10 July 2015

Oman taps tight gas to boost LNG exports

The sultanate is reviving its natural gas production in a bid to meet domestic demand and satiate growing export appetite.

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Can Oman emerge as a major liquefied natural gas player? The sultanate has the reserves and the geographic proximity to Asian markets to carve a niche for itself in the fast-expanding global market, provided it can act quickly.

But the country has been facing gas shortages for some years, even threatening the viability of its existing liquefied natural gas exports and has resorted to pipeline imports from Qatar.

Indeed, power consumption in the country has increased by some 150 per cent in the past seven years, according to a new government study, making huge demands on the energy resources. The government will have to walk the tightrope of balancing domestic demand without sacrificing LNG exports.

In a bid to satisfy both domestic demand and global needs, Oman is looking to revive natural gas production by tapping the tight gas field Khazzan, which holds around 200 billion cubic meters of gas.

The field's operator BP has been negotiating with the government for many years on gas prices, while the government has simultaneously been renegotiating gas prices for industrial customers.

In late 2013, BP signed a 30-year gas sales agreement to develop the tight gas field, with commitments of USD16 billion in investments and drilling of more than 300 wells over a 15-year period. The first gas is expected in late 2017, ramping up to plateau in 2018, and bringing on 10 billion cubic meters per year, which is equal to one-third of the country's current production, according to BP.

The International Energy Agency believes the Khazzan-Makharem gas field "would restore LNG exports and bring new supplies to the domestic market," especially as it could lead to the unlocking of other tight gas resources.

Investment boost

The country's total spend on oil and gas exploration and production last year stood at USD10 billion, with 72 per cent allocated to capital investments, according to the Oil & Gas Ministry.

The Oman Gas Company is also building a liquefied petroleum gas processing plant in Salalah at a cost of USD500 million. The facility is expected to produce up to 800 tons a day of LPG, mainly propane and butane, much of which will be for domestic consumption.

In 2013, the sultanate consumed around 27 billion cubic meters domestically from gas production of around 37.2 billion cubic meters, while the rest was exported by Oman LNG project, Economist Intelligence Unit data shows.

"LPG consumption is also rising rapidly, increasingly driven by consumption in the petrochemical sector," the EIU said.

To meet rising demand, Oman has signed an agreement with Iran to import approximately 10 billion cubic meters by 2015-16 under a USD60 billion heads of state agreement. Part of the gas will be used to feed the existing Omani LNG plant, which is under-utilized. Gas will be shipped through a 260 kilometer pipeline that will be built through Iran's Hormuzgan Province to Sohar port.

New markets

Oman began LNG production in 2000 with 2.3 million tons per year, which now currently stands at 10.3 million tons per annum. As much as 55 per cent of production is tied up with long-term export contracts with countries like Japan and South Korea.

While a number of new LNG projects in Australia, United States and Canada are expected to come on line by the turn of the decade, Oman has an opportunity to build on existing relationships in Asia and beat a number of players to market.

In addition, stable Omani natural gas supplies would also be welcome in Europe, which is keen to secure diverse supplies of natural gas after its political tensions with Russia over the Ukraine crisis this year.

Reviving natural gas production is crucial as the IEA projects Oman's crude oil output to edge down to 890,000 barrels per day in 2019, a fall of about 55,000 bpd from their current level.

"The decrease in production is driven by declines in mature fields, only partly offset by employment of EOR techniques, including miscible gas, steam injection and chemical EOR Technologies, the IEA notes.

Occidental's Mukhaizna EOR project continues to produce at around 120,000 bpd and will likely plateau at this level, despite an initial plan for 150,000 bpd of peak production capacity.

Oman's Ministry of Oil and Gas also signed two exploration and production sharing agreements with France's Total SA and Canada's Petrogas Energy Corp. in the Al Wusta governorate.

Other ramping EOR projects that should add around 40,000 bpd in total in the medium term include Qarn Alam, Amal East and West Steamflood. About 105,000 bpd of Oman's liquids is field condensate, which is blended into heavier crudes such as Mukhaizna to lighten their grade prior to export.

Oman expects to generate revenues of USD64 billion from the hydrocarbons sector over the next six years and create 50,000 new jobs in the sector. As such, the economy will remain vulnerable to any downturn in oil production and to fluctuations in oil and gas export prices, according to the EIU.

© Zawya

Disclaimer: This article is not intended to constitute any advice or an offer. Any forecasts or projections are indicative only. HSBC or any of its affiliates accepts no liability, whether express or implied, arising out of or incidental to contents forming part of the article.

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