Divisions among Libya’s political, security, and financial institutions remain a key obstacle to the political transition process, and foreign powers still stoke many of these divisions for their own strategic interests.
Oman continues to push new frontiers in the development of its complex geological oil and gas reserves amid the downturn in energy prices. Oman’s oil and gas production reached record levels in 2015 and is set to edge marginally higher this year. To offset lower oil revenue and reduced government funding, the country’s state oil companies are tapping into international finance markets.
With its very modest petroleum reserves relative to other Gulf oil exporting countries, Oman has carefully managed its resources using the latest technology to maximize production for the past decade. The onset of multiyear declines in oil production in 2001 led Oman to adopt enhanced oil recovery (EOR) technologies to increase recovery rates from its heavy oil and mature reserves. By 2005, the downward trend was reversed with the launch of one of the world’s largest steam flood projects for EOR. Over the next 10 years, Omani oil production steadily increased from 750,000 barrels per day (kb/d) to a high of near 1 million barrels per day (mb/d) during 2015.
A regional leader in EOR, Oman is now using pioneering technologies in hydraulic fracking for the development of the country’s nonconventional gas resources. Oman is also breaking new ground with the world’s largest solar powered EOR facility at the heavy oil Amal West field. The project, expected online in 2017, uses solar energy to produce steam for extracting heavy, viscous oil from the field, instead of more valuable natural gas and, at the same time, significantly reduces greenhouse gas emissions.
While the lower oil price era has led international oil companies to slash planned capital expenditure budgets, national oil companies are, not surprisingly, largely maintaining energy investments given the strategic importance for government revenue. As the drop in oil prices since mid-2014 turned budget surpluses into deficits, governments have been struggling with fiscal reform and at the same time increasing investments in non-oil sectors to accelerate much needed economic diversification. Oman plans to reduce spending to $30.9 billion (11.9 billion Omani rials) from $36.6 billion (14.1 billion Omani rials) in 2016, with oil and gas expenditures cut by 14 percent.
To counter government budget cutbacks and reduced revenue, Gulf Cooperation Council state oil companies are increasingly turning to the international banking community to secure funding for oil and gas investments. In its first foray into international finance markets, majority state-owned Petroleum Development Oman PDO in June secured $4 billion in project financing. PDO is 60 percent government owned, with remaining shares held by Royal Dutch Shell (34 percent), Total (4 percent), and Partex (2 percent). PDO’s managing director commented, “This competitive new source of funding will enable us to reduce reliance on government funding, so that it can redeploy resources to other areas of the economy.” Meanwhile, Oman Oil is seeking $1.35 billion for its exploration and production arm and Oman Shipping a $250 million loan. GCC state oil firms more than tripled their borrowing in the second quarter compared to a year ago, to $12.9 billion, according to Bloomberg.
Oman’s Reversal of Fortune
Oman’s geology is complex, with small fields characterized by tight reservoirs with low permeability at depths up to 5,000 meters (around 5,468 yards), making extraction technically challenging. As a result, production costs in Oman are relatively higher than those of its Gulf neighbors with more favorable geology such as Saudi Arabia.
Similar to the technology-driven shale revolution that transformed the declining U.S. oil industry, Oman shifted its business strategy in mid-2000 to attract foreign joint venture partners with expertise in EOR technologies, which reversed the waning fortunes for this geologically complex country. In what proved a turning point, Occidental signed a 30-year production sharing contract for the faltering heavy oil Mukhaizna field with Oman in 2005. Occidental, along with its partner Liwa Energy Limited, which is owned by Mubadala of Abu Dhabi, implemented aggressive drilling and development programs, including a major steam flood project for EOR. By 2015, daily output from the field was around 125 kb/d, over 15 times higher than the production rate in September 2005 when Occidental assumed operations. Occidental said in March that it is exploring for new opportunities in production block 53, where the Mukhaizna field is located.
The country’s oil projects are aimed at sustaining oil production at around the 1 mb/d mark over the next five years. Oman exports roughly 85 to 90 percent of its production, almost all to the east of Suez markets. China is the largest importer of Omani crude, taking roughly 60 percent of exports. Oman also regularly exports to Japan, Thailand, India, and South Korea. Ironically, Oman’s relatively modest oil production plays an outsized role in setting prices for as much as 10 to 12 mb/d of Middle East oil exports. The Oman Crude Oil Future Contract has been the flagship contract on the Dubai Mercantile Exchange since 2007 and a key benchmark for setting prices for Middle East crudes sold into Asian markets.
Given the technically difficult geology and relatively high cost of production, Oman offers attractive contract terms to international partners with expertise using advance technology. The Oil and Gas Ministry said it will offer new production sharing agreements for a potential five oil blocks in October. Occidental is the largest foreign operator in the country. Others include Shell, BP, Total, Japan’s Mitsui, China’s CNPC, Sweden’s Tethys Oil, and Canada’s Gulfstream Resources. However, PDO accounts for approximately 70 percent of the country’s oil production and almost all of its gas output, with over 125 producing fields. PDO is currently focused on accelerating conventional oil and gas production instead of short-term expansion of resource-intensive and higher cost EOR projects. PDO says improved operational efficiencies and procurement savings on megaprojects will enable it to achieve $1 billion in savings from 2016-20. New technology has reduced costs for unconventional drilling in 2015, down 25 percent from 2014.
