Oil and Gas. Chapter Three

Transcription

1 Chapter Three

2 The robust macroeconomic performance of Oman in 2005 was largely conditioned by the strong surge seen in the oil and gas sector income resulting from favourable international oil price developments. The impact of declining trend in the volume of oil production on the economy was more than offset by the strong 46 percent increase in the prices of Omani crude, which was manifested in the form of further increases in the shares of oil and gas sector in total nominal GDP, exports and Government revenue to 49 percent, 84.2 percent and 79 percent, respectively in As against aggregate world oil supply of 84.0 million barrels per day in 2005, Oman's average daily production during 2005 was at about 0.77 million barrels per day. Thus, as a marginal player in the global oil market, Oman essentially operates as a price taker, and the prices of Omani crude are conditioned by the overall global trend in the oil market. Domestic exploration activities as well as plans for further investment in the oil and gas sector to augment supply are influenced to a considerable extent by global market conditions. Global markets for oil seem to be guided primarily by fears of supply disruptions arising from worsening that was witnessed in oil prices. As per IEA projections, even in 2006 higher world supply at 85.2 million barrels per day would almost match the higher world demand of about 85.3 million barrels per day. As per the OPEC projections, cumulative world production capacity could rise by around 12 million barrels per day or more over the next five years, well above the expected cumulative increase in demand of about 7 to 8 million barrels per day during the same period, which could involve large additional investments by oil exporting countries. Thus, market fundamentals do not seem to justify the extent of price escalation, even though fears of supply disruptions resulting from geopolitical developments as well as concerns about inadequate investment response to augment supply levels in future clearly weigh heavily on the market. The IMF also highlights in its World Economic Outlook for April 2006 the inadequate investment response to high oil prices, both in upstream projects for crude and downstream projects in refined products. Every additional investment may also involve a large gestation lag, implying that the actual supply response may come only after several years geopolitical environment, rather than by any major actual supply shortfall in relation to the growing demand for oil. According to the data compiled by Omani Crude Oil Prices and Production Energy Information Administration (EIA), as against world demand for oil of about 83.7 million barrels per day in 2005, aggregate world supply was higher at about 84.0 million barrels, and after accounting for the incremental change in commercial stock build up, there was no supply demand mismatch of any significance that could explain the type of increase Production Production Price Price Central Bank of Oman Annual Report

3 Chapter Three from the time when the additional investment may be made. Costs of additional investment are also increasing in view of the tight supply position in respect of skilled workforce, drilling rigs, tankers, and other equipments, as also difficulty in finding large oil fields and the extraction complexities often encountered in smaller fields. Conditional and tighter norms adopted by several oil exporting countries in respect of foreign investment in the oil sector also partly explains the inadequate response of additional investment in the oil sector. The possibility of creating excess capacity through additional investment that could lead to sudden fall in prices may also be operating as a deterrent to large investment. Additional investment in downstream projects is as much important as in upstream projects, since the markets for refined products also remain tight. As noted by OPEC, unlike upstream projects where oil exporting countries may step up supply matching growing demand, in respect of downstream projects relating to refined products oil importing countries and international oil companies have to also come up with additional investment. Many of the oil exporting countries, however, do recognize the scope for value addition arising from investment in downstream projects, and reflective of that realization, Oman has not only invested in a new refinery whose output is meant mostly for exports, but it has also taken up several mega gas-based projects involving large investments, which could help in diversifying the economy and thereby gradually reducing the excessive dependence on oil. Besides downstream projects, there is a plan to invest about USD 10 billion in the Five Year Plan period of in upstream enhanced oil recovery projects to sustain oil production. As per this plan, international oil firms are being encouraged to develop difficult blocks in the country, whether by way of jointdevelopment programmes or through concessions agreement on production sharing basis. A number of exploration and production agreements have already been signed with international oil firms in the recent period. In Oman, thus, there has been considerable additional investment response in both upstream and downstream oil and gas projects. Crude Oil Production: The policy pursued by the Omani Government towards oil production is two-fold; namely, optimization of the ratio of low-cost oil production to total oil production and the maintenance of a sustainable level of production over the medium and long-terms. Keeping these broader objectives in view, Table 3.1 Oil Production & Exports (Million Barrels) Direction of Oil Exports 2005 Year Production % Change Exports % Change Source: Ministry of Oil and Gas and Ministry of National Economy 36 Central Bank of Oman Annual Report 2005

