For decades the energy sector has acted as the key driver of Oman’s economy and it continues to take centre stage in the sultanate’s development. A major magnet for foreign investment, and home to a range of growing domestic players, the sector looks set to continue attracting attention as Oman aims to accelerate growth and meet rising domestic demand. Areas of particular interest include the gas segment, where discoveries in the past two decades have boosted reserves, and enhanced oil recovery (EOR), which will become increasingly important as the sultanate looks to tap into its more hard-to-reach reserves (see analyses).
Sector Legislation
Over the past decades, Oman has embraced an open approach to hydrocarbons development, promoting foreign investment and partnerships in order to capitalise on the expertise, technology and capital-raising ability that international players can deliver. Simultaneously, the government has also strongly promoted local companies operating in the sector. The government’s sound policy-making has helped underpin investor confidence.
Ultimate responsibility for final approval of major policies and investments lies with Sultan Qaboos bin Said Al Said, who also holds the position of prime minister, but day-to-day decisions are managed by other bodies. The oil and gas sector is overseen by the Ministry of Oil and Gas (MOG), currently headed by Mohammed bin Hamad Al Rumhy, who is credited with leading Oman’s recent production recovery. Al Rumhy hit the headlines worldwide in November 2013 when he told a conference in Abu Dhabi that subsidy regimes in the Gulf were leading to waste of valuable resources and that overconsumption was a growing threat to the region. While it is unclear whether this will presage reforms of Oman’s own energy subsidies, Al Rumhy’s statement highlighted what will be one of the country’s most pressing challenges in the future.
Almost all exploration and production in the sultanate has taken place under the aegis of Royal Decree No. 42/74, known as the Petroleum Law, established in 1974. The law laid down the essential regulatory framework for operations in the sector, including the approval process for exploration, extraction, exploitation, storage and distribution of hydrocarbons, as well as the physical infrastructure such as pipelines, storage tanks, ports and port facilities, offshore platforms, pumps and pumping stations, and marine loading facilities. It also established environmental standards and sanctions for operators who breach them.
New Regulations
In 2011, Royal Decree No. 8/11 was promulgated, establishing a new oil and gas law. Much of the basis of the law comes from the previous legislation, but adds aspects of regulation. It includes provisions for health, safety, security and environment, and the protection of archaeological finds discovered during energy operations. Perhaps most significant are its clauses relating to human resources. As well as greater provisions for training, the law extends the concept of Omanisation, obliging international operators to incrementally increase the proportion of Omanis among their workforce. The regulations, intended to promote local employment and to develop the skills base, are part of a nationwide strategy of Omanisation that applies to all sectors.
In addition to industry-specific legislation, companies operating in the Omani hydrocarbons sector are naturally obliged to follow broader regulations on environmental protection and health and safety, including the provisions of the 2004 Labour Law.
PDO
Policies promulgated by the MOG are implemented by Petroleum Development Oman (PDO), whose history dates back to the late 1930s when the Iraq Petroleum Company created Petroleum Development (Oman and Dhofar) to operate a 75-year concession in the sultanate. The government now has a 60% stake in PDO, which it took in 1974, with the remainder held by Royal Dutch Shell (34%), France’s Total (4%), and Partex Oil and Gas of Portugal (2%).
The company is the dominant player in the hydrocarbons industry, accounting for around 70% of total oil production. PDO’s Block 6 is the largest in the country, covering 90,874 km in southern and central Oman.
The firm also has almost all of Oman’s natural gas reserves and production, although this is changing – a process that will be accelerated by the expected launch of commercial production by the UK’s BP on its Block 61 tight gas fields in 2017.
PDO’s total hydrocarbons output was 1.24m barrels of oil equivalent per day (boepd) in 2012, topping its previous peak of 1.21m boepd in 2001. The company averaged production of 566,305 barrels per day (bpd) of oil, above its long-term plateau target of 550,000 bpd. In terms of gas (associated and non-associated), PDO’s production was 582,500 boepd, making 2012 the fifth consecutive year of production growth. The company also produced 92,500 bpd of condensates.
