Over the course of the first five months of 2016, Oman’s oil revenue plunged by 44.7% to $3.34bn compared to the same period in 2015. It has been estimated by the World Bank that the Sultanate lost about $10bn in revenues in 2015 alone – an alarming loss that has prompted the Omanis to take urgent steps towards driving oil prices in order to boost the economy.
During a visit to Abu Dhabi in early 2016, the Sultanate’s oil minister, Mohammed bin Hamad Al Ruhmy, told reporters, “Oman is ready to do any¬thing that would stabilise and improve the market. At least, if OPEC and few non-OPEC [countries] chop 10% [of production], I think the problem is solved.”
When OPEC and non-OPEC countries in Vienna in December reached an agreement to reduce output to prop up prices, Oman presumably displayed the utmost enthusiasm about the success of the talks. Along with Russia, it joined a monitoring committee set up by the OPEC to oversee the implementation of oil production cuts by adherents.
According to Nizar Jichi, audit partner and oil & gas leader at KPMG Lower Gulf, said, “OPEC and non-OPEC members recently cut oil production by almost 1.8mn barrels a day. This has driven oil prices up by 15% reaching $55/barrel. We anticipate oil and gas companies will maintain current levels of operations until the year 2020.”
“That being said, Oman oil and gas companies are advised to continue to focus on cost optimisation initiatives, lifting costs, and driving leaner operations. We anticipate oil prices will remain volatile for the foreseeable future, potentially increasing above current prices, but certainly not to the levels witnessed in the first half of 2014,” Jichi told Oil & Gas Middle East.
Even the (once angry) Omani workers and trade union leaders expressed optimism regarding the recent output cut deal. The chairman of the oil and gas trade unions, Saud Salmi, told the media shortly after the Vienna meeting, “We see a ray of hope not only for the workers in the oil and gas sector, but also for those who are working in other sectors. If oil prices recover, firing can come to an end, existing projects can continue, new projects will come and moreover, workers can get real jobs.”
During the downturn in the regional oil and gas industry, over 1,600 Omani oilfield workers have lost their jobs, sparking frustration among the affected. Leaders of trade unions, like Salmi, had anticipated this and the Oman Society of contractors (OSC) warned that up to 55,000 Omani construction workers risked losing their jobs if market conditions didn’t improve.
Modest, yet significant, reserves
Unlike its GCC neighbours, Oman has relatively modest oil reserves. Yet, the country’s reserves are significant enough to account for 90% of the government revenues, 70% of exports, and 50% of the GDP.
It has been reported that Oman has 5.3bn barrels of estimated proven oil reserves, as of January 2016, meaning the country has the 7th largest proven oil reserves in the Middle East and 22nd in the world. State-owned Petroleum Development of Oman (PDO) holds more than 70% of Oman’s oil production. PDO itself is 60% owned by the government while Shell owns the other 34%, Total 4%, and Potugal’s Partex 2%.
Oman’s production reached a record high rate of 1mn barrels per day in July last year, but a tweet from the ministry of oil and gas said, ‘Oman will cut oil production by 45,000 barrels a day, following an agreement reached by OPEC with independent producers outside the organisation’. The Sultanate’s total output will see a 4.5% reduction in January 2017.
Difficult-to-recover hydrocarbons
Because of its complex geological structure, Oman’s oil reserves have proven to be hard, and expensive, to recover. The reservoirs across the country are located at a depth of more than 5.5km, far deeper than elsewhere in the world. This natural difficulty (in part) has also traditionally caused Oman to produce less oil than its other oil producing counterparts; something that has led Oman to fervently adopt – perhaps more intensely than its GCC peers – Enhanced Oil Recovery (EOR) technologies to suit production requirements.
In a 2012 interview with Oil & Gas Middle East, Vinod Shah, managing director at Mott MacDonald’s Oman office, said, “Output in the country’s maturing oilfields peaked in the 1990s and PDO, the Sultanate’s leading oil company, spearheaded the implementation of EOR techniques with its first trials in the late 1980s.”
“Oman, in particular, has seen considerable investment in a range of EOR technologies to produce heavy oil and now a host of other countries in the Middle East and India have been encouraged by Oman’s success. Between 2001 and 2007, Oman’s oil production fell by 27%, but by 2009, due mostly to EOR projects, oil production had increased by 17%,” he added.
Due to the innovative EOR technologies, production was back up on its feet by 2015. However, this reliance on technology makes production in the Sultanate a costly business. Shell and several other partners invested more than $25mn in solar-powered EOR process in Oman in 2012. Such projects are expected to generate significant leads and the government said it expects 16% of its oil production came from EOR projects by 2016, in contrast with 3% in 2012.
