A decade of rapid development in Oman has seen the sultanate’s population jump, while rising industrialisation and new construction projects have bolstered economic diversification under the Vision 2020 economic development plan. This has not come without costs, however, and natural gas consumption has sky-rocketed in recent years, driven by heavy new demand in the utilities sector, as well as expansive new projects utilising enhanced oil recovery (EOR) techniques. A landmark natural gas agreement with Iran will see the sultanate shore up its gas supplies via its second international gas pipeline, although domestic reserves will likely prove to be beneficial sources of new LNG supply. Having already welcomed its first commercial tight gas production in late 2014, Oman is now moving forward on drilling at its Khazzan tight gas reserves, which are estimated to hold trillions of cubic feet of natural gas. Downstream, major gas projects including a gas plant processing new offshore production will enhance value addition and bolster the supply chain.
A Notable Increase
Gas consumption has shown a sharp increase over the previous decade. The US Energy Information Administration (EIA) reported that consumption rose by 168% between 2002 and 2011, while the sultanate’s National Centre for Statistics and Information (NCSI) reported that consumption expanded by 3.2% in 2013, as a result of population growth and rising demand from industrial projects, to reach 1.38trn cu feet. The sultanate’s total natural gas production, meanwhile, grew to reach 1.31trn cu feet in 2013, including 242.04bn cu feet of associated gas, and 1.07trn cu feet of non-associated gas, up from 1.27trn cu feet in 2012. Salim Al Aufi, the undersecretary of the Ministry of Oil and Gas (MoG), announced in March 2014 that the ministry is planning to expand gas production by an additional 17.65% over the 2013 total between 2014 and 2018 to reach some 4.24bn cu feet per day.
According to data released by the Central Bank of Oman, the sultanate had 24.91trn cu feet of aggregate gas reserves in 2013. The EIA reports that there are 35 producing fields currently in operation, while the sultanate imports around 71bn cu feet of gas annually via the Dolphin pipeline to Qatar. However, demand has been outpacing supply, and with a number of its long-term gas supply contracts offering less-than-favourable rates, Oman is facing the challenge of meeting both its domestic supply demands and foreign export commitments.
“The need for gas is growing very quickly in Oman, as it is throughout the Gulf region. That’s primarily driven by demographics. More young people are moving into the workforce, buying their own homes, and they need power, water, desalination and jobs. All of that means more gas,” Rod MacGregor, CEO of GlassPoint Solar, told OBG.
Iran
One solution to Oman’s gas constraints lies in a new import deal signed with the Iranian government. In August 2013 the Omani government signed a memorandum of understanding with Iran’s Ministry of Oil concerning the construction of a new pipeline running under the Gulf of Oman, supplying the sultanate with gas under a $60bn, 25-year supply deal. According to the EIA, the sultanate will earmark more than 350bn cu feet of imports annually for domestic consumption, processing additional volumes for export from its liquefied natural gas (LNG) terminals. In September 2014, Bijan Namdar Zanganeh, Iranian oil minister, announced that the deal is expected to “activate” soon, telling local media that Iran will supply Oman with 20m cu metres, or 706.3m cu feet, of natural gas per day.
Khazzan Gas Field
In October 2014, the Oman Oil Company Exploration and Production (OOCEP) made history when it brought its Abu Butabul tight gas field, located in the sultanate’s Block 60, into commercial production, marking the first time an Omani operator had added unconventional tight gas to national supply. Tight gas, as its name suggests, can be difficult to extract, requiring sophisticated technology and experienced technicians.
As part of the commissioning phase, small volumes of gas were introduced into OOCEP’s gas processing plant, which is located on the Musandam Peninsula, while plateau production is expected to be maintained at 70m cu feet per day over six years. In addition to five wells already drilled, the OOCEP will continue adding a handful of wells each year to sustain output, with the total first phase of the project expected to reach a value of $2.5bn.
Innovation & Upskilling
Unconventional gas production has been in development in Oman for decades, representing the most significant potential source of future supply. This is especially true in the sizeable Khazzan tight gas reserves, which were discovered in 2000 in the Ad Dhahirah Governorate, and are estimated to hold a total of 100trn cu feet of natural gas reserves.
Harnessing the potential of an unconventional tight gas field, where the gas is trapped in microscopic pores in rock at great depths, is no mean feat. Wells are characterised by tight right with porosity and permeability, and must be hydraulically fractured, or fracked, to enhance productivity, driving production costs higher than in conventional gas reserves. This will mandate innovation and upskilling in the sultanate’s oil industry, offering significant opportunities to become a regional leader in unconventional gas extraction. In December 2013, BP announced it will drill 300 wells in the field’s Block 61 under a 15-year deal with the government worth an estimated $16bn. The project is expected to produce 1bn cu feet of gas per day from tight sandstone deposits located 4.5 km below the surface.
