PDO branches out
The firm is building on decades of experience to further develop its technological prowess and encompass alternative fuels
Petroleum Development Oman is a remarkable survivor, dating back in some form to 1937. It's a curious hybrid, not quite a national oil company, but more than a private joint venture. And it's embarking on probably its biggest transformation—even changing its name—since the government acquired a majority stake in 1974.
The new 'Energy Development Oman' (EDO) now faces three major tasks: to sustain production from increasingly mature oil and gas fields; to introduce new hydrocarbon and non-hydrocarbon technologies; and to strengthen the national economy and capabilities.
Along with its wider capabilities Sultan Qaboos, ruler since 1970, PDO has built Oman. When the sultan overthrew his father, the country had 10km (6 miles) of paved roads and three schools. Oman never had the oil wealth of its neighbours, Saudi Arabia, Iran and the UAE. But PDO built up production impressively to fund modern infrastructure and a consolidated state.
PDO groups the Omani government (60%), Shell (34%), Total (4%) and Partex, inheritor of Calouste Gulbenkian's interests (2%). The company's Block 6 concession has been chipped away at over the years, but still covers 30% of the country's land area. It has about 70% of the country's oil reserves, 63% of its gas, and produces 60% of Omani crude and currently 80% of gas. This dominance, and the state's majority interest, make it like an NOC, even though Oman also has a 100%-owned entity, Oman Oil Company.
But unlike many NOCs, it has no downstream (refining and petrochemicals). In fact, even its gas production is managed on behalf of the government. And it remains strongly influenced by Shell. Long-time managing director, Raoul Restucci, appointed in 2010, is a Shell veteran. The British-Dutch firm may have pulled back from the Middle East in recent years, but PDO remains a core asset in finances, reserves and as a technical test-bed.
Saudi Aramco may make the Middle East headlines, but PDO is probably the region's technically most adept state oil firm. It deals with almost every onshore technical challenge: deep, tight and sour gas; very mature oilfields with water-cuts over 90%; heavy oil; and a variety of enhanced oil recovery operations covering miscible hydrocarbon gas injection, surfactant and polymer injection, and steam floods, even using solar heat.
Oil output plateau
Crude oil production peaked in 2000, and went into steep decline amid Shell's 2004 revelation that it had overstated its reserves, including a significant chunk in Oman. But since 2011, crude and condensate production has stabilised and somewhat increased to 600,000 barrels a day of crude and 81,000 b/d of condensate in 2016, until it was slightly cut back in 2017 to comply with the OPEC+ deal. Today, gas output is 2.7bn cubic feet a day, some of which is used in operations, and the rest supplied to the Oman LNG export plant (in which both Shell and Total have shareholdings) and the domestic market for power and industry. Future oil production has a target of 650,000 b/d, with a plateau at 2022, while gas is set to decline somewhat. That means that, even with heavy efforts, Oman as a country will have to look to its other operators and areas for growth.
"PDO is working to transition to a fully-pledged energy company with a greater emphasis on renewables"—Restucci, PDO general manager
It now has 178 producing oilfields and 12 producing gasfields, far more than its neighbours, and runs 46 rigs, about half as many as Saudi Aramco for less than a tenth of the production, indicative of the amount of effort the mature fields require. Its long-time workhorses, Fahud (PDO's original discovery), Lekhwair and Yibal, carbonate fields in north Oman, have been in decline for some years. The drop is made up by growth in south Oman, including the unusual Precambrian carbonates of the Harweel area, and complex glacial sandstones; and various heavy-oil and tight-gas developments across Block 6.
With some 50bn barrels of original oil in place, 12bn barrels produced to date, and 5.4bn barrels of reserves, the currently-estimated ultimate recovery factor is about 34%. Both Saudi Arabia and Abu Dhabi target 70%, from their simpler and larger fields. So, PDO needs to work hard on enhanced oil recovery (EOR)—it projects that 23% of its production by 2025 will come from EOR. This makes it a valuable test-bed for techniques that will be applied elsewhere in the Middle East in the years to come. Oddly though, carbon dioxide flooding, preferred in Abu Dhabi and Saudi Arabia, isn't on PDO's agenda.