In October 2013, Raoul Restucci, managing director of PDO, announced that the company was planning to invest more than $11bn by 2022 in order to develop 16 new oil projects, with the ultimate aim of producing more than a billion barrels of oil and thereby helping the government meet its wider objective of maintaining and, where possible, increasing the sector’s hydrocarbons output.
As of late 2013, PDO had projects expected to produce around 750m barrels of oil equivalent either under development or in the execution phase, and the company has a portfolio of around 600 projects scheduled to be implemented over the next decade. Restucci has said that PDO will remain focused on achieving long-term sustainable production and optimising development and exploitation of hydrocarbons, both through increasing yields from conventional methods and expanding the use of EOR at unconventional fields.
The company is already performing well on sustainability. According to Restucci, in 2012 it achieved a reserves replacement of 203m barrels of oil, while production was only slightly above, at 206.8m. In terms of natural gas, the company discovered 960bn cubic feet (bcf) of gas against 990 bcf of production. In the coming years, PDO will focus on conventional water-flood extraction in some fields including Amin and Nimr, while intensifying EOR activities.
The company is also experimenting with several types of EOR technology, including chemical, gas injection and thermal, and, since 2012, has been pioneering the world’s largest solar-powered EOR project. Fields where EOR is being deployed include Amal, Qarn Alam and Marmul Al Khalat.
In terms of gas projects, PDO will work on the Mabrouk discovery, developing the Al Huwaisah field, and invest in early production facilities at the Fahud South-west and Khulud gas areas. As part of these projects, PDO will be seeking partners, as it has done in the past, typifying Oman’s encouragement of private sector and foreign investment in public projects.
“The increase in the oil and gas budget will lead to several projects over the next five years,” Vinod Shah, managing director for Oman at Mott MacDonald, a global consultancy, told OBG.” The number of projects arising in the oil and gas, power and water segments has lead to a mass of new players within the industry, which has increased competition as never before.”
OOC
In 1996, PDO was joined by the Oman Oil Company (OOC), a wholly government-owned company with the mandate to pursue investment opportunities in the energy sector within and outside Oman. It has partnered with a range of other players including other government bodies and international companies to pursue ventures from exploration through to production, refining, marketing and distribution.
The company’s assets include the 25,600-sq-km offshore Block 42; a 20% stake in the Oman Gas Company, a gas distribution firm in which the MOG owns the other 80%; and a 25% stake in the Oman Oil Refineries and Petroleum Industries Company, which operates the country’s two refineries and in which the Ministry of Finance owns the other 75%. OOC also owns 20% stakes in two fields in Kazakhstan, as well as stakes in downstream companies in Spain and China, amongst other international investments.
Reserves
As of the end of 2012, Oman had expected oil reserves of 4.97bn barrels, or 0.3% of the world total, according to BP’s “Statistical Review of World Energy 2013”. The country’s reserve to production ratio was 16.3, meaning that if production continued at current rates and no new reserves were found, it would take just over 16 years for the sultanate to use all its proven reserves. However, ongoing exploration has actually seen expected reserves of oil and condensate rise from 4.7bn barrels in 1992 to 5.7bn barrels in 2002, falling slightly over the past decade despite continuing production.
Output Rising
Oman has implemented a successful programme of boosting oil output in recent years, following a decline as major fields matured. Between 2000 and 2007, for example, production fell from 955,000 to 710,000 bpd. However, increased use of EOR on older fields in recent years, including some that have been in operation for more than four decades, and production from new fields has lifted output to around 940,800 bpd by October 2013.
This represents a significant rise from 2012, when the sultanate had an average production of 918,500 bpd, itself up 3.8% from 2011. The government aims for average production of 940,000 bpd in 2013, and to maintain this level for five years.
As of October 2013, there were ongoing exploration and production activities in 31 exploration blocks in Oman, according to MOG. Nearly all of the country’s hydrocarbons production comes from the Oman Basin, which covers much of the country’s territory, with an few small offshore fields around the Musandam Peninsula, an exclave protruding into the Strait of Hormuz. In November 2012, offshore production commenced at Musandam’s Block 8.
“There’s not much oil left untouched onshore, and there is limited scope for getting more out of the ground,” Kingsuk Sen, chief commercial officer at Petrogas E&P, told OBG. “Most acreage onshore has already been surveyed. Offshore provides more untouched areas, and is just opening up. There is a lot of exploration and the main future discoveries will be there.”