Armed with its new $4 billion in project financing, PDO plans to develop three mega onshore oil projects. The Rabab Harweel Integrated Project, the Yibal Khuff integrated oil and gas facility, and the Budour integrated project combined could ultimately contribute one-third of the company’s future production at a cost of over $10 billion. At Yibal Khuff, PDO will undertake construction of one of the largest and technically complex integrated oil and gas facilities ever implemented by the company. The sour crude production with high levels of hydrogen sulfide requires substantial investment in state of the art sulphur removal technology. PDO is also looking at plans for the first use of water injection in a sour oil field at the Budour project.
A Promising Future for Gas
Oman’s gas industry is on track to expand significantly to meet competing demand for exports from its three-train liquefied natural gas complex at Qalhat and rising domestic use, especially from the growing petrochemical sector and new industrial centers. The country currently imports a small amount of gas from Qatar via the Dolphin pipeline. Oman’s gas production averaged around 122 million cubic meters per day (mcm/d) in 2015, more than double the output of a decade ago. In 2006, the Ministry of Oil and Gas improved contract terms for exploration and production sharing agreements in order to attract more tech savvy partners, with gas prone blocks targeted in a drive to increase natural gas output for domestic use and feed its EOR field operations.
The BP-led Khazzan gas project is expected to add approximately 42.5 mcm/d by 2020, equivalent to 40 percent of the country’s current production. Khazzan is one of the largest unconventional tight gas reservoirs in the Middle East and will be a major source of gas supply for Oman for decades. The first production is expected on stream in late 2017. Tight gas is technically difficult to produce because the low porosity of the reservoir and without fracking and other advanced technologies is not accessible or economically viable. To unlock the gas, BP is using an innovative proprietary hydraulic fracking system to break up the rock so the fractures act as conduits for the tight gas to flow through. BP holds the majority interest in the field at 60 percent and Oman Oil Company holds the other 40 percent.
The reality of lower oil prices has forced GCC members to adopt austerity measures and reforms designed to increase the non-oil sectors of their economies. For Oman, however, careful management of resources and the new “beyond oil” catch phrase has been part and parcel of the sultanate’s economic strategy for decades given its meager oil reserve base. Oman’s proved, recoverable oil reserves at 5.3 billion barrels represent just 1 percent of the GCC’s nearly 500 billion barrels total. At the end of 2015, Oman’s reserves to production ratio was a short 15.3 years, according to the BP Statistical Review of World Energy 2016. By contrast, Saudi Arabia has a production span of about 60 years at 266.6 billion barrels, Kuwait at 90 years with 102 billion barrels, and the United Arab Emirates at 69 years with just under 100 billion barrels.
Ever mindful that its halcyon days as a major oil producer are drawing to a close, Oman’s current five-year plan calls for halving the economy’s dependence on the oil sector from 2016-20, to 22 percent of gross domestic product from 44 percent. The plan calls for over 500 programs and policies aimed at expanding the non-oil sectors, including manufacturing, mining, transport, and tourism.
The oil and gas industry remains a key pillar of support for the country’s economic development in the ninth and last five-year plan of the country’s “2020 Vision.” Not only will the energy revenue generated from the sector fund the country’s economic ambitions, but the expansion of natural gas production is critical for fueling the power, water, and transport projects embedded in the country’s diversification strategy.
The Ancient Mariner
The mega industrial projects along the coast are central to the country’s economic diversification plans. Development of strategically located gas fields and a web of pipelines and other transport infrastructure are closely intertwined with Oman’s development of coastal ports and industrial zones for expanding the refining and petrochemical sectors. The projects also include residential, commercial, and tourism developments. The Sohar development in the very north of the country on the Gulf of Oman was launched in mid-2000, but a number of projects have been put on hold until the Ministry of Oil and Gas allocates enough gas for them to operate. Muscat, which has maintained a friendly relationship with Iran as part of its neutrality-based foreign policy, is hoping a deal with Tehran for gas from Kish Island via a proposed nearly 125 mile underwater pipeline will be reached soon, though supplies would not start flowing until 2019.
The Duqm development is strategically located outside the Strait of Hormuz off the Arabian Sea and Indian Ocean; it is the largest economic project Oman has undertaken. The once remote fishing village is being transformed into a downstream hub with plans for a world-class oil refinery, petrochemical complex, and one of the largest oil storage facilities.
The port and industrial zone projects, once completed in the next decade, will re-establish Oman as a pivotal maritime hub at the intersection of East-West shipping routes, with proximity to sea lanes serving Asia, Africa, and Europe. The restoration of the country’s ancient role as a maritime trading empire may secure Oman’s place as a key link in the global energy supply chain even after the country’s oil resources taper off.
Muqtada al-Sadr’s announcement that he will boycott upcoming parliamentary elections has thrown the electoral process into disarray at a time when the future stability of Iraq depends on legitimate and transparent elections.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More