4 Petroleum Development Oman Co. (PDO), together with other oil producing companies (i.e., Occidental Oman, Occidental Mukhaizna, Daleel Petroleum, Novus Oman and Petrogas) produced some million barrels of oil and condensates during 2005 as compared to million barrels in 2004, representing a marginal decrease of 1.0 percent. Average production per day thus decreased from thousand b/d in 2004 to thousand b/d in 2005 (Table 3.1). Out of a total number of 124 oil producing fields in 2005, 106 belonged to PDO, constituting 85.5% of the total. The trend decline in production that started in 2001 continued even in 2005, and the PDO has planned for increasing use of costlier enhanced old recovery techniques to reverse the production trend. According to PDO, however, for the third year running, the company met its oilproduction targets, because of its continuing efforts to promote excellence in its operations and to manage its wells and reservoirs with increased attention. Such concerted efforts enabled the company to reverse the decline of production in the Marmul field during Some of the action plans launched for reversing the overall production trend involve gestation lags and may not yield tangible benefits for some time. PDO's Study Centre continued to carry out the thorough fullfield studies that underline robust field-development plans. Over half of PDO's oil in place is now covered by such studies. With a view to reversing the decline in oil production, PDO has planned for major new investments in the coming few years. Despite the fall in oil production, benefiting from the high oil prices, value added in the petroleum sector at current prices increased remarkably by 44.3 percent to reach RO 5,796.2 million in 2005 from RO 4,016.1 million in As a result, the share of the petroleum sector in GDP increased to 49 percent in 2005 from 42.2 percent in Reserves Because of continued efforts to discover new oil fields, Oman's proven oil and condensate reserves stood at billion barrels in 2004, representing an increase of 8.5 million barrels over During 2005, as a result of new discoveries, however, some million barrels of crude oil were added to Oman's oil reserves, raisng thereby total reserves of oil and condensates to billion barrels. It is worth mentioning that during 2005 the partners of PDO, i.e. Shell, Total and Partex as well as the Government of Oman which holds 60 percent of PDO's share capital, agreed for extension of their contract by another 40 years. As a result of the agreement, it is expected that liquid reserves in the PDO block would be around 4.7 billion barrels of oil and condensate over the extended contract term. New Projects Reflecting the policy of encouraging international oil companies to invest in the oil industry in the Sultanate of Oman, the Ministry of Oil & Gas signed several new agreements in 2005 with international oil companies, namely: Reliance of India, Circle Oil of Ireland and Goat Oil. These production sharing agreements cover exploration and development activities in specified areas. The four agreements will require investments worth of USD 30 million (about RO 12 million). Moreover, PDO carried out various projects during 2005 aimed at both developing existing oil fields and discovering new ones within the country's overall strategy of enhancing reserves and raising production levels when required. Various new advanced oil recovery projects were also Central Bank of Oman Annual Report

5 Chapter Three Table 3.2 Direction of Oil Exports (In Million Barrels) Country of Destination Japan China Korea, South Philippines Taiwan Thailand Malaysia USA Singapore Others Total Source: Ministry of Oil & Gas and Ministry of National Economy Table 3.3 Oman s Oil Prices (US $/B) January February March April May June July August September October November December Average Jan-Dec Source: Ministry of Oil & Gas and Ministry of National Economy implemented, including Mukhaizna field project which aims at extracting heavy crude from the field using thermal recovery technology, and Harweel field project which started producing crude oil in early 2003 by using miscible gas injection technology. Petroleum Development Oman (PDO) has given the final approval for the company's first full-scale enhanced oil recovery (EOR) project at the Zalzala field - the US$600 million Harweel Phase 2A/B project - in the south of the county. The project builds on Harweel Phase 1, which brought four oilfields in the cluster on-stream in 2004, beginning with Zalzala and is now producing at 15,000b/d. The other fields to be developed in Phase 2A/B include Sakhiya and Dafaq, although they will be developed using conventional recovery for now. PDO's total capital expenditure stood at USD 1,238 million (around RO 476 million) during Exports Oil Production & Exports (In Million Barrels) Total crude oil exports reached million barrels in 2005 as compared to million barrels in 2004, Production Exports registering a marginal decrease of 0.6 percent. The share of oil & gas exports in total exports of Omani origin increased moderately from 90.9 percent in 2004 to 91.6 percent in 2005, while the share in total exports (including re-exports) increased from 81.4 percent to 84.2 percent in 2005 due to a 46 percent increase in Oman's oil price during China 38 Central Bank of Oman Annual Report 2005

