Royal Dutch Shell Plc  .com Rotating Header Image

Shell hopes loss of Omani field is just a warning

FINANCIAL TIMES: Shell hopes loss of Omani field is just a warning

By James Boxell

Published: May 4 2005

Royal Dutch/Shell’s loss of the right to develop the Mukhaizna field in Oman is a serious blow to the oil company as it tries to recover from last year’s reserves overbooking scandal.

For although this part of Oman currently only produces 10,000 barrels of oil a day – minuscule compared with the 3.8m barrels Shell extracts around the world – Oman is Shell country.

Yet, having agreed a deal with Shell six months ago, the sultanate appeared to change its mind and this weekend handed the contract instead to Occidental Petroleum of the US.

Occidental has promised the Omani government that, by spending $2bn (£1.1bn), it can increase production from the 2.4bn-barrel field – Oman’s sixth largest – to 150,000 barrels a day within the next few years. This is almost double what Shell promised.

Stewart Johnstone, vice-president of Charles River Associates, the consultancy group, who works regularly for Middle East governments, says: “The loss of the field is a blow to Shell’s reputation in the longer term.”

Shell has been active in Oman since the 1930s and was almost solely responsible for the development of the country’s oil industry. Oman is now Shell’s most important source of oil after the US, Nigeria and the UK.

While other international companies bailed out of Oman in 1960, after failing to find any significant oil, Shell stuck it out and was rewarded by a series of big finds from 1962 onwards.

Oman has never been one of the Middle East’s biggest hydrocarbon repositories – its reserves are estimated at 5.5bn barrels of oil – but Shell helped put it on the map as a producer.

Colin Lothian, analyst at Wood Mackenzie, the oil industry consultancy group, says: “They took it from nothing to more than 800,000 barrels a day [in the 1990s].”

The loss of Mukhaizna is particularly embarrassing for Shell as it comes just months after it signed an extension to its concession in Oman that gives it rights to develop most of the country’s oil and gas fields for the next 40 years.

The Mukhaizna field was part of that deal and Shell is in talks with the government that could result in the company relinquishing a further 10 per cent of the concession area, although it insists this is standard practice and that it can refuse to give up important fields.

The company has relied in the past on the excellent relations between the British government and Sultan Qaboos bin Said, a graduate of the Royal Military Academy at Sandhurst who was educated privately in Britain from the age of 16.

British military advisers helped the Sultan to depose his father in a palace coup in 1970, after the old isolationist Sultan’s insistence on using oil revenues exclusively to fund defence had embarrassed his UK allies and Shell.

However, one person close to the Omani government says that the country’s energy minister, Mohammed al-Rumhi, a trained petroleum engineer, is less favourably inclined towards Shell following four years of declining production.

“There has been quite a bit of friction at the working level between Shell and the ministry,” the person says.

Shell will be concerned particularly about any perception that it is losing favour in Oman because of its inability to use technology to squeeze more oil from difficult reservoirs.

It prides itself on its technology and hopes that this will give it an advantage as other Middle Eastern governments look to enhance recovery from fields – an area of business that will be extremely important for international oil companies in the next few years.

Mr Johnstone at Charles River says: “When they try to get concessions elsewhere there will be questions raised, probably by competitors, on whether they have the skills to do it.”

However, Mr Johnstone says, there is a possibility that Occidental could have overpromised on its plans for Mukhaizna.

Shell believes that it has more experience of the advanced technology needed to extract the heavy oil from the field, which injects steam to heat up the dense oil to make it less sticky. It owns 52 per cent of Aera, a company that uses the technique on 6,000 wells in the US.

Shell says that it will maintain an equity interest in Mukhaizna through Petroleum Development Oman, the owner of the Oman concession in which it holds a 34 per cent stake.

It will hope the loss of control amounts to nothing more than a “slap on the wrist” to get production going again, as Mr Johnstone suggests, rather than something more permanent.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Shell hopes loss of Omani field is just a warning”

Leave a Comment

%d bloggers like this: