Non-Opec producer Oman struggles with Opec policy
Oman, a large non-Opec producer is struggling under the wilting oil price
Mohammad Al-Ruhmy, Oman’s urbane oil minister, is not happy. Opec’s decision to leave output unchanged last November, part of a Saudi-led campaign to push costly rival North American supply out of the market, has caused collateral damage nearer to home. Oman, a member of the Gulf Cooperation Council (GCC) and the region’s largest non-Opec oil producer, is among the unintended victims.
Ruhmy used a Petroleum Economist conference in Kuwait City in January to deliver his withering verdict on Opec’s decision to make market share, not revenue, its priority. Before it “declared war” on rival suppliers at the November meeting, Opec had been earning $2.7 billion to $2.8bn a day, said Ruhmy. The plunge in oil price since then has cut that income by almost half. “Apparently $1.5bn is better than $2.7bn or $2.8bn,” he said. “This is politics that I don’t understand. What have we achieved? We have created volatility. How can you plan your business with a volatile commodity?”
Among GCC countries, Oman and Bahrain are most exposed to the slump in oil prices thanks to their relatively low sovereign reserves and high break-even oil prices – $99 a barrel for Oman, according to the IMF. High spending is partly to blame. In January, defying the collapse in oil markets, the government announced another rise in its budget. Combined with a fall in oil revenue, which accounts for almost 80% of the country’s income, this would force the government to run a deficit of 7.8% in 2015 – the only GCC member to do so, said Moody’s, a ratings agency. With an estimated $19bn in sovereign reserves, or about 21% of GDP, Oman has limited firepower compared with its bigger Gulf rivals. Even without the fall in oil prices, said the IMF recently, Oman’s net debt would reach about 10% of GDP by 2017. Accounting for the price fall, the finances will inevitably look even more fragile.
The slump could yet also undermine the country’s hopes to continue lifting oil output, which has risen annually since 2007 and reached just over 940,000 barrels a day (b/d) at the end of 2014. This year, production could reach about 965,000 b/d, according to Ruhmy, a record high for the country and one it didn’t expect to hit before 2018. Some oil ministry officials have even talked of production reaching 990,000 b/d by year-end.
Yet the resilience of such plans remains to be seen. State company Petroleum Development Oman (PDO), which has accounted for the bulk of production growth, has already begun an $11bn programme across more than a dozen deposits. It says it will stay the course. But Omani production, involving increased use of extensive enhanced oil recovery, is costly compared with other regions in the Gulf. Margins will be difficult to maintain at lower oil prices, especially when the government has to plug gaps elsewhere.
Foreign investment would help. But efforts to draw international oil companies to Oman’s offshore – where two blocks were offered in 2012, when oil prices were much higher – have been fruitless so far. The market’s collapse will hardly encourage margin-obsessed investors to speculate in Oman’s pricey offshore. A measure of their enthusiasm will be plain in March, by which time the government should have announced the results of last year’s bidding round, which included three onshore blocks as well as the two offshore.
If the results are as disappointing as expected, they shouldn’t detract from Oman’s recent success in boosting oil output, or its importance as a supplier to Asia, the destination of more than 830,000 b/d of its crude in 2013. Since 2000, natural gas exploration and production – spurred by the coming-on-stream of Oman’s two liquefied natural gas (LNG) facilities in 2000 and 2005 – has been similarly prolific. In 1999, output was just 200bn cubic feet (cf). By 2013, it had reached about 1.3 trillion cf.
Domestic demand has almost kept pace, growing from 182 bn cf in 1999 to 715 billion cf in 2012. Meeting this local need while also exporting 10.4 million tonnes a year (about 500bn cf) is getting harder. Oman LNG, in charge of the two LNG plants, has said that by 2024 it may be forced to end exports so the gas can be used domestically. For now, the Dolphin pipeline from Qatar has supplied some extra gas. Oman has also signed a preliminary agreement with Iran for a $60 billion pipeline to connect the two countries. Iran could use the link to export some of its own gas as LNG. But details, not least the price of the gas and its volume, remain sketchy.
The best option for Oman’s gas sector would be further development of its own reserves. A lot rests on BP, which agreed a $16bn deal in 2013 to develop the 7 trillion cf Khazzan field, a tight gas play in block 61. BP says it will drill 300 wells over 15 years at Khazzan to produce 1bn cf a day of gas, enough to lift the country’s output by about a third. Production is due to begin in 2017. It will be one of the world’s most significant unconventional projects outside North America, and a critical development for both Oman and the Gulf.