Related Articles
Forward article link
Share PDF with colleagues

Oman mulls over tight-gas price

Huge tight-gas reserves need higher prices to make projects economic

OMAN’S need to plug a domestic gas supply shortage may force it to sweeten the terms of a deal signed with BP four years ago to develop two tight-gas fields. Local press reports suggest the government is prepared to renegotiate its 2007 agreement with BP to develop the Khazzan and Makarem fields, in the central region, once BP presents its full development proposals.

The Block 61 fields are part of an area covering 2,800 square km awarded to BP, where the supermajor estimates reserves could be between 20 trillion and 30 trillion cubic feet (cf) of tight gas – although the two fields may hold significantly more volumes than this.

BP has so far drilled seven appraisal wells with two more expected by mid-2011. Once it determines a development plan, BP will begin talks with the oil ministry over price terms, with the company likely to press for higher prices as it moves towards a final investment decision.

Oman is under growing pressure to retain BP’s interest in the potentially massive project, after the sudden withdrawal of BG Group from a rival tight-gas project in June last year. Oman reached an in-principle deal with BG in November 2009 on Block 60, estimated to hold around 8 trillion cf of gas in the rock. But by June last year, BG walked away from the work programme commitment, having failed to find sufficient commercial reserves to justify developing a field that needed $0.8bn of capital investment.

The failure to agree a price satisfactory to both sides may have influenced BG’s pullout. The original Omani gas-purchase price from BG was set at just $1/m British thermal units, which was considered much too low to monetise Block 60’s tight-gas reserves.

“It was a big blow to them when BG left,” says Sam Ciszuk, Middle East energy analyst at IHS Global Insight. “Although the BG tight-gas project was not as big as BP’s, it was a wake-up call to them that they must provide better commercial terms – tight gas is very important to Oman and could be a true game changer.”

Khazzan and Makarem could raise Oman’s gas production by a third, Ciszuk predicts, with the prospect of pumping 1bn-2bn cf/d, compared with total Omani gas output of 3bn cf/d. This would be enough to end gas shortages in the sultanate. But to do so, it must clearly provide terms sufficiently attractive enough to BP to sell the gas domestically.

If BP opts to go for full development of Khazzan and Makarem, it will prove an expensive project. “If they roll it out on a much bigger scale, that will require some very big investments. The question up to now has been: is it technically feasible to produce this tight gas? Now it looks like BP is optimistic that it can, but it will be nothing like the historically cheap gas produced in the Gulf previously,” says Ciszuk.

According to Global Insight, Oman has a greater appreciation than other Gulf states of the need to accept higher gas-purchase prices for difficult gas.

If Muscat accedes to BP’s demands for prices that exceed the existing domestic rates for non-associated gas, it would mark a significant change for the Gulf’s gas sector, where the resource has been viewed as a cheap, subsidised feedstock for power stations and downstream industries. Yet the government may have little choice if it is to ensure sufficient volumes to keep its export-revenue-earning liquefied natural gas (LNG) export projects operating.

In 2009, Oman LNG and Qalhat LNG exported 9.9m tonnes, around 20% below the previous year’s level, a result of rising domestic gas demand.

The situation is different from neighbouring Abu Dhabi, where US independent Occidental in January secured a 40% interest in the Shah sour-gas field, a year after ConocoPhillips pulled out of the project. Oxy has failed to wring pricing concessions out of state-owned Adnoc and will instead recover costs through the sale of condensates.

Compared with Oman, Abu Dhabi does not suffer such large gas-supply shortages, which put Adnoc in a stronger negotiating position relative to foreign companies looking to position themselves for unconventional-gas plays in the region.

Oman has fewer cards up its sleeve when it comes to bringing its tight-gas deposits on stream. Says Ciszuk: “The Omanis need this gas and weren’t quick enough to realise that, leading to BG’s exit last year. They are simply adjusting to the new realities.”

Also in this section
Zama oil find targets 2020 FID
17 January 2020
Upgraded resource estimate from Mexican field boosts hopes of a financial decision, but a serious potential roadblock remains
PNZ patch-up raises offshore gas hopes
17 January 2020
Belated reconciliation over acreage shared with Saudi Arabia offers relief for Kuwait's flagging oil expansion efforts
Russian oil hits another peak
16 January 2020
The country’s 2019 production reached a further post-Soviet high, marking another year Moscow fell short of cuts promised to its Opec partners