Petroleum Development Oman LLC

Post Office Box 81
Muscat
Oman
678111
Fax: 677106

State-Owned Company
Incorporated: 1937 as Petroleum Development (Oman and Dhofar) Ltd.
Employees: 4,500
Sales: RO1.34 billion (US$3.53 billion)

Like most countries in the Persian Gulf area, Oman’s economic prosperity is closely linked with the oil industry. It was the development of the oil industry and the use of the resulting revenues for economic and infrastructural development purposes that enabled Oman’s gross national product per capita to expand by 8% in real terms from 1965 to 1987, according to World Bank estimates.

Although Oman’s approach to the awarding of concessions to foreign oil companies is more liberal than that of its gulf neighbors, its oil industry remains dominated by Petroleum Development Oman (PDO), which is 60% owned by the state with the remaining 40% divided between Royal Dutch/Shell (34%), Total Compagnie Francaise des Petreles (Total CFP) (4%), and Partex, the company founded by Calouste Gulbenkian (2%). Elf Aquitaine and Occidental Petroleum produce small quantities of crude oil, but about 95% of Oman’s crude oil is produced by PDO, which is synonymous with Oman’s oil industry.

Commercial oil production in Oman began in 1967. Exploration had started in Oman as far back as the 1920s under the Anglo-Persian Oil Company, the forerunner of British Petroleum, but results were discouraging. Sporadic attempts at exploration took place in later years, but difficult conditions hindered success.

Petroleum Development (Oman and Dhofar) Ltd. was founded in 1937 by a consortium of Western oil companies. Its name was changed to Petroleum Development Oman in 1951. Serious exploration activity by the company only began in the 1950s, but success was elusive, and in 1960 four of PDO’s major shareholders, British Petroleum (BP), Compagnie Francaise des Petreles (CFP), and the predecessors of Exxon Corporation and Mobil Corporation withdrew from the consortium. The Royal Dutch/Shell group was left with an 85% holding in the company, with the remaining 15% in the hands of Partex. In 1967 CFP—now Total CFP—repurchased a 10% stake in PDO, thereby reducing Partex’s share to 5%.

In the early years of the 1960s oil was found in commercial quantities. By 1964, sufficient oil had been discovered in the Yibal and neighboring Fahud area to make development and production a viable proposition. An export terminal was built at Mina al-Fahal near Muscat, Oman’s capital, and the first oil exports took place in 1967. Initial shipments were modest, averaging less than 30,000 barrels per day (b/d) in 1967, but production picked up rapidly as several new finds took place, reaching 332,000 b/d by 1970.

The development of the oil industry coincided with—and helped bring about—the key event in modern Omani history. In 1970, Oman was an isolated, undeveloped country that survived by subsistence farming and fishing. This country, with a population approaching one million, had three primary schools, one hospital, and just a few kilometers of surfaced road. The first earnings from the oil industry held out the promise of major improvements, but it was not until July 23, 1970, following a palace coup led by Sultan Qaboos bin Said that Oman embarked on an embitious social and economic development program which utilized the oil revenues, and brought Oman into the international fold through in membership in the United Nations and the Arab League.

The early 1970s were important in the history of the international oil industry, not only because of the first oil price shock in 1973 but also because several OPEC countries, particularly in the Gulf area, asserted themselves by taking control of their oil industries. Although not a member of OPEC, Oman followed the lead of its OPEC counterparts and took a 25% share in PDO in December 1973. This share was increased to 60% in July 1974. The government ruled out any further state participation because of the lack of trained local staff. At the beginning of the 1990s, non-Omani staff still comprised over 40% of PDO employees. The remaining 40% of PDO stayed in the hands of Royal Dutch/Shell, Total CFP, and Partex. Royal Dutch/Shell, with its 34% share of the company, remained the dominant foreign oil company in Oman and has continued to play a key management role in PDO. In 1980, PDO was re-registered as an Omani company rather than as a joint venture.

Political developments continued to interact with the fortunes of the oil industry. Since 1966, there had been opposition to the old regime with the resulting insurrection organized by the Popular Front for the Liberation of Oman (PFLO). The so-called Dhofar war continued in the South until 1976 and inhibited further exploration of the southern part of the country. However, the end of hostilities in the south in 1976 heralded a renewed exploration effort, and in 1977 the government and PDO concluded a five-year agreement that provided attractive incentives for exploration and development, particularly in the Dhofar region.

Meanwhile, events outside Oman were building up to produce the second oil shock. In 1978, Omani crude was priced at $13 per barrel. By 1980, Omani crude was fetching $39.5 per barrel. This escalation in prices transformed the outlook for the whole Omani industry. Higher prices made it worthwhile to recover oil in south Oman, and the use of secondary recovery techniques became feasible. Exploration and development have flourished throughout Oman ever since. Success was particularly marked in the south in the early stages, and was helped by the discovery of associated gas, which was injected and pumped into existing fields to enhance recovery rates. The boom continued well into the 1980s, and during the first years of the decade PDO discovered oil in far greater quantities than were produced. The success rate of exploratory drilling was very high; eight new wells were discovered in 1979 and two-thirds of all wells drilled by PDO in the early 1980s yielded oil. Of particular importance was the discovery of Sayyala field, which yielded a much lighter crude, of a much higher quality than that previously recovered.

