Oman - Hydrocarbon Sector
Since the first commercial field was discovered at Jibal, west of Adam, in 1962, the petroleum industry has dominated the economy. In 1991 the industry contributed about 43 percent of GDP and 82 percent of government revenues. The government's heavy reliance on crude oil export earnings to maintain its income distribution system and political stability made continued development of this sector a priority.
By early 1977, the newly organized Ministry of Petroleum, Fisheries, and Agriculture prematurely assumed that production had probably peaked at more than 350,000 barrels per day and would decline. Exploration activity in the south was insignificant, deterred by political instability in the region, and production at the main fields of Petroleum Development Oman (PDO) in the north, including Jibal, was in decline. The suppression of the Dhofar rebellion in the mid-1970s helped reverse an output decline. Foreign exploration companies, satisfied with the restoration of political stability, began to sign area exploration and production agreements with the government. Enhanced oil recovery (EOR) techniques at existing fields, combined with new fields coming onstream, raised average output to 708,000 bpd in 1991.
The principal problem the government faced in the early 1990s was a diminishing reserve base. Proven reserves were estimated at 4.6 billion barrels in 1992, small in comparison with other gulf states. At the mid-1992 rate of production of 725,000 bpd, Oman's crude reserves are sufficient to permit seventeen years of output, compared with nearly 350 years for Saudi Arabia.
Oil prospecting began in 1924 when the Anglo-Persian Oil Company (later renamed British Petroleum) obtained a concession; however, unsuccessful exploratory drilling discouraged further interest. Discoveries in Bahrain and Saudi Arabia during the 1930s stimulated exploration activity. The first concession agreement was signed with Petroleum Concessions, a Western consortium formed by the owners of the Iraq Petroleum Company (IPC). In 1951 the concessionaire's name was changed to Petroleum Development Oman (PDO). In 1993 PDO remained the principal operating company and controlled the bulk of oil reserves and output.
After several years of costly and unsuccessful exploratory drilling, most IPC partners wanted to withdraw from their concession area. In 1960 Royal Dutch Shell acquired an 85 percent interest in PDO; Participations and Explorations (Partex) held the remaining 15 percent share. In 1967 the French firm TotalCompagnie Française des Pétroles acquired 10 percent of Partex's 15 percent interest. In December 1973, the government of Oman, following the participation agreements negotiated by several gulf countries, acquired a 25 percent share of PDO. In July 1974, the government's stake was raised to 60 percent, retroactive to January 1, 1974. Since 1974 the remaining 40 percent has been held by Royal Dutch Shell with 34 percent, Total-Compagnie Française des Pétroles with 4 percent, and Partex with 2 percent.
PDO operates two main production areas: a group of northern oil fields, including Jibal, Fuhud, and Sayh Nuhaydah, that produce lighter grades of crude oil; and a group of southern fields, including Rima, Mamul, Amal, Nimr, Mukhaizna, and Sayyala, that produce heavier crudes. Development of the southern fields was contingent on the suppression of the Dhofar rebellion and the reestablishment of political stability in the sultanate.
As of January 1992, official proven crude reserves were estimated at 4.6 billion barrels, up almost 6 percent from 1991 and up 83 percent from the oil reserve estimate in 1980. The relatively gradual increments to Oman's reserve base since 1980 were attributable to the discovery of new, smaller oil fields and revised estimates for existing fields.
More than one-half of Oman's total reserves are concentrated in the northern region, where six fields--Jibal, Natih, Fuhud, Al Huwaysah, Al Khuwayr, and Shaybikah--are part of a single geological structure containing recoverable reserves of more than 2 billion barrels. Similarly, in the south, eight principal producing fields also come from a single geological structure.
Several foreign companies that are engaged in exploration and production activities, such as France's Elf Aquitaine Oman, the Occidental Petroleum Corporation (Occidental Oman), and the American Oil Company (Amoco), signed agreements in the 1970s. Others, such as the Japan Exploration Company (Japex Oman) and Canada's International Petroleum, followed in 1981 and 1984, respectively.
Oil Production and Exports
During the period from 1967 to 1980, crude oil production peaked in 1976 at 365,000 bpd but subsequently declined. Producing fields are concentrated in the northern region around Jibal, Fuhud, and Natih, all three of which were discovered in the 1960s. The Dhofar rebellion inhibited exploration farther south and suspended development activity around Mamul, discovered in 1957 and holding 600 million barrels of gross proven and probable oil reserves. Because of the declining production from northern fields, total output fell. In 1979 average output was 285,000 bpd.