6 occupied the first place as the main importer of Omani crude oil, although its share in Oman's total exports of crude oil decreased from 40.3 percent in 2004 to 32.2 percent in Thailand came second, with 16.8 percent share in The share of Japan, which ranked third, was 16.4 percent in 2004 and South Korea was in the fourth place, with a share of 15.7 percent. A few other countries also imported oil from Oman during (Table 3.2). Oil Revenues The Government's net oil revenues increased during 2005 by 11.1 percent to reach RO 3,227.3 million from RO 2,904.9 million in However, the share of net oil revenues stood lower at 70.5 percent of total revenues in 2005 as against 71.9 percent in the previous year, mainly because of the conservative revenue realization policy adopted by the Government, keeping in perspective the importance of long-run fiscal sustainability. Refinery Oil refining in the Sultanate of Oman started, for the first time, in November 1982 with the capacity of b/d which increased to b/d thereafter. The Oil Refinery output that had reached 31 million barrels in 2003 fell to 28.9 million barrels in 2004, but increased to 31.6 million barrels in However, the main reason for the drop in the output of the refinery in 2004 was for undertaking a "turnaround" in the refinery plant for planned maintenance of the machinery in the month of December At present, the Refinery produces five types of products viz. LPG butane, Jet Fuel, Gas oil and two grades of gasoline, plus residual. The details of inputs and outputs of the refined products are shown in Table 3.4. In 2003, work started on Sohar Refinery Company, which is 100 percent Government-owned. The output capacity of the said refinery is 116,400 barrels of oil per day. It is expected to start operations in Table 3.4 Oman Refinery Company - Crude Oil Input and Output by Type of Product (In Thousand Barrels) Input/Output * Input Crude Oil Output Gasoline Regular Super DP Kerosene Gasoil Butane Long Residue(Bunker) Change in intermediate products Fuel and Uses of ORC Source: Oman Refinery Company and Ministry of National Economy * Provisional Central Bank of Oman Annual Report

