Oman: Shoring up supply

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The Omani government is moving forward with plans to raise prices for natural gas in an effort to recalibrate the supply-and-demand equation, with local demand for the feedstock rising rapidly on the back of industrial expansion and domestic supplies limited.

While some producers will doubtless be affected by the move, it is designed to balance the needs of industry with those of the broader economy, keeping local industries running while the government continues to search for additional domestic reserves.

With global market conditions prompting increasing use of the feedstock and the Sultanate’s reserves relatively smaller than those of some of its neighbours, a rebalancing is necessary, and the rise will bring Omani natural gas prices more in line with the market, local media has reported.

However, the increase could temporarily impact the expansion plans of several foreign and domestic industrial players, which include iron and steel producer Jindal Shadeed, aluminium producer Sohar Aluminium and global mining firm Vale.

Downstream processing activities, especially in the Sultanate’s burgeoning aluminium sector, could also be affected. Oman Aluminium Processing Industries (OAPIL), which is aiming to more than double its processing capacity, is dependent on low-cost gas from the government, according to Hussain Salman Al Lawati, the vice-chairman and managing director of Oman Cables, one of OAPIL’s parent companies. “Our expansion will depend on commitment from Sohar Aluminium for liquid aluminium and the government for natural gas,” he told The Times of Oman on November 16.

Oman India Fertiliser Company (Omfico), which ships most of the urea it produces to India, has reported the price of gas purchased from the government could increase fourfold. Changes to its contract could increase prices from $0.77 per million British thermal units (mBtu) to $3 per mBtu, thereby increasing imported urea prices by around $60 per tonne.

Though the price of urea supplied by Omfico would almost certainly increase from its current price of around $150 per tonne, it would likely still remain far below current market prices, which can reach up to $500 per tonne.

Oman has proven natural gas reserves of around 30trn cu ft, according to the Oil & Gas Journal. The Sultanate produced about 875bn cu ft of natural gas in 2010, amounting to around 2.4bn cu ft per day, according to the US Energy Information Administration (EIA), and in 2009 exported 208bn cu feet of natural gas, coming in only behind Qatar in the region in terms of exports.

However, while the Sultanate is a net exporter of natural gas, shortfalls in supply during times of peak demand have led the government to begin importing gas as well. This mostly comes from Qatar and the UAE through the regional Dolphin Pipeline system, which transports 2bn cu ft of natural gas per day.

The government is currently investigating ways to increase its reserves, according to the EIA. This would help it meet the demands of export contracts, as well as provide ample supply for domestic consumption, which rose by 135% between 1999 and 2009. This rise was largely due to growth in both the population and the economy. The growth of industry in the Sultanate has also increased demand, and the government has set aside a significant amount of natural gas to fuel industry expansion.

“Oman has set aside 5trn cu ft of natural gas for industries in Sohar, as part of a major industrialisation drive in [the city],” Frederic Rouyer, CEO of OAPIL, told The Times of Oman in November.

The discussion of raising prices is heating up just as Oman has been accepted to the Gas Exporting Countries Forum, an intergovernmental organisation comprising 12 gas-producing countries – including Russia, Iran and Qatar – which together control more than 70% of the world’s natural gas. Sergei Shmatko, the Russian minister of energy, told Russia’s state-owned news agency RIA Novosti in mid-November that the organisation is seeking to expand its global reach.

"Requests for admission from several other countries are currently under consideration," he said. "The forum has become an effective platform to discuss very diverse issues of the gas market development."

As Oman has become a more active participant in global energy markets ¬– particularly as an exporter of oil and gas – the need to bring prices in line with global norms has grown more apparent. While a price increase may not receive a warm welcome in many industries, it will aid the Sultanate in maintaining its supply and meeting the population’s growing energy demand in the long term. The extra earnings, in turn, will likely help expand domestic industries and create a more solid foundation for maintaining its position as a natural gas exporter.

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