largest hydrocarbons producer, is majority owned by the government, with the remaining shares divided between international producers Royal Dutch Shell, Total and Partex.

The developments are expected to help secure Oman’s long-term gas supply, as domestic consumption of this primary fuel resource is expected to rise in the coming years, driven by energy-intensive industrial development and electricity demand growth.

Downstream investment highlights spike in oil activity

In tandem with the recent gas developments, increased investment in downstream oil infrastructure is also expected to support growth and the diversification of revenue streams in the energy sector.

In April construction began on a new 900-ha oil refinery in Duqm, located in the Al Wusta Governorate in central-eastern Oman. A partnership between the Oman Oil Company and Kuwait Petroleum International, the $7bn project is expected to have the capacity to process 230,000 barrels per day upon completion in 2022.

It will produce diesel, jet fuel, naphtha, liquefied petroleum gas, sulphur and pet coke as its primary products, and includes an export terminal and 80-km pipeline connecting the site with a crude oil storage terminal at Raz Markaz.

Given its position on the Arabian Sea and subsequent short shipping times to India and South-east Asia, the terminal is expected to benefit from a number of export opportunities.

While the efforts made to bolster downstream oil activity should enhance the sector’s revenues and profitability in the medium to long term, in the nearer term, oil majors will benefit from the 20% oil price increase over the first months of 2018 to almost $80 per barrel.

Given that the government’s annual budget was based on expected oil prices of $50 per barrel, rising prices should provide a significant boost to the sector’s contribution to the economy, which the IMF forecasts will rise by 2.1% this year and 4.2% next year, following a decline of 0.3% in 2017.

Improved regulations provide boost to sector investment

Increased oil and gas activity follows changes to the regulatory environment in recent years, which have worked to facilitate investment.

In 2014 the Joint Suppliers Registration & Certification System (JSRS) was established. Devised as a way to create a single supplier pool to provide energy sector operators with easy access to necessary market and industry information, the fully online system also includes e-procurement and contract management functions, as well as a business-to-business connectivity platform called Connect Oman.

A mandatory system for both operators and suppliers, the system aims to improve data gathering efficiency and create a transparent marketplace for new business opportunities.

Due to its success within the oil and gas industry the JSRS has been piloted for use across other sectors of the economy and is expected to be updated with improved regulations before the end of the year.