Oman oil stays the course, navigates challenges

OREANDA-NEWS. Oman's state-controlled and Shell-led oil and gas producer PDO had an average production of 570,534 b/d last year, marking the firm's highest level since 2006 and nearly a 4pc increase on the plateau target of 550,000 b/d. But PDO's proactive cost-cutting strategies have not been immune from the impact of low oil prices.

PDO's managing director Raoul Restucci said the company is investing \$40bn to hit its target of 600,000 b/d by 2019 and that the company must "sweat our assets" for maximum value, adding that "everything is staying the course and if anything, it is being accelerated."

But small signs of economic stress have emerged. PDO has pulled back on the Habab enhanced oil recovery (EOR) project and the Badour northeast project, with Oman's oil minister Mohammed al-Rumhy saying that complex and expensive technology was the main stumbling block at Habab. The ministry added that this issue had triggered second before the decline in oil prices.

"Hopefully we will go back to it again when there is better technology, methodology and hopefully, a better [oil] price," al-Rumhy said in Muscat this week. Officials stressed that the two projects represent a very small portion of a much wider project base.

Restucci said that some of the EOR projects that are completed have rates of return in excess of 100pc, with PDO still on track to have EOR projects account for 33pc of the firm's total production by 2025. There are around 22 projects currently at various stages.

PDO accounts for 70pc of Oman's oil production, which totaled 943,000 b/d of crude and condensates in 2014, coming in around the same level as 2013. Despite missing its target of 950,000 b/d last year, Muscat is aiming for 980,000 b/d this year.

The ministry spent \$8.7bn on the country's oil sector and \$2.8bn on natural gas production last year. Oil reserves rose by 393mn bl to 5.306bn bl last year, while 1.9 trillion ft? of natural gas was added, lifting total natural gas reserves to 24.3 trillion ft?.

Muscat's plans to market oil blocks have taken a knock. French major Total has pulled out of deepwater Block 41, joining Norwegian firm DNO and Hungarian oil group MOL's recent departure from Blocks 31 and 34, respectively. Limited commercial success triggered Total's retreat, which the ministry admitted will make its job marketing the blocks "in the next few years" more challenging. Total acquired the additional acreage in December 2013, which covered a large unexplored area of almost 24,000km? in water depths in a 30-3,000m range.

Oman's state-owned refiner Orpic saw a more challenging 2014, as low oil prices, squeezed margins, including those in the petrochemical aromatics markets, left the company \$4mn short on its target of \$725mn profit. Weakening oil prices since last June cost Orpic lost \$571mn and technical issues at the 116,400 b/d Sohar refinery cut operations by 76pc and cost \$111mn, squeezing the firm's balance sheet further.

Chief executive Musab Al Mahruqi said the company is looking to borrow up to \$3.7bn to support its Liwa plastics project by year-end, which would mark the country's largest internationally-supported project financing.

Despite strained margins, Muscat is still keen on stretching its downstream operations. Muscat is pursuing its biggest energy project with the downstream Duqm complex that is due for completion in 2020 and that will include a 230,000 b/d refinery, a petrochemicals plant and a 200mn bl oil storage terminal. The expansion at the 116,400 b/d Sohar refinery to boost its output by 70pc is still due for completion in early 2017.

Progress on Oman and Iran's plans to build an underwater natural gas pipeline between the two countries remain slow, with both sides yet to tie down a route for the 260km project. The initial completion date of 2017 has been scrapped, but Oman's oil and gas ministry remains confident that the project will be realised, with the latest export volume of 20mn m?/d (7.3bn m?/yr) of gas agreed in September .

Meanwhile, al-Rumhy has spoken out against Opec's policy- and decision-making processes this week and said it is common practice for Opec and non-Opec oil producers to maintain an open dialogue.

"That has not happened this time around," he said, suggesting many non-Opec producers would have gladly joined an Opec round table to address oversupply. But "some prefer to focus on increasing their market share instead of increasing price," said al-Rumhy. The oil minister said he expects oil prices to be \$55-\$65/bl for the rest of this year.

The ministry added that it will be near impossible to sustain the country's current budget "over the coming years" if the oil prices remain around current levels, with the Brent crude price currently at \$59/bl. Oil production is the backbone of Oman's economy and is projected to account for 79pc of total revenue of OR11.6bn (\$30.1bn) this year, with Muscat's 2015 budget based on an oil price of \$75/bl, down from \$85/bl last year. But this new level is still significantly higher than the oil prices this year.