One of the first fields to benefit from the new circumstances was Marmul in the South. This field was discovered in the late 1950s but was subsequently abandoned because of the low quality of the crude. The field became viable once more, because of rising oil prices, in the late 1970s, and came on-stream by the end of 1980 with estimated reserves of 100 million barrels. Fields around Marmul were also developed and, as the decade unfolded, more oil was discovered in commercially exploitable quantities to the south and southwest of older central fields.

Marmul, Birba, and Qaharir, the first Dhofar fields to be developed, rapidly added 70,000 b/d of crude to Oman’s production. By the end of 1981, the addition of other fields boosted Oman’s total production to over 350,000 b/d.

Foreign companies participated in the exploration boom of the late 1970s and early 1980s. Elf was the first foreign company to start production. In 1984, Occidental became Oman’s third oil producer, and in 1990 Japex Oman Co., a joint venture between Japan National Oil Corp., Japan Petroleum Exploration Co., C. Itoh Energy Development Co., and Indonesia Petroleum Co., commissioned the Daleel field. However, PDO still accounts for over 95% of Omani oil production.

After the initial oil price shock at the beginning of the 1980s, the oil markets moved into a period of large surpluses and weak prices. OPEC attempted to rein back its production in an effort to sustain prices and tried to persuade non-OPEC members to cooperate with this strategy. As an independent non-OPEC member, Oman continued to increase production, which rose from 103 million barrels in 1983 to 178 million barrels in 1985. Oman’s government revenues and economy remained relatively stable while those of its neighbors went through hard times. In addition, at a time when many oil importers were reluctant to buy oil from other gulf producers because of the risk to shipping from the Iran-Iraq War, Oman benefited immensely from unfounded fears about attempts to close the Straits of Hormuz and the fact that its main export terminal, Mina al-Fahal, was outside the gulf.

However, Oman was unable to buck the trend indefinitely. Oil prices collapsed in 1986, and, with PDO operating at full capacity, Oman was no longer able to compensate for lower prices by boosting production. Oman decided to cooperate with OPEC and announced a 50,000 b/d production cut in October. Further cuts were announced in 1987 as a contribution to OPEC’s strategy of achieving a stable oil price of $18 per barrel. Production was stepped up again towards the end of 1988, and averaged 620,000 b/d in 1989, 600,000 b/d of which were produced by PDO. A decision was taken early in 1990 to boost production to 689,000 b/d—a level which represents Oman’s short-term technical limit. Until 1982 all Oman’s crude production was exported, but in November of that year the country’s first refinery was opened. The initial throughput capacity was 50,000 b/d, later expanded to 80,000. The refinery is operated by the Oman Oil Refinery Company, which is 99% owned by the Petroleum Ministry and 1 % by the Central Bank of Oman.

PDO’s second major activity is gas, which was given a high priority during the 1980s. Prior to 1984, gas discoveries were a result of oil exploration, but in 1984 PDO and the government sighed a ten-year contract that enabled PDO to dedicate resources specifically to the task of finding gas. While foreign companies are encouraged to search for oil, gas development is a matter for PDO and the gas department of the Ministry of Petroleum. Plans are already in operation to double the capacity of the Yibal gas treatment plant. The 1990s are expected to see further extension of the gas grid and greater use of gas in the industrialization process that is intended to allow Oman to diversify into other industries and free itself from its overwhelming dependence on oil.

Oil fields have traditionally been the main users of gas, rein-jecting it into wells to improve recovery rates. The development of gas is intended to increase its importance as a domestic fuel in power generation and in industrial projects, and to release more oil for export. The 1989 discovery of 10 billion to 11 billion cubic meters of gas in the Sain Nihayda area represented the largest gas discovery in over 20 years.

At the beginning of 1991, total proven reserves were estimated at 4.3 billion barrels, yielding a 20-year reserve lifespan at the current rates of production. So far, intense and extensive exploration activity has been very successful in boosting the life of these reserves; in 1980 PDO had only ten producing fields, whereas in 1990 it brought its 64th field into operation. Vast areas of the country remain unexplored and could yield further significant finds.

Oman’s reserves and production can also be boosted by better exploitation of already discovered fields. Extensive efforts are underway to boost the amount of recoverable reserves.

The future of Oman’s oil industry, and with it that of PDO, will—as always—largely be determined by events in the international oil markets. Now that Iraqi troops have been removed from Kuwait, a war risk premium is no longer keeping oil prices high. Oil markets have returned to economic fundamentals which at the beginning of the 1990s were primarily concerned with surplus supplies.

Further Reading

Skeet, Ian, Oman before 1970: the End of an Era, London, Faber, 1985; Allen Calvin H. Jr., Oman: Ancient Sultanate and Modern State, London, Croom Helm, 1986; Hawley, Donald, Oman and Its Renaissance, London, Stacey International, 1987; Pridham, B.R., ed., Oman: Economic, Social and Strategic Developments London, Croom Helm, 1987; Zahlan, Rosemarie, The Making of the Modern Gulf States: Kuwait, Bahrain, Qatar, UAE and Oman, London, Unwin Hyman, 1989; “Oman: A MEED Practical Guide,” Middle East Economic Digest, all editions.

—Debra Johnson