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Issue No. 29 - April 2005
| PDO - INTO THE FUTURE, TO THE YEAR 2044 |
Shell welcomed the signing of agreements in December 2004 with the Government of the Sultanate of Oman which extended the term of Petroleum Development Oman's (PDO's) Block 6 concession, PDO's sole oil concession, located in central and southern Oman. The agreements address the rights of the concessionaires, both Government and Private Shareholders, to carry out petroleum operations for oil in Block 6 for the next 40 years to 31st December, 2044. The Omani Government owns 60 per cent of PDO, Shell owns 34 per cent and is Technical Advisor to the company, Total holds 4 per cent and Partex holds 2 per cent. The agreements were signed in Muscat on behalf of the Government of Oman by His Excellency Dr Mohammed bin Hamad bin Saif Al Rumhy, Oman's Minister of Oil and Gas and Chairman of the Board of Directors of PDO, and Malcolm Brinded, Shell's Executive Director of Exploration and Production. 'Shell in the Middle East' reports...
PDO produces oil from around 100 fields in its Block 6 concession area, which covers nearly 114,000 square kilometres in central and southern Oman. PDO's previous concession for Block 6, the company's sole oil concession area, was to expire in 2012. The decision to extend the term of the concession to the year 2044 was due to the long-term nature of investments that will be required in the coming years to increase production, particularly relating to water injection and enhanced oil recovery (EOR).
"I am pleased to sign these agreements, which provide the certainty that the Government, Shell and the other Private Shareholders require to take PDO forward. "There are huge resources in Block 6 but the reservoir structures in Oman are amongst the most geologically complex in the world. Their effective exploitation has always required a wide range of production techniques.
Expanding on the challenges ahead, compared to those of the past, he said, "Although we, or rather our predecessors, first appeared on the scene as long ago as 1937, the partnership started in earnest nearly 40 years ago in 1967, the year that the first oil shipment from Oman was lifted and when we signed the existing agreement to explore for, develop and produce oil in the Sultanate. The successful development of the nation's hydrocarbon resources since that time has played an important role in Oman's Renaissance under the wise leadership of His Majesty Sultan Qaboos bin Said. "The Private Shareholders are very proud to have had the opportunity to play their part in that development. Over these years we have seen the venture grow from the drilling of the first - dry - exploration well [Fahud 1] in 1956 to what we have today, a complex and sophisticated network of wells, gathering stations, pipelines and the export facilities at Mina al Fahal and Sur. "Furthermore, in PDO we have an organisation that currently employs some 4,500 people, the majority - more than 80 per cent - of whom are Omani nationals, including a significant number of its senior leaders. "PDO is an enterprise that is planning to produce some 635,000 barrels of oil and some 45 million cubic metres of gas every day in 2005. This oil and gas not only delivers much-needed revