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Like many Middle Eastern countries in the catastrophic aftermath of Saudi Arabia’s latest oil price war folly against the U.S. shale sector, Oman has been left in the position of having to decide whether to risk becoming a client state of China or to attempt to extricate itself from the financial hole that the Saudis dug for it on its own. Although Oman has engaged with China recently on a number of levels, it has also sought to develop its own new streams of income and to lessen its overall cost base. The announcements last week that the Sultanate has completed its flagship Rabab Harweel Integrated Project and also that it has brought its first utility-scale solar power project online confirm its efforts to survive through its own initiatives but a third announcement that the state-owned China National Petroleum Corporation (CNPC) is in advanced talks to buy a 10 per cent stake in the huge Khazzan unconventional gas field from BP hints at Oman’s foremost fallback position. Even before the Saudis’ second ill-judged oil price war ended in exactly the same failure as the first only four years before, Oman’s financial position was shaky. It had a budget breakeven price per barrel of Brent of nearly US$86, according to the IMF, although it has now risen to nearly US$87. It also did not have enormous oil reserves to prop up the budget in the short-term, with only around five billion barrels of estimated proved oil reserves, barely the 22nd largest in the world, although Oman still depends on the hydrocarbons sector for over 80 per cent of its national budget revenues. As such, a senior legal source in Abu Dhabi focussed on the oil industry spoken to by OilPrice.com at that time stated that the Sultanate needed at least US$7 billion ‘very quickly’ to avoid extremely negative financial consequences. Given these factors, Oman was downgraded twice in a short time, most recently by Moody’s Investors Service, to Ba3 - three levels down into non-investment (junk) status – and just before that by S&P Global Ratings’ to BB-, with a negative outlook. 

Against this backdrop comes the news that Oman’s US$1.25 billion Rabab Harweel Integrated Project (RHIP) was completed last week, after a six-year project period. One of the largest ever projects of the Sultanate’s state-run Petroleum Development Oman (PDO), and located in the Harweel cluster of fields in the South Oman desert, around 200 kilometres from the nearest port and about 80 kilometres from the nearest village, the RHIP is - crucially for Oman’s budget - not being delivered on a lump-sum turnkey basis. Instead, and unlike most other oil and gas projects in the Middle East, RHIP’s key contractor, Petrofac, is providing its services on a reimbursable basis with its profit linked to the achievement of specific milestones. These efforts revolve around the provision by the RHIP of sour gas processing facilities and associated gathering and injection systems, and export pipelines. 

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These integrated facilities are geared towards being able to the production of oil and gas from the Harweel oil reservoir, via miscible gas injection, and the production of gas with condensate from the Rabab reservoir, through partial recycling of sour gas. According to PDO figures, the Rabab and Harweel reservoirs hold reserves of more than 500 million barrels of oil and oil equivalent. When operating at full capacity, the RHIP will have the capacity to deliver at least 60,000 barrels per day (bpd) of oil, six million metric standard cubic metres per day of sweet gas, and 16 million metric standard cubic metres per day of high pressure sour gas injection. Additionally, given the still relatively low oil and gas price environment, the investment returns for Oman are ‘substantial and robust at low oil prices’, according to PDO’s managing director, Raoul Restucci last week. 

This new development follows on from news that PDO achieved record oil, gas, and condensate output in full-year 2019, with 1.21 million barrels of oil equivalent produced every day (boepd). This compared to combined oil, gas, and condensate output in 2018 of 1.205 million boepd. Although part of this increase came from a jump in the output of low-grade ‘black’ oil, with gas production at 62.2 metric standard cubic metres per day last year slightly lower than the 2018 figure, condensate output surged to 93,000 bpd from just 65,300 bpd in 2018. Significantly as well, PDO was able to book 136 million barrels of contingent oil resources, and 1.1 trillion cubic feet of commercial contingent resources of non-associated gas volumes at the same time as announcing a further reduction in the unit finding cost of oil to US$1 per barrel and to US$0.9 per barrel of oil equivalent.

With this current and future boost to revenues on the one hand, Oman also announced last week that it has brought into commercial operation its first utility-scale solar photovoltaic (PV) scheme - the 105 megawatt alternating current (MWac) capacity Independent Power Project (IPP) located at Amin in the south of the PDO’s Block 6 licence. Representing a consortium led by the Japanese-based international conglomerate Marubeni Corporation (also comprising the Oman Gas Company SAOC, the Bahwan Renewable Energy Company, and Nebras), the Amin Renewable Energy Company (AREC) built the facility under a long-term Power Purchase Agreement (PPA) signed with the PDO. 

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This features 336,000 solar PV panels, the output of which is earmarked exclusively for use by PDO in powering its interior operations. In pre-launch partial operations, Amin Solar exported more than three million units of commissioning energy to PDO’s grid, according to AREC, whilst PDO has underlined that the project has secured carbon credit registration within the European Union. 

Aside from the fact that at full capacity, clean energy from the plant will help offset more than 225,000 tons per year of CO2 emissions – the equivalent of taking around 23,000 vehicles off the road – the new facility underlines the operational and cost benefits for Oman in pursing the renewable energy sector. “The necessity of Oman to secure other methods of income and electricity generation aside from oil and gas means that it is one of the few places in the Middle East where there is a genuine drive to build-out a proper renewable energy infrastructure and industry,” Richard Bronze, senior cross-energy analyst for Energy Aspects, in London, told OilPrice.com. 

The foundation for the Sultanate’s energy transition was laid by the Oman government in 2016 with the launch of the ‘National Programme for Enhancing Diversification’. This set a base target of having renewable energy projects contribute at least 10 per cent to the country’s total power mix within 10 years. This was subsequently expanded to a goal of having at least 30 per cent of its electricity needs met by renewable energy by 2030. Over the period, power demand in Oman is projected to increase by around 5 per cent every year, according to figures from the Oman Power and Water Procurement Company (OPWP). 

“This initiative got a major boost in 2017 when Oman introduced a cost reflective tariff billing system for major energy consumers in the country, meaning that unless they implemented ways of making their energy usage more efficient then they would be penalised via tariffs,” underlined Bronze. Whilst there are no codes that allow companies to qualify for lower tariffs simply by dint of their ‘green’ profile, there has been an increase in the number of major power consumers and building developers since 2017 that have sought to make their operations and/or buildings more sustainable from the energy perspective, according to the OPWP. 

Given that Oman has an average of only 10 rainy days per year, with the remainder generally being bright sunshine, solar energy is the top priority for development in the sultanate. According to the OPWP, solar energy will likely produce 21 per cent of Oman’s total power needs by 2030, with an interim 2025 target of 12 per cent. To this end, there are a number of major solar projects on the agenda plus other solar initiatives aimed at broadly reducing the country’s carbon footprint. Notably as well, PDO announced over a year ago that it is to construct a 1000 megawatt (MW) solar facility in the south of Oman, at Amal. The project will utilise solar power to create steam that will be used to extract oil from nearby deposits. 

In the background, as highlighted by OilPrice.com, remains China, with already-deep involvement in Oman but looking to extend this influence, as part of its ‘One Belt, One Road’ programme. Looking to leverage its massive infrastructure investments, news emerged last week that CNPC is currently in advanced talks to buy a 10 per cent stake in the Khazzan unconventional gas field in Oman from BP in a deal that could be worth US$1.5 billion. 

By Simon Watkins for Oilprice.com

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Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More