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Sat 25 Oct 2008 04:00 AM

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Oman plays with Dolphin

The arrival of Dolphin gas in Oman could breathe new life into the economy as its own reserves run low. 

The arrival of Dolphin gas in Oman could breathe new life into the economy as its own reserves run low. Arabian Business analyses the country's energy future.

Cheap gas supplies have fuelled Oman's industrial growth and helped diversify its economy, away from oil-related industries but a shortage of natural gas supplies and an unprecedented growth are threatening to cut levels of production.

Diversification has been top of the agenda for GCC countries for some time but none more so than in Oman. Unlike its oil-rich neighbours, Oman has diminishing supplies of proven oil reserves.

According to BP's World Statistical Review, the country has just 5.6 billion barrels of proven reserves compared to the UAE's 98 billion and Saudi Arabia's 264 billion. At current output levels oil is expected to be exhausted in two decades.

Oman has developed a number of gas-related industries in line with its Vision 2020 plan, such as petrochemical and fertiliser production, boosting its manufacturing contribution to GDP from five percent in 1995 to an expected 15 percent by 2020.

Its liquefied natural gas (LNG) sector is particularly vital, contributing around 10-12 percent of the country's national income. Last year it shipped 5.25 billion tonnes of LNG to Japan and Korea.

The industry's growing importance is demonstrated in its abundant use of the country's natural gas supplies.

Oman LNG and Qalhat LNG, two of Oman's state-controlled gas plants in which Royal Dutch Shell Plc is the largest foreign shareholder, consumed 45.8 percent of the country's total natural gas supply last year, with just 16 percent used for fuel and re-injection purposes on oil fields and the remainder utilised by the government for power generation, industrial estates and mining.

Yet despite increased natural gas production and intensive exploration, the country's moderate gas supplies and rapidly growing gas-related industries are draining supplies.

Oman has just 0.98 trillion cubic metres of gas reserves compared to 25.36 trillion in Qatar and 7.07 trillion in Saudi, according to BP statistics. Oman's Oil & Gas Ministry forecasts that demand for natural gas will reach 3.8 billion cubic feet a day (cf/d) by 2010, far outpacing supply of just 2.7 billion cf/d.

In February newswire Bloomberg reported that the country's liquefied natural gas facilities were unlikely to reach full capacity for at least three more years, as it diverted gas to boost oil output and industries that provide jobs.

The country's shortages have severely damaged its industrial growth, say analysts.

"There's been a lack of gas for power generation... plants are running significantly below capacity and the country is even holding back on some gas promised for exports and not delivering the full contractual value," says Samuel Ciszuk, a Middle East energy analyst for forecasting firm, Global Insight.

"The diversification has looked at strategies that are too intensive in natural gas," agrees Remy Salters, a credit analyst for Oman at credit ratings agency, Standard & Poor's.

In the coming weeks, however, Dolphin Energy will start to supply natural gas from Qatar under a 25-year deal signed by the Oman Oil Company in 2005.

Following several delays, the Abu Dhabi-based firm will supply 200 million cf/d of natural gas to the energy-hungry sultanate via the UAE. The $4.8bn project is the world's first cross-border gas project in the world's biggest exporting region.In July, Dolphin, an Abu Dhabi government venture through its investment arm, Mubadala Development Co, France's Total and US Occidental, began to supply the UAE with 2 billion cf/d a day of natural gas.

Oman's gas supply will be diverted from the current UAE supply and delivered through Dolphin's Eastern Gas Distribution System (EGDS) via a hook up in the nearby emirate of Al Ain.

While analysts say the additional gas supply will help to alleviate the country's shortages and allow it to fulfill its ongoing commitments, it is unlikely to solve the problem long-term.

"The demand by 2010 is expected to be at 3.8m cf/d while supply is only going to be 2.7 cf/d so it's a pretty significant gap," says Bobby Sarkar, vice president at Al Mal Capital Research in Dubai.

Ciszuk agrees that the new pipe won't be enough to meet increased demand.

"In ways of evolution it is quite short term," he says. "As long as demand growth continues rapidly, these volumes from Dolphin will be eaten up quite quickly."

But the sultanate is working on a number of alternatives in a bid to alleviate shortages. This month the Iranian Oil Ministry's official Shana news agency reported that a deal between the two countries had been struck which would allow Iran to export a substantial amount of gas from its Kish field to Oman.

Iran, the world's fourth-largest crude producer, also sits on the world's second-largest gas reserves after Russia.

Despite the political tension, the $7-$12bn deal, which will see Tehran export 1 billion cf/d to its Gulf neighbour, could be beneficial for both countries.

"Iran has so much more reserves which would be open for Oman... This would be a way forward for Iran to also get some experience in how to market LNG, through joint ventures, as they are having a big problem getting their own LNG projects underway," says Ciszuk.

Outside of costly import supplies, Oman is also working on its own production of gas. According to OGJ, Oman's proven natural gas reserves stood at 30 trillion cu ft in January 2007 and natural gas production has increased steadily over the last decade. According to official data, production increased by 14.6 percent to 1.052m cu ft in 2007.

Intense exploration is currently under way to increase production with outside partners. In 2007, BP signed a major production-sharing agreement in Oman, giving it access to the Khazzan and Makarem gas fields, which the firm said could yield resources of 20-30 trillion cu ft of natural gas.

The two fields, which were discovered in 1993, remained undeveloped due to the complexity of the country's geology and its tight gas reservoirs.

But production of gas supply from these fields is likely to be both expensive and challenging says Ciszuk: "They are very challenged to produce from and no one knows if it's going to be viable... if it goes ahead it will be a pioneering project with quite high production costs."

He also warns that whatever Oman's solution, it and other major gas-consuming countries in the region, should get used to high costs as they look to procure diminishing gas supplies from unconventional sources.

"Looking for unconventional gas deposits and paying a much high energy price for their own domestic brand, is something countries are going to have to get used to."

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