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Oman exports more LNG in move with implications for oil

Summary:
Over the past two years, Oman has quietly expanded the number of countries to which it exports LNG to well beyond those with which it has long-term supply contracts. In a state that needs increasing gas volumes to fuel its oil and heavy industrial sectors, this raises far-reaching questions about energy strategy. To be sure, Oman’s government two decades ago saw LNG production as an important means of diversifying the sultanate’s economy and move state revenues away from heavy dependence on crude oil exports. A total of 10.4 million mt of LNG production and export capacity was duly developed at Qalhat, a remote coastal location about 350 km southeast of Muscat, with plants commissioned in 2000 and 2005. This constitutes the second largest concentration of such facilities in the Persian Gulf region, behind only those of Qatar. The sultanate’s LNG plants and export terminals were for years run by two separate joint ventures between the government and various international partners. Oman LNG and Qalhat LNG signed long-term supply contracts with Japanese, South Korean and Spanish buyers, which in some cases were also their shareholders. They planned to negotiate further contracts with new customers, predominantly in Asia.

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Over the past two years, Oman has quietly expanded the number of countries to which it exports LNG to well beyond those with which it has long-term supply contracts.

In a state that needs increasing gas volumes to fuel its oil and heavy industrial sectors, this raises far-reaching questions about energy strategy.

To be sure, Oman’s government two decades ago saw LNG production as an important means of diversifying the sultanate’s economy and move state revenues away from heavy dependence on crude oil exports. A total of 10.4 million mt of LNG production and export capacity was duly developed at Qalhat, a remote coastal location about 350 km southeast of Muscat, with plants commissioned in 2000 and 2005. This constitutes the second largest concentration of such facilities in the Persian Gulf region, behind only those of Qatar.

The sultanate’s LNG plants and export terminals were for years run by two separate joint ventures between the government and various international partners. Oman LNG and Qalhat LNG signed long-term supply contracts with Japanese, South Korean and Spanish buyers, which in some cases were also their shareholders. They planned to negotiate further contracts with new customers, predominantly in Asia. However, industrial expansion and rampant population growth in Oman, as elsewhere in the Arabian Peninsula, meant that securing domestic gas supply quickly trumped exports as a government priority, leaving the sultanate’s LNG production plants significantly underutilized.

Global LNG trade data compiled by the Oslo-based International Gas Union showed the sultanate’s LNG exports fluctuating narrowly around the 8 million mt/year mark during the period from 2010 to 2012, indicating that roughly a quarter of the sultanate’s LNG production capacity was idle.

In 2011, senior government officials suggested that at least one of the plants might be decommissioned once the operator’s long-term supply contracts expired.

By that time, Oman had embarked on a major program to modernize, expand and integrate its petroleum refineries, with an emphasis on enhancing the sultanate’s ability to process its increasing output of heavier crudes. The revamped refineries, related petrochemicals developments, as well as upstream heavy-oil projects that turn copious volumes to steam to coax sticky crude out of the ground, would all significantly raise domestic gas demand.

Yet in 2013, Oman took a decisive step to improve the performance of its LNG installations by integrating the operations of the two majority government-owned joint ventures and, in September, formally combining them into a single entity.

The combined company, Oman LNG, reported record Omani LNG production of 8.9 million mt for 2013. The IGU put Oman’s LNG exports for the year slightly lower at 8.63 million mt, with cargoes going predominantly to South Korea and Japan and with Spain as the only other importer.

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Last year saw a different pattern emerge. Oman LNG reported annual production falling back to 7.95 million mt, attributing the decline mainly to a major maintenance shutdown. The IGU’s 7.91 million mt estimate of Oman’s LNG exports for the year was close to the official production figure. The industry group’s data showed deliveries to South Korea and Japan again accounting for most of the trade flow but with significant declines from the previous year. Exports to Spain were flat, but tellingly the sultanate also exported LNG during 2014 to five other countries — China, Taiwan, Thailand, India and Kuwait.

This speaks not of a state that is passively allowing its LNG production and export business to decline in the face of rising imperatives to supply the domestic gas market, but of one taking steps to protect its LNG trade amid difficult market conditions.

There are a number of political as well as commercial reasons for Muscat to follow such a course, including strengthening ties with Asian countries that also import Oman’s crude. However, it is by no means clear how Oman will be able to continue feeding large gas volumes to its LNG plants in future. The IGU, in its 2015 World LNG report, continued to predict that Omani LNG production capacity would eventually be decomissioned.

Supporting such reasoning is the nature of sultanate’s untapped gas resources, which are substantial but consist mostly of tight gas. Such deposits are costly and technically challenging to produce, requiring massive amounts of drilling. Oman’s biggest current gas development is the $16 billion, BP-operated Khazzan tight gas project from which output is expected to start in 2017. However, the projected 1 bcf/d of plateau gas production has been ear-marked for domestic use.

Against that is the wild card of Iran, with which Muscat has held years of on-again/off-again negotiations about potential gas imports. Although skepticism that the discussions would ever bear fruit have long been the order of the day, that could change if international sanctions on Iran are lifted soon.

Tehran has long eyed Oman’s excess LNG production and export capacity as a potential conduit for Iranian gas to the international market, and Muscat officials have indicated they are receptive to the idea. However, negotiations on Iranian access to Oman’s LNG facilities have dragged on for years.

Could Tehran’s nuclear deal with the P5+1 group help break the impasse?

Analysts have argued that a better use for Iran’s gas production as the country tries to recover from the crippling economic effects of sanctions would be injection into its oil fields to boost crude output, but such advice seems less compelling the further oil prices fall.

In late July, Iran’s semi-official Mehr news agency quoted the head of National Iranian Gas Export Co. as saying that exporting gas to other Persian Gulf states, especially Iraq and Oman, was at the top of the company’s agenda in a post-sanctions era. NIGEC Managing Director Alireza Kameli referred specifically to a proposal to build a gas pipeline from Iran to Oman which he said would enable Iran “to take advantage of the gas refineries of Oman.”

For its part, Muscat at least seems to be keeping such options open as its  LNG export volume continue the recent decline.

The oil and gas ministry in early August reported that the country’s H1 LNG exports totaled 3.81 million mt. No year-on-year comparison with H1 2014 was available, but the amount was less than half the sultanate’s full-year 2014 exports.

Oman, a consummate Arab trading nation, could do worse than to conclude an agreement with Iran that would allow it to continue reaping all the commercial and collateral benefits of its existing LNG export business while also boosting gas supply to its heavy oil fields. With such a gas deal in place, it would be no surprise to see the sultanate’s crude output rise quickly from its current level of about 970,000 b/d to surpass the 1 million b/d mark, establishing Oman as a major Arab beneficiary from Iran’s nuclear deal.

Oman’s LNG exports (million mt/year)

Country 2012 2013 2014
South Korea 4.03 4.54 3.89
Japan 3.91 3.97 3.45
Spain 0.12 0.12
China 0.13 0.13
Taiwan 0.13
Thailand 0.07
India 0.10
Kuwait 0.03
TOTAL 8.08 8.63 7.91
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