Once hostilities ceased in 1975 and confidence in the authority of the central government returned, southern exploration and production activities resumed, facilitating new discoveries in the late 1970s and 1980s. The Rima field, with gross proven and probable reserves estimated at 270 million barrels, was discovered in 1979; Amal, with 145 million barrels of reserves, was discovered in 1982; and Mukhaizna, with 130 million barrels, was discovered in 1985. All were brought onstream by PDO. As a result, oil output increased throughout the 1980s. Crude oil production averaged 708,000 bpd in 1991, compared with 685,000 bpd in 1990. Output for 1992 averaged 745,000 bpd. Most of this, about 670,000 to 680,000 bpd, was lifted by PDO. According to Minister of Petroleum and Minerals Said Ahmad ash Shanfari, there are plans to maintain output at that level into the twenty-first century.
Apart from PDO, which contributes the bulk of the output, three other groups have interests in the producing fields. These are Occidental Oman (28,000 bpd), Elf Aquitaine Oman (15,000 bpd), and Japex Oman (8,000 bpd).
To maintain output at current levels and avoid future declines, the government is pursuing a two-pronged strategy of developing smaller fields and applying EOR and secondary techniques at existing fields. The strategy appears successful because 1992 was the twelfth consecutive year in which production increased. However, a pattern has emerged whereby the number of fields discovered holding large (greater than 500 million barrels of gross proven and probable) reserves has been declining. The potential for discovering fields with a reserve base and production rates comparable to Jibal appears remote, given Oman's mature exploration history.
EOR techniques are applied to the mature fields. In the north, additional wells have been drilled, and water injection facilities have been constructed at the Jibal field. Gas injection is used at Fuhud and Natih. At Mamul, in the south, high-pressure steam injection techniques have been used since 1985.
Most of the increase in output will come from PDO's Al Khuwayr field in north-central Oman, where a US$500 million development project was designed to increase the field's output from 25,000 bpd to more than 120,000 bpd when completed in 1993. The project involves gas lift and water injection facilities. Output will compensate for falling output from existing producing fields. Apart from the pilot waterflood project at Al Khuwayr, near Izki, the Sayh Nuhaydah gas-condensate field is a potential candidate for an analogous waterflood development program.
More than 90 percent of oil production is exported. The majority of Oman's exports are destined for the Far East market. Japan, the Republic of Korea (South Korea), Singapore, China, Taiwan, Thailand, and the Philippines accounted for 85 percent of total crude exports in 1990. Japan accounted for 40 percent of total exports, South Korea for 26 percent, and Singapore for 7 percent. Less than 7 percent of crude exports was destined for the United States market.
All crude oil from the northern and southern fields is collected and blended into Omani export blend. The country's only refinery and terminal is at Mina al Fahl, near Muscat. The refinery, completed in 1982 with an initial throughput capacity of 50,000 bpd and expanded to 80,000 bpd in 1987, was designed to meet domestic demand for petroleum products. Operated by the Oman Oil Refinery Company, in which the Ministry of Petroleum and Minerals held a 99 percent share and the Central Bank of Oman held 1 percent, the refinery produces liquefied petroleum gas (LPG), butane, jet fuel, and two grades of gasoline.
Foreign Downstream Ventures
The Oman Oil Company (OOC), established in the late 1980s, is responsible for the government's foreign petroleum activities. The board of directors consists of former government officials and private advisers and is responsible to the Ministry of Petroleum and Minerals. The OOC engages in international oil trading, including the purchase and sale of Omani crude oil, and in acquiring foreign downstream holdings. Acquiring foreign downstream holdings is the most recent development in the ministry's oil policies, lagging behind such other Arab oil producers as Kuwait, Saudi Arabia, and Libya, which have actively pursued foreign downstream ventures to ensure a secure market for crude oil sales.
As of late 1992, the OOC was negotiating equity interest in a foreign downstream venture, the acquisition of a 20 percent stake in Thailand's fifth refinery, in Rayong Province in the south. The refinery is designed to process up to 120,000 bpd of crude and will cost US$600 million. Operations are scheduled to begin in 1996 and will involve Oman's supplying part of the refinery's feedstock. Also, as a member of a consortium including Chevron Corporation of the United States, the OOC has committed itself to build an export pipeline to transport oil from the Tengiz and Korolyov fields in Kazakhstan to international markets. The pipeline complements an agreement signed on June 18, 1992, by the government of Oman with Kazakhstan for exploration and production of oil and gas in the former Soviet republic. The Tengiz and Korolyov fields are said to have a potential output of 700,000 bpd by 2010.