Under the terms of the deal, BP will hold a 60% operating stake, drilling gas using fracking technology developed in the US, while OOCEP will hold a 40% stake, with $1.5bn already invested in the project.
Although supply prices for the deal have not been revealed, BP and the government reportedly haggled for months before signing a 30-year production and gas-sharing agreement. This agreement will allow BP to appraise additional gas resources in Block 61, which will be developed in later phases. The Omani government will take 55% of gas sales revenues, while the rest will be split between the project partners, with 60% for BP and 40% for OOCEP after deducting costs, according to the MoG.
The fields are expected to become fully operational in 2018, with production expected to meet at least a third of the sultanate’s domestic gas demand. BP officials said the company expects to drill 7trn cu feet of gas in total, as well as 25,000 barrels per day (bpd) of gas condensate over the project’s lifespan, ensuring a good rate of return.
Significant Importance
“The Khazzan project is not only important for BP, but also for the sultanate. The economic benefit of gas extends beyond the energy sector because the growth in the supply of energy for Oman is also a potential enabler for economic development and diversification into other sectors,” Dave Campbell, the country manager and vice-president of operations at BP Oman, told OBG.
Khazzan’s development has progressed steadily since December, and in October 2014, BP Oman announced it had awarded two long-term drilling contracts worth an estimated $740m.
The UK’s KCA Deutag was awarded more than $400m in contracts for the construction and operation of five new build land rigs for Khazzan, which will be assembled in Nizwa to maximise employment opportunities under the in-country value programme. Oman’s Abraj Energy Service, meanwhile, won $330m in contracts to supply three drilling rigs for the full field development of the Khazzan Project.
BP Oman has awarded $90m in contracts to Omani companies for civil works, including well pads and in-field roads, in addition to $16m in contracts to Omani companies, which will supply carbon steel pipes, as well as for installation of a water pipeline, which will be manufactured in Sohar. The UK’s Petrofac, meanwhile, won a $1.2bn engineering, procurement and construction (EPC) contract in February 2014 for Khazzan’s planned central processing facility. Expected to be completed in 2017, the central processing facility will have two process trains, and the project additionally includes an associated condensate processing system, power generation plant, and a water treatment system, as well as all associated utilities and infrastructure.
Petrofac has witnessed strong recent expansion in the sultanate following the Khazzan deal, with another contract for Oman’s Rabab Harweel Integrated Project (RHIP). RHIP will include sour gas processing facilities, as well as associated gathering and injection systems and export pipelines, handling production from the Harweel oil reservoirs, as well as gas condensate from the Rabab reservoir.
In March 2014 PDO awarded Petrofac a $1bn EPC contract with the company slated to provide engineering, construction and commissioning management support services on a reimbursable basis, and procurement on an incentivised pass-through basis.
Downstream
Outside of extraction and production, the sultanate’s downstream gas segment is also expanding. In October 2013, the Oman Gas Company (OGC) announced it planned to invest $3.5bn in downstream gas and petrochemicals projects, with a new liquefied petroleum gas (LPG) plant in Salalah, and a gas pipeline connecting the planned Duqm refinery to central Oman.
With its Salalah LPG project, OGC is hoping to produce 700 tonnes per day of LPG, including butane, propane and other condensate, while remaining methane will be sold to the Salalah Free Zone.
In 2012 OGC selected the Spanish engineering company Tecna to carry out a conceptual study for the project, and in April 2014, the Oman Oil Company signed a memorandum of understanding with the Salalah Free Zone to develop the new facility, which is expected to commence operations in 2018. OGC announced in July 2014 that it is preparing to award the EPC contract for the construction of a new gas pipeline between Saih Nihayda and the Port of Duqm in the Sultanate of Oman.
The project includes construction of pipelines between central Oman and the Port of Duqm, as well as new oil treatment facilities that will extract LPG, and processing facilities to produce NGL, at a total project cost of $220m.
Musandam GasAS Plant
The OOCEP, meanwhile, is currently finalising construction on the Musandam gas plant, a $600m project which will process production from the West Bukha field, in the sultanate’s offshore Block 8, when it begins operations.
In June 2013, OOCEP awarded an EPC contract worth $40m to Abu Dhabi-based National Petroleum Construction Company for installation of two offshore pipelines, which are planned to transport well fluids to the Musandam gas plant for processing.