Almost all of Oman’s natural gas production is associated, that is, found alongside crude oil and brought to the surface during oil extraction. However, this may be about to change, with production expected to start in the coming years on the potentially substantial Block 61 tight gas field (see analysis).
Major Contributor
It is hard to exaggerate the importance of the hydrocarbons industry for Oman – oil and gas earnings contributed 49.6% of GDP and 85% of government revenues in 2012, according to the National Centre for Statistics and Information (NCSI). Through oil income, the government is able to maintain its investment-friendly, low taxes while sustaining high levels of expenditure. Government spending is set to rise considerably in the coming years, as the sultanate pushes ahead with ambitious plans to strengthen its infrastructure, including large-scale investments in roads, a new railway and industrial developments at ports such as Sohar and Duqm.
Expenditures rose 1% to OR9bn ($23.3bn) in the first 10 months of 2013, according to the NCSI. During this period, the fiscal surplus fell 80.6% from OR2.81bn ($7.28bn) to OR544.1m ($1.41bn), thanks not only to the rising spending, but also to a drop in the average price of Omani crude oil to $106 from $110. Although Oman is promoting greater economic diversification, which should reduce dependence on oil earnings for the government and the economy as a whole, in the short and medium term sustaining oil output is key to ensuring that the country meets its investment targets without running a deficit. Furthermore, as the fiscal results of 2013 demonstrate, raising production should also help buffer the Omani economy from drops in the global oil price.
Costs & Price
Costs of raising a barrel of oil to the surface vary widely in Oman, depending on the geology, the age of the field and the extraction technique used. For example, extracting oil from Block 7, 3500 metres under the surface and requiring EOR, costs $40-45 per barrel. Whereas in the free-flow Rima field, 1200-2000m deep, the cost is much lower: $15-16 per barrel. Maintaining a relatively high price will be important for the sector to continue attracting investments, as margins must remain sufficient for oil companies to take on the significant capital expenditure required.
Higher prices will also be important for the country to meet its ambitious infrastructure spending plans. The government estimates that its breakeven price for 2013 is $104, somewhat below the 2012 average price of Oman crude, $109. Sen is confident that the Brent crude price will hold at least $100, and probably average a nominal $120-130, in the coming years.
A number of factors point towards a fairly solid oil price in 2014 and potentially beyond, though predicting the commodity’s movements is never straightforward. High demand from emerging markets and the geopolitical risk caused by the conflict in Syria promise to keep prices high. However, a slowdown in some emerging economies, particularly China, Oman’s main export market and forecast to soon be the world’s largest oil market, could result in lower prices. Rapprochement between the US and Iran, while welcome for the peace dividend that it could bring to the region, may also put downward pressure on oil and gas prices.
New Projects
In November 2013, the MOG announced plans to offer 53 hydrocarbons projects to the private sector in the next seven years to drive the industry’s expansion and create between 10,000 and 15,000 new jobs for Omanis.
Nassir bin Khamis Al Jashmi, then-undersecretary at the ministry, told local press that the projects would include manufacturing, assembling and services, though he did not give figures of total investment. “These projects will include developing existing industries and constructing new units,” Jashmi said.
Service companies are already gearing up for a new wave of tenders and subcontracts that they expect to come from Oman’s large-scale new investments in hydrocarbons. “The continuous growing demand for oil and gas has put pressure on suppliers but has also created an opportunity for service-related small and medium-sized enterprises (SMEs) in the sector,” Dave Campbell, general manager of BP Oman, told OBG.
Other Sector Players
After PDO, Oman’s second-biggest producer is Occidental Petroleum, which currently holds three blocks: Blocks 9 and 27 (4083 and 1254 sq km, respectively), as well as Block 53 (694 sq km). Occidental produced an average of 218,000 boepd in Oman in 2012 and sees the sultanate as “an ongoing growth driver for the company”, CEO Stephen Chazen said in the company’s 2012 annual report.