7 Chapter Three Natural Gas Natural gas is another source of energy in the Sultanate of Oman. Therefore, the Government aims at conserving this natural wealth even while raising value addition through export of LNG and implementation of several gas based projects. For the 27th year in a row, PDO provided an uninterrupted supply of natural gas to the Government Gas Network. But the successful commissioning of the gas processing plant at Saih Nihayda and the completion of the 265-kilometer "loop" pipeline were without doubt the major highlights of the year Those projects allowed PDO to increase its supply capacity to the nation's gas-liquefaction plants by 30 percent. As a result of the exploration programmes, the Sultanate's proven natural gas reserves (associated and non-associated) increased by 0.53 trillion cubic feet to reach trillion cubic feet in The increase was due to newly drilled wells as well as better exploitation of the existing ones. In 2005 some billion c.f. of natural gas was produced (270.5 billion c.f. associated and billion c.f. nonassociated), as against billion cubic feet (287.7 billion c.f. associated and billion c.f. nonassociated) in The number of non-associated gas fields during 2005 was 10, out of which 4 fields belonged to PDO and 5 to Occidental Company, and the remaining one to Novus Company. At present, besides the use for LNG trains, gas is largely utilized for reinjecting it into the oil reservoirs to maintain pressure and sustain oil production. An increasing part of the natural gas is being used as fuel to generate power, and in desalination plants, cement factories and other industrial projects. Over time, domestic industrial use of gas will increase further as demand increases from gas-based projects such as fertilizer, aluminum, cement and petrochemicals. New Gas projects During 2003 and 2004, "Oman Gas Company" implemented several gas projects among which was Al Mahdha - Al Ain pipe line (45 kilometers) to provide UAE with Omani gas. A 676 kilometers gas pipeline from Sehroll to Salalah was built during The total capacity of the pipeline is about 5 million cubic meters per day. It will provide the required energy to the Raysut Industrial Zone and Raysut Cement factory. The third gas pipeline which was inaugurated during 2003 runs from Fahud to Sohar. The work on the project started in 2000 and operations started in January Apart from these projects, Oman Gas Company executed several projects during , such as a central control project, intelligent scrapers, optical fibre glass cables from Fahud to Sehrol and pressure reduction station in Sohar. In 2005, work on previously planned projects continued, among which was Qalhat LNG (Third Train) that started production at the end of Other projects implemented during 2005 were: enhancing the efficiency of infrastructure in order to increase the productive capacity of gas to meet increased demand; providing industrial projects and facilities operating with gas in required quantities; the establishment of a central unit for gas processing in "Seeh Nahida"; the expansion of gas plants in "Gebal" and "Sehroll"; a new gas pipeline to connect the projects comingup in "Sur", and many more. LNG Exports During 2005 LNG exports amounted to million tons (7 million from Oman LNG Company -first and second Trains- and 63 thousand tons from Qalhat LNG Co. -3rd Train) as compared to 6.9 million tons 40 Central Bank of Oman Annual Report 2005

8 in LNG was exported to Korea, USA, Japan, Spain, France and Belgium. Some thousand metric tons of by-products of LNG were also exported to UAE in Mining and Quarrying Mining and Quarrying sector has played an important role in Oman's economy since ancient times. To enhance its role, the Government has embarked on an intense programme of geological research and exploration in order to develop the country's mineral resources. These minerals include Copper, Chromite, Nickel, Iron (Laterite), Gold and Silver. In addition, Oman possesses deposits of many non-metallic minerals, e.g. large quantities of Gypsum and limestone, which are being exploited for the production of cement. High quality marble is also quarried and sold both in the domestic and international markets. With regard to exploration, a project comprising detailed Geological Mapping and Ground Geophysics (IP & TM surveys) to identify potential areas of mineral presence, including one conducted with the assistance of Japan International Cooperation Agency (JICA), is in progress. Work so far carried out has resulted in the discovery of new potential area for the copper and gold deposits. An Airborne geophysical survey for Haushi, Huqf, Izki and Masirah Island was completed few years back. Based on the evaluation of the results of the survey, potential areas have been delineated to carryout detailed survey and the Diamond Core Drilling. The Sultanate's Gold production stood at 9005 ounces in Oman's production of Silver stood at 2803 ounces in This was extracted from Yankul and Sohar mines. The entire gold and silver production was exported to the UK. The Sultanate's production of Chromite went up considerably from 18,000 metric tons in 1997 to 30,000 metric tons in 1998; 26,009 metric tons in 1999; 15,000 metric tons in 2000; 30,150 metric tons in 2001, 27.4 thousand metric tons in 2002 and 11 thousand metric tons in 2003, then it jumped to around 29 thousand metric tons in 2004 and to around 30 thousand metric tons in The production of Chromite is fully exported. The main importers are Japan, the U.K., Germany and some other EU countries. Oman's Iron (Laterite) production from the Sharqiya region (Ibra) stood at around 166 thousand metric tons in 2005, where 18 percent of this amount was exported, whereas 82 percent was consumed locally. It is worth mentioning that one of the most important targets of the mining and quarrying sector, under the vision of the Omani economy (Oman 2020), is to achieve an annual 3.3 percent rate of growth in value added in this sector during the Sixth Five Year Plan ( ) and to raise the share of the sector in GDP by 0.3 percent annually with the rate of Omanisation enhanced by 10 percent annually. Central Bank of Oman Annual Report