Gas Development and Production
The depletion of the sultanate's crude oil reserves accelerated the government's bid to increase the use of gas in electric power generation and industry. In the early 1970s, the sultanate began to use gas in electric power generation. Gas pipelines were laid, and generators were converted from diesel to gas. This was done in the Muscat metropolitan area just before the second oil price shock despite resistance by importers of diesel. Plans were to increase gas use by extending the government gas grid linking the south and the east to the north. Power generation facilities north of Muscat in 1992 were using gas as a feedstock, and plans were to increase gas-fired units elsewhere.
Although the government has promoted the industrial use of gas, oil firms remain the principal consumers, using a total of 8.5 million cubic meters per day of associated gas. Gas is required for reinjection, compression fuel, and power generation to support facilities at producing fields. This is likely to continue in the short term, given the slow pace of switching industrial use from petroleum. The government's focus in the 1990s on exploiting natural gas reserves and increasing output to meet rising demand complements its priority in maintaining current oil output levels. It seeks to do this without depleting crude reserves by using gas produced in association with oil output for reinjection at mature fields to increase production and, by substituting gas for oil, to release greater volumes of crude oil for export.
On February 8, 1992, the Ministry of Petroleum and Minerals signed a cooperation protocol with Royal Dutch Shell for a comprehensive evaluation of Oman's gas reserves, estimated in June 1992 at 482 billion cubic meters, the bulk of which is in nonassociated form. According to the minister of petroleum and minerals, some studies indicate a reserve base as high as 935 million cubic meters. A preliminary feasibility study conducted by Royal Dutch Shell indicated the potential for exploiting gas reserves at a rate of 142,000 cubic meters per year as exports over a twenty-year-period and for meeting domestic demand for the next fifty years.
Most of the gas produced is in associated form and comes from PDO's Jibal field; smaller volumes come from the Natih and Sayh Nuhaydah fields in northern Oman and the Birba field in the south. Gas plants have been constructed in Jibal, Fuhud, Sayh Nuhaydah, Sayyala, and Rima, providing Oman with a gas-processing capacity of almost 18 million cubic meters per day. Despite increased gas production, gas throughput at these plants ran at about one-half of total capacity in 1989.
Evaluation of the commercial viability of the northern offshore Bukha natural gas and condensate field, discovered in 1986 by its concession operator, the International Petroleum Company of Canada, was completed in June 1992. The company estimates the life expectancy of the Bukha field at fifteen years, a capacity of 28 million cubic meters per day of gas and 5,000 to 10,000 bpd of condensate, and a requirement of an approximately US$60 million capital investment to bring the field onstream. Production was scheduled to begin in 1993.
The government planned to drill wells in the central fields (Sayh Rawl, Sayh Nuhaydah, Barik, and Mabruk) at a cost of RO47 million (US$18 million) between 1992 and 1995. Output from these structures will supply the US$9 billion LNG project, which was finalized on May 6, 1992, by a memorandum of understanding. In this project, the government will be responsible for all upstream activities. A new consortium was established, comprising the Omani government at 51 percent, PDO's foreign shareholders (Royal Dutch Shell, Total-Compagnie Française des Pétroles, and Partex) at 42 percent, and three Japanese firms (Mitsubishi, Mitsui, and C. Itoh) undertaking downstream operations under a service contract. Deliveries of LNG are not expected to begin before 1999. The Japanese market is expected to be the most probable destination for output.
If increasing volumes of gas are lifted, the government may consider new gas-based industries such as methanol, fertilizers, and methyl tertiary-butyl ester (MTBE). During 1992 talks were conducted with Iran concerning joint development of the Bukha and Henjam offshore fields, where limited drilling has indicated a gas and gas liquids potential. Omani officials have also conducted talks with Qatar regarding the purchase of natural gas from Qatar's North Field. The proposal to build a gas line from Qatar to Dubayy may be expanded to include a spur line to Oman. Minister of Petroleum and Minerals Shanfari indicated that Oman is prepared to purchase a volume up to 113 million cubic meters per day of gas from Qatar if an acceptable price can be negotiated. The regional gas line proposal was being considered among gulf countries for much of the 1980s. As of early 1993, a definitive decision on a regional (Arabian Peninsula) coordinated, long-term gas plan that would rationalize supply and demand for decades had not been completed.
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