So far, Block 6, which accounts for up to 70% of the country’s oil production, has been the centre of the Sultanate’s EOR technologies. Here, polymer techniques have been used in the Marmul field, miscible in Harweel field, steam technology in Qarn Alam field, and the GlassPoint-commissioned solar-powered EOR project in Amal-West oilfield.
“Oman’s complex and often challenging geology makes embracing new ideas and cutting-edge technologies an essential requirement of any oil and gas company wishing to operate in the Sultanate,” Raoul Restucci, managing director of PDO, said in an interview with O&GME last year.
He also added that PDO is testing, reviewing, or piloting between 50-70 technologies at any given time. “It is important to highlight that our focus is less about technology development and more about proficient and widespread deployment.”
Based on this reliance on expensive EOR technologies and the expenses that this entails, the most effective model that the government created was to offer generous incentives to international oil companies (IOCs). Such attractive contract terms offered to international partners has made E&P in Oman a more favourable option compared to other countries in the region.
One of the largest foreign operators in the Sultanate is Occidental, while others include Shell, BP, Total, Japan’s Mitsui, China’s CNPC, Sweden’s Tethys Oil, and Canada’s Gulfstream Resources.
Diversification and localisation
A national strategy that Oman shares with its neighbouring GCC countries is that it aims to diversify its economy and reduce dependency on oil. Being one of the hardest hit in the region by the dip in oil prices, the government wants to ensure the sustainability and development of other sectors.
As a result, the government in Muscat has been trying to increase investments in non-oil sectors, while struggling with fiscal reform. With these goals in mind, Oman plans to cut oil and gas expenditure by 14%, from $36.6bn to $30.9bn.
Some of the driving forces behind sustainability include the In-Country Value (ICV) strategy. With the current dependence on foreign operators, it will take a while before Oman is self-sufficient. However, the government is already taking steps towards the right direction.
“Public-private partnership has paid well and resulted in developing standard criteria for the In-Country-Value (ICV) for the oil companies tenders. The Ministry is considering implementing a number of important projects, including coordination with oil companies to implement an e-system for reporting ICVs by oil and gas sector,” oil minister Rumhy says.
In October, PDO awarded three contracts worth $330mn to local Omani businesses. Under the terms of the deals, which will run for four years with options to extend the duration, earthworks will be carried out by local community contractor Najed al Ahliya at PDO fields at Fahud, Lekhwair and Yibal, as well as by Sarooj Construction Co at Qarn Alam and Saih Rawl.
PDO, in a statement, has claimed that the contracts are further evidence of the success of its ICV strategy to build a thriving small and medium enterprise (SME) sector and retain more of the oil and gas industry’s wealth in Oman.
“Oman has worked with IOCs, with PDO and with Oman Oil, a 100% state company, as well as offering small fields to other sub-contracting companies. Oman has worked hard to attract smaller companies too,” confirmed Robin Mills, CEO of Qamar Energy, an exploration and production (E&P) consulting and investment advisory firm.
As further evidence to its commitment to develop local content, PDO has signed another contract with the amount of $200mn with an Omani factory. According to the agreement, the Gulf International Pipe Industry (TMK-GIPI) mill, based in the Sohar Industrial Estate, will manufacture a variety of pipeline for PDO and other operators.
‘Omanisation’ is another point of focus for the government in order to sustainably diversify the economy. This will require the Sultanate to further look inwards, invest and develop local talent. Enhancing areas like science, technology, engineering and mathematics (STEM) will feed the entrepreneurial spirit required to strengthen the SMEs sector.
Fuelling optimisation
Under the umbrella of ‘doing more with less’, which continues to dominate the oil and gas industry in the low oil price environment, operational excellence and cost efficiency have emerged as key factors to success, an element that PDO has embraced. The oil major has said that improved operational efficiencies and procurement savings on megaprojects is expected to save the company up to $1bn from 2016 to 2020.
“Buoyed by a renewed focus on enhancing or maintaining productivity while reducing costs, operational excellence (OE) continues to be a hot topic in the Middle East oil and gas industry – and Oman is no different. The gap between the cost of production in Oman and global oil prices is wide enough for E&P companies to make a profit,” Stuart Douglas, vice president-Middle East at UK-based Petrotechnics, says.
Speaking prior to ADIPEC 2016, the exploration director at PDO advised that Omani companies must seize the opportunity afforded by the current economic constraints to challenge the way they work, by focussing on core activities including safety, production and early monetisation. Douglas concludes, “One example of this approach working in action is the Mukhaizna field in Oman. However, Omani companies still must challenge the way they work in order to continue to succeed in the current economic climate.”