Chazen noted that at the Mukhaizna field in Block 53, the company ramped up average daily production to 120,000 boepd, more than 15 times the level when the company signed a 30-year production agreement with the government in 2005. Occidental has a major steam flood project at Mukhaizna and has drilled almost 1800 new wells since it began operations.
Another large producer in the country is Petrogas, a mid-sized player which sources most of its output from three primary assets: Block 5 with 40,000 bpd; Rima, where it has a service agreement with PDO and an offtake of 12,000 bpd, and Block 7, its most mature field, with an output of 1000 bpd. Petrogas took over Block 5 in 2001 when it was producing 4500 bpd, and company officials are confident that production can be ramped up further. Sen told OBG that the increases in production that the company has achieved in Block 5 and Rima are indicative of its capacity to maximise production at mature fields where other players might not have managed – providing another example of the importance of technical expertise, including geological knowledge, in Oman’s environmentally complex and competitive hydrocarbons sector.
“We are always on the look out for projects in Oman,” said Sen. “We actively participate in bidding. In the oil and gas industry, value is driven by expertise and human resources. People are a core value generator – it’s an advantage having a geological and geophysical (G&G) team that knows Oman’s geology more than most, and understand the geological plays that are available. It is important to have the capacity to do out of the box thinking about opportunities that haven’t been exploited yet.” New entrants that lack this expertise can be at a disadvantage, as they have to acquire the knowledge to compete effectively. Thus many foreign companies partner with a local firm that has the G&G knowledge, while bringing technology that domestic players do not always have. These sorts of partnerships are a natural strategic fit and also help pool risk. Given the fact that oil in Oman is becoming harder to extract – and will increasingly require higher capital investment, EOR technology and an understanding of the geology – the logic behind these sorts of partnerships is likely only to grow stronger.
In terms of liquefied petroleum gas (LPG), Oman’s main player is the National Gas Company. However, with domestic prices fixed by the government and increasing operating costs, the company has expanded throughout the region and to Malaysia. Sheikh Abdulla Suleiman Al Harthy, chairman of the National Gas Company, told OBG, “The hardships of the domestic market for LPG products are price and quantity constraints. For the domestic market to evolve and to thrive, these key issues must be addressed.”
Proactive Stance
Oman has long taken a proactive stance in encouraging foreign investment in the energy sector, as it is aware of the need to harness expertise and economies of scale from big international players, while also encouraging local companies to engage and grow as partners.
For example, the country’s geology makes extraction generally more technically difficult than in most of the rest of the region and, as a result, Oman offers contract terms that are more favourable than those found in other GCC member states. As a result, the country has attracted a number of international players including, among others, Shell, Occidental, Partex, Total, China’s CNPC and Spain’s Repsol.
Following recent changes, the government now takes a stake in projects after the discovery of commercially viable reserves, retrospectively paying partners for its share of the exploration risk. This means that the government avoids risk in explorations that do not yield commercially extractable resources. Generally speaking, bidders have not raised objections to this change, which is partly designed to help the government – often through OOC – retain funds that it can invest in other sectors, fulfilling its growing role as a driver of economic diversification.
Omanisation
While the oil and gas industry is one of Oman’s main sectors and requires many skilled workers, it is also one of the more Omanised areas of the economy and is dominated by the private sector. This is partly due to the sector’s history and importance. It has been thriving for decades, so Omani educational institutions are primed to train students for roles in the hydrocarbons industry, and Omanis are well aware of the opportunities available. There is also now a long legacy of knowledge transfer from international investors operating in a range of different segments.
“Energy is the largest sector in Oman and it is still growing,” Mulham Al Jarf, deputy CEO of OOC, told OBG. “By developing its human resources (HR) capacity, the industry is putting itself in a better position to sustain future growth. We can empower SMEs in Oman by providing them with a proper education and knowledge of the sector to which they cater. Once this has been established, it will encourage larger contractors to hire and work with SMEs.”
BP, a relative newcomer to Oman, has a 74% rate of Omanisation. Among its efforts to attract, train and recruit Omanis is a training programme for technicians, which has recruited 40 people so far, with a final target of 150. The scheme involves four to five years of training in technical skills and management. As a comparison, Petrogas E&P, a local company, has Omanisation levels of around 85%.
