BP signs $16bn deal to develop large gas project in Oman

The project’s success is vital for Oman whose own gas exports have been eaten away by its voracious appetite for energy

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BP will drill some 300 wells to flush gas trapped deep under the Omani desert over the next 15 years in a $16-billion project that Oman is relying on to keep its economy growing.

The Khazzan tight gas project, which aims to extract around one billion cubic feet (bcf) per day of gas from sandstone at depths of up to 4,500 meters in central Oman, is a showcase for BP's tight gas extraction technology.

Its success is vital for a country whose own gas exports have been eaten away by its voracious appetite for energy.

“Today's signing is an important step in the Sultanate of Oman's plans to meet growing demand for energy over the coming decades and to contribute to economic development in Oman,” the country's oil and gas minister, Mohammed Al Rumhy, said in a statement after the signing in Muscat.

“The Khazzan project is the largest new upstream project in Oman and a pioneering development in the region in unlocking technically challenging tight gas through technology.”

BP will have a 60 percent operating stake in the project, which involves a 15-year program of drilling into sandstone thousands of meters below the surface to extract gas using hydraulic fracturing technology developed in the United States.

BP expects to invest around $9.60 billion over the full field development, in accordance with its 60 percent stake in the $16 billion project, a BP spokesman said. State-owned Oman Oil Company Exploration & Production (OOCEP) will have a 40 percent stake. The $16 billion total investment estimate includes around $1.5 billion already spent.

Months of haggling

After months of haggling, Muscat agreed in mid-2013 on the price at which BP could sell gas it can squeeze from deep under the desert of central Oman.

Neither side would reveal the price they had agreed to make the project worthwhile for BP, but BP Chief Executive Bob Dudley said the price was competitive within BP's global investment portfolio.

“We are a company who has said that we will use a very disciplined capital framework and for the rest of the decade we will keep BP's capital investments between $24 and $27 billion a year,” Dudley told reporters.

“There are other projects that we have put aside but this is one that is big, it is important and it is a good partnership... It fits with our strategy as a company to develop large reservoirs.”

Construction is expected to begin in 2014, with first gas expected in late 2017 and plateau production of around 1 bcf, or 28.3 million cubic metres, per day expected in 2018.

This would be enough to meet around a third of the country'scurrent domestic gas needs. But Omani energy demand is rising rapidly and Muscat also hopes to import Iranian gas in a 25-year deal signed in August.

“The country needs the gas to develop its economy,” Al Ruhmy told journalists. “Our needs for gas increase day by day.”

BP expects to develop around 7 trillion cubic feet (tcf) of gas in the Khazzan project, and to pump around 25,000 barrels per day (bpd) of gas condensate, a light oil, helping ensure a good rate of return from the investment.

The 30-year production sharing and gas sales agreements also allow BP to appraise more gas resources in Oman's Block 61, which it expects to develop in later phases.

The Omani government will take 55 percent of the gas sales revenues, while the rest will be split between the project partners, with 60 percent for BP and 40 percent for (OOCEP) after deducting costs, the minister told the news conference.

BP shares rose from close on Friday at 465.55 pence to around 470.35 pence at 1430 GMT on Monday.

Low prices

Rock-bottom, government-set gas prices prevalent in the Middle East have discouraged investments in projects needed to meet rapidly rising demand for gas across the region, making many countries rely increasingly on imports or watch rampant domestic demand eat into their gas exports.

In a rare Middle East move to cut huge fuel subsidy bills, Oman plans to double natural gas prices for some industrial consumers from $1.5/mmbtu in 2012 to $3/mmbtu in 2015.

Oman currently exports gas from liquefied natural gas (LNG) plants that were planned before the small non-OPEC oil producer was forced to revise down its gas reserves.

Oman's gas appetite has already taken a bite out of its LNG exports and analysts say the success of Khazzan will be vital for the country to keep exporting over the next decade.

BP said it had also signed a non-binding memorandum of understanding with state-run and Oman Oil Company to develop a one million tonne per year acetic acid plant in Duqm, on the Arabian Sea coast of Oman.

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