Gulf Business

Vol.9 |Issue.5 | 9, 2004

Gushing With Hope

Gushing With Hope

New oil discovery in Oman has raised PDO hopes, but can it mask structural weaknesses? Anju Govil finds out.

New oil discovery in Oman has raised PDO hopes, but can it mask structural weaknesses? Anju Govil finds out.

Amid fears that crude output could fall again this year, the significance of Petroleum Development Oman (PDO) striking oil again in the Oman’s Malaan area far exceeds the actual volume of oil that would be drilled from these wells. Finding oil has been a top priority for PDO in the recent past. The company holds more than 90 per cent of the country’s oil reserves and accounts for about 94 per cent of the production. However, crude

production has been steadily falling from a high of almost one million barrels per day (bbl/d) five years ago to just over 700,000 bbl/d, making its modest aim of reaching 800,000 bbl/d by 2007 even tougher.

"The commercial find, which may be sizeable, will act to reduce PDO’s historic rate of decline in production levels and highlights the need for up to date technology in the future development of Oman upstream," says Isaac Xenitides, senior director, European Energy, Fitch Ratings.

The discovery has done just that by lending instant credibility to PDO’s unconventional thinking and application of new drilling technology. As part of its attempts to expand its reserves, Oman had signed a six-year contract with the United Kingdom’s Spectrum Energy and Information Technology in 2003 to have old seismic studies reprocessed. Spectrum’s geophysical re-interpretation of the seismic data in region and new drilling technology are the main reasons behind the new find.

Success here would also make PDO more confident in tackling the technological problems in production overall. "We are running pilot projects with improved extraction technology at many more sites, but nothing has materialised," admits Mundhir Al Barwani, director of external affairs and human resources at PDO.

"The discovery brings to a close a long period of involvement in the Malaan formation (within the mature Shuiaba oil producing province) since 2000 and illustrates how the introduction of new technology can improve exploration success," agrees Xenitides.

Furthermore, as Xenitides argues, "the find may be a welcome boost for the ongoing partnership with Shell". Shell, with 34 per cent shareholding of PDO, could have faced the prospect of its investments giving unacceptable returns. On a recent visit to Dubai, Shell vice-chairman, Jeroen van der Veer, said that Oman’s oil fields had faced some challenges recently and had moved into decline. However, Al Barwani insists that there has been no friction with Shell and that both partners are committed to pushing technology to the limit to raise production and maximise recoverable resources.

It was not just the PDO and analysts who were concerned at the falling production levels. The government had planned to invest (2001-2005) $828.6 million in PDO to revive and raise petroleum production levels. Significantly, the government allocated an increase in capital expenditure of 10.6 per cent in 2003 to $626 million.

Till the end of July 2003, $394.5 million had already been spent on PDO-related investments.

This raises many unanswered questions about the viability of the new site. PDO expressed its inability to comment on the expected investment necessary to make the new discovery profitable. "We are still confirming our dig and are in the testing phase," says Al Barwani.

Fitch Ratings is, however, more optimistic. "The flow rates from the two exploration wells drilled are encouraging," says Xenitides. The other two wells in the region, Malaan 1 and Malaan 2 are delivering 1,800 bbl/d and 2,600 bbl/d each.

Considering that the amount of oil originally in place in Oman is said to be around 50 billion barrels, each small step towards increasing production will continue to be critical for the country’s economy. Oil is the mainstay of the economy, accounting for nearly 80 per cent of export earnings and 40 per cent of GDP.

However, a report by Oman’s Ministry of National Economy notes that the country’s total (i.e. including condensate and other liquids) production figures fell 6.4 per cent in 2002 and another 6.5 per cent to 843,208 bbl/d in the first seven months of 2003. Experts had estimated that if output continues at the present pace and no new reserves are discovered, Oman would have less than 20 years left as a major oil-exporting nation.

Besides, the falling production levels lead to shrinking revenues and smaller oil exports, which in 2002 stood at 306 million barrels - a 7.8 per cent reduction from 2001.

Three years of windfall oil revenues did provide some comfort in this scenario and managed to keep Oman’s economy healthy as high oil prices were reflected in consistently high GDP rates. Annualising the data available for the first half of 2003 indicates a GDP growth rate of 3.5 per cent, higher than the IMF forecast of 2.2 per cent in 2003 for the country. In 2002, estimates indicated GDP growth of 1.8 per cent (nominal growth) compared to 0.4 per cent in 2001.

This positive trend could easily reverse as analysts predict energy prices to ease by next year while volumes will remain stagnant, thus adversely affecting Oman’s export earnings. Worse still, the imports are expected to continue rising.

The rosy GDP scenario is marred by the fact that the non-oil economy is unable to compensate for the downturn in the oil sector. The current risk environment is not helping the Omani government’s efforts to attract foreign investment outside the gas and oil sectors.

The weakness of sectors outside of the oil and gas industry would also keep the economy years away from The Sultanate Vision-2010 to bring down the oil’s share of GDP from 41 per cent to nine per cent.

It is clear, however, that broader economic issues would shade the long-term contribution of the new oil wells. As Al Barwani says: "At this point any news is good news."