Finding workers who have both sufficient training and experience can be difficult, particularly given this international competition for top workers. While there is a growing stream of young graduates, they do not have the career experience necessary to take on senior roles. Naturally, this will change over time, as these graduates gain experience and rise up the corporate ladder, but it is a necessarily slow process. Thus companies are focusing on training graduates on the job.
This can be frustrating for some graduates who, having invested in higher education, expect faster promotion, rather than a more gradual process starting with on-site jobs. “Hard oil and gas specialities are still hard to come by, but educational standards are progressing well,” Irshad Al Lawati, CEO of Oman Society of Petroleum Services (OPAL), an industry body that works to promote and strengthen the sector, told OBG. “Things are getting much better, but could be improved. For example, we need more technicians and engineers. Not many vocational training colleges are addressing the specific requirements that the oil and gas sector has. There needs to be a sustained focus.”
One of the effects of the Omanisation drive has been a tightening of work visa restrictions for foreigner workers, making it more challenging to import skilled labour where it has not been possible to find, or recruit, an Omani specialist. While these restrictions are an understandable measure to help promote the employment of Omanis, they can be a source of frustration for firms in need of specific skills that are in short supply. This issue can be particularly troublesome when the need is urgent. The resource pool is ultimately limited by Oman’s small population, fewer than 4m people, as much as by the proportion of graduates equipped with the necessary skills. “The global oil and gas industry faces challenges in finding and hiring capable individuals,” Campbell told OBG. “The available talent pool in Oman is small but there is lots of potential. Human capital development requires proper investment and attention to ensure long-term sustainable success.”
In-Country Value
Omanisation is an important plank of Oman’s in-country value (ICV) programme, which aims to boost value-added elements within the domestic hydrocarbons industry and retain the benefits of investment within the country. The government’s strategy includes a target of raising the percentage of the local contribution in the oil and gas sector from 18% to 32% by 2020 by adding 10, 000-15,000 jobs. The government has also established an ICV committee, bringing together executives of upstream and downstream companies, with the goal of creating polices and regulations that increase the proportion of revenues that remain within Oman, catalysing business formation and new skilled jobs.
“ICV is about involving local organisations. It is about further developing SMEs, which will increase volumes in the sector as time goes on. SMEs can be developed through the Super Local Community Contractors model,” Peter Hall, CEO of Al Hassan Engineering, told OBG, referring to a programme which aims to ensure that the local community benefits from nearby oil and gas production. “PDO is a great example of how this model can be successful, where big companies help buildup expertise in local companies.”
PDO provides a list of potential areas for Omani companies to invest, effectively a shopping list of possible projects for which there is perceived growth potential. The idea is to provide ready-made basic project plans and a one-stop shop for local investors looking to capitalise on the oil and gas industry’s growth.
OPAL
Local companies in the hydrocarbons sector can rely on the support of OPAL, which has 374 members, mostly Omani. The organisation does not operate in the commercial domain, but aims to improve the way that the industry functions and its standards. This includes the fields of health, safety and HR – for example, OPAL supports sector companies in their efforts to comply with Omanisation targets.
OPAL issues compliance verification certificates (CVCs) for companies meeting standards in caring for their workforces, HR development, and health and safety. Society officials say that the organisation’s regulations are more stringent than the industry average, and that the group develops best practices and models that can be adopted by the industry more widely.
OPAL’s training for employment programme involves the society acting as a nexus between sector employers, education providers and job candidates. When companies need (or forecast a future need for) specific staff, they contact OPAL, which helps them establish off-the-shelf training programmes for those roles, as well as locate potential candidates to train. The successful trainees then have guaranteed employment contracts – the system benefits everyone. OPAL is also offering forums and discussion groups for industry stakeholders on various key topics.
Outlook
While diversification efforts are bearing fruit and are a major focus for the government and private sector alike, there is no doubt that hydrocarbons remain the primary driver of Oman’s economy, and will do so for some years to come. The future will be affected by international oil prices and demand outlook, always a tough factor to forecast, but the sector looks to be in good health as it enters 2014. Investments in exploration are paying off and have helped bolster Oman’s relatively modest reserves, and BP’s Block 61 could provide another major boost to gas supply. Oman is ahead
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