More heavy oil?
The most headline-grabbing EOR project has been Miraah, a giant array of mirrors to concentrate solar heat to make steam, with 1,021 megawatts equivalent output, saving gas and carbon dioxide emissions. The Rabab-Harweel integrated development, due to come on stream in 2019, is one of PDO's two largest current endeavours. The other is the conventional development of complex sour oil and gas reservoirs in the Khuff reservoir of the Yibal field in north Oman, to begin in 2020.
Meanwhile the large Habhab heavy-oil field, with 1bn barrels in place of less than 10° API gravity oil, in a low-permeability sandstone, requiring complex solvent injection, was shelved due to high costs, but is now offered by PDO for contractors to develop under a service agreement.
The company has also been developing difficult gas, particularly from the recent Mabrouk North East find, with 4 trillion cubic feet of tight gas at a depth of around 5,000 metres. Such fields are the likely future of its gas business, and for Oman in general with BP's separate, giant Khazzan field, carved out from Block 6. In May, Shell and Total also agreed with the government, outside the PDO framework, to develop tight gas in the Barik area, and build up an LNG ship-bunkering business. Khazzan, in particular, has, for a while, taken the pressure off PDO to meet what had appeared a threatening national gas deficit.
Overall, PDO will invest $20bn up to 2021, having spent $5.8bn in 2017. If anything, therefore, that represents a slight fall in annual spending, putting a premium on cost savings and improved efficiency. With operating expenditure of $1.8bn, the implied costs are about $15 per barrel of oil equivalent of capital costs, and $4.6 per boe of operating costs. That makes it relatively expensive compared to Middle East peers, and higher oil prices in 2018 will be welcome in ensuring the new EOR projects remain economic. Some were suspended during 2016-17, but are now likely to come back if the oil price remains reasonably strong.
Beyond this core oil and gas business, the concept of EDO includes a push into new energies. Restucci says "PDO is working to transition to a fully-fledged energy company with a greater emphasis on renewables". As well as Miraah, the company wants to broaden its focus to include solar photovoltaics and wind. It has almost 6 MW of solar PV installed on carparks and has tendered for 100 MW to power fields in southern Oman. Produced water at the Nimr field has for some years been treated with reed beds, and PDO is looking at the possibility of biosaline agriculture.
But the EDO paradigm remains nascent. Is the company going to take on the attributes of a renewable energy vehicle like Abu Dhabi's Masdar? Is it becoming an NOC with some supporting renewable projects in the style of Saudi Aramco? Or is it starting on the path of its shareholders Shell and Total towards an eventual hybrid oil-energy company? The coming years will provide the answers.
The lower oil prices of 2014-17 strained Oman's finances, and PDO has been called upon to support them. In June 2016, it turned to banks to raise $4bn of debt to reduce the call on government financing, and it took a further $1bn pre-export financing in July 2017.
In the style of a dominant NOC, PDO is also expected to support local employment and the national economy. Its 8,772 staff are 79% Omani. But back in 2011, amid protests in Oman, there was some discontent from PDO employees about their salaries and other conditions. In 2014, several PDO employees and contractors received lengthy jail sentences and heavy fines over corruption cases.
Like Saudi Aramco and Adnoc, the company has an in-country value-added programme to encourage local businesses. This presents one challenge: cutting costs in a lower oil-price environment while not bankrupting the domestic oil service sector. And given its 40% private shareholding, the government doesn't have absolute discretion to direct PDO for social goals.
PDO is a valuable trailblazer for other Middle East NOCs, both technically and as a model of a successful private-state partnership. At the same time, the country's unique characteristics, political and geological, make it rather hard to emulate. PDO is vital to keeping Oman economically afloat through a difficult episode. Energy Development Oman is on the horizon, but going beyond petroleum appears as difficult here as across the Middle East.
Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis