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Gas on the rise in Oman

Expanding upstream investment is boosting Oman’s thriving gas sector

From being a country in danger of falling off the global energy map as the rate of new oil discoveries slowed, Oman today is attracting some of the biggest names in the business, with BP and Italy’s Eni joining long-time stalwarts Shell and Total in developing the Mid-East Gulf nation’s upstream. The attraction these days is the prospect of developing new gas reserves. 

“Gas is on the rise in Oman, and this transition is very timely. Oil output declines over the last two years may indicate a point of no return for Omani oil, but the country’s sliding oil production is set to be replaced by gas”, writes Aditya Saraswat of analysis firm Rystad. 

Shell (with a 75pc share) and Total (with 25pc) signed interim upstream gas agreements in February this year to develop reserves in the Greater Barik region in the north-west. Initial production is estimated at 500mn ft³/d. Aside from providing feed gas for Shell’s planned 45,000bl/d gas-to-liquids (GTL) facility at Duqm port, the plan is for Total to develop an LNG bunkering project at Sohar port, with capacity of 1mn t/yr. 

BP is partnering Eni in a 50/50 venture to develop Block 77, which lies only 19 miles (30km) from Khazzan—the field which produces 1bn ft³/d of Oman’s total 3bn ft³/d) and which has enabled the Oman LNG (OLNG) facility to not only resume its nameplate capacity production of almost 11mn t/yr but to undertake a debottlenecking programme that will lift output to 12mn t/yr by 2021. 

The expansion of Oman’s energy sector as a whole offers opportunities for investment in new technology and expertise

“I’m not an upstream person,” says OLNG CEO Harib al-Kitani, speaking on the sidelines of Petroleum Economist’s 2019 Awards ceremony in London, “but from what I hear we are very, very excited about it.” Oman energy minister Mohammed al-Rumhy has said the block contains discovered reserves of up to 4bn ft³, with the potential of there being as much as 10bn ft³ in place. Eni is also slated to start drilling offshore Oman, in Block 52, in early 2020, with the expectation of finding gas. 

New arrangements governing the gas sector are attractive both for operators and the government, says Kitani. “Before, upstream companies would find gas and the government would buy it from them, with the government taking the full risk. Today, the government lets the companies discover the gas and develop it all the way to production and export. It is a totally integrated project from one end to the other. It helps the government in terms of risk taking and financial commitments.” 

Investment opportunities

The expansion of Oman’s energy sector as a whole offers opportunities for investment in new technology and expertise. “The government is spending a lot of money on bringing in technology,” says Kitani. “These days you cannot survive without being efficient and without cost optimisation. Part of our rejuvenation project at Oman LNG is modernising the technology. The current first phase of debottlenecking is using new technology. If we move to Phase 2, it will again be totally new technology, cooler boxes, the pre-cooling of gas before it goes to the compressors. A lot of this is being developed, and we will apply it.” 

LNG production began at Qalhat in 2000 and since then there have been enormous strides forward in technical development. Kitani cites the example of the facility’s power supply. “Since the start of operations we have been using open-cycle power generators, which are not efficient. Today, we are developing gas engines which are much more efficient and can be combined-cycle. The project is ongoing on the ground now.” 

In July 2019, US engineering heavyweight GE announced that it had won a contract to provide a variable-speed drive system, with the existing two 7.5MW motors being replaced by an 18MW two-pole motor as part of OLNG’s debottlenecking programme. Earlier in the year, GE signed a 16-year contractual service agreement for the 12 turbines at the Qalhat plant. 

In Kitani’s view, OLNG has done much more for Oman’s economy and society than simply produce and export liquefied natural gas. “We are part of Oman’s diversification process in a big way,” he says. “When Oman LNG came about it really changed the dynamic. The company contributes 10pc of total government revenue—a huge contribution to the country. But it has also helped the government spring into other projects and other initiatives—for instance, the shipping industry. The seed shipping business started with LNG. Today it has grown to be quite a big business for the country.” 

Local talent training 

At the same time, OLNG has considerable money and effort into training young Omanis and encouraging commercial and social projects. “We have developed local talent,” says Kitani. “We have trained people; some stay with us for many years, some move to other industries in Oman, armed with huge experience and very good training. We have contributed huge amounts of money to local communities, to build industries and create jobs, directly or indirectly.” 

The sums are indeed large. “When it comes to corporate governance, we are a role model for the region, not just Oman. So far, we have committed $500mn to be pushed into corporate social responsibility (CSR). Around $350mn has already been spent on different projects. We have $220mn in the kitty for CSR. There is no company that spends so much on CSR initiatives.” 

CSR became such a major element in the company’s thinking that, in 2015, it created the Oman LNG Development Foundation to handle investments in health, education and welfare across all areas of the country. Companies and organisations from around the world—including Shell, Total and the Arab League—have sought the foundation’s advice, says Kitani. 

In Kitani’s view, OLNG has done much more for Oman’s economy and society than simply produce and export liquefied natural gas

All this spending in the community depends, of course, on more gas discoveries being made and OLNG continuing to prosper. If there are more major finds, like Khazzan, in the future, might the company think of building a fourth liquefaction train? “Yes, we hope to. The government agrees—if we have more upstream gas, I think LNG is the best return on investment,” says Kitani. 

Several countries have come to the same conclusion. The global LNG supply sector is expanding fast, given the substantial increases in capacity in Australia and currently unfolding across two waves in the US, while Qatar plans to expand capacity by 49mn t/yr to 126mn t/yr by 2027. 

Not that Kitani is worried by the competition. “The industry is expanding and creating competition and opportunities for us,” the OLNG CEO says. “Look at the growth on the consumption side. We have a lot of new users and new markets—China, India, Pakistan, Jordan, the United Arab Emirates. So, I think it is healthy competition. I do not think we will have problems with volume requirements in the market. We may, though, have issues on price competition because there are more players in the market.” 

Traders and middlemen 

Kitani acknowledges the rapid pace of change in the LNG market over the past two decades. “There are not only new producers like the US, but there are a lot of traders and middlemen coming into the market to change the dynamic. They are trying to commoditise LNG. We are not there yet, but you can see the trend. We are on the way to becoming totally unregulated, total competition. It is not the same game as before, but we welcome competition.” 

The key, Kitani says, is to be cost-effective. And this is where some of the planned projects will fall down, “because not all of them are cheap, not all can be built from shareholders’ money”. “Bank loans for LNG are not easy because the market is difficult,” says Kitani. “So it is not like before. Shareholders have to cough up money to build new projects. And that is why you see many of them constantly being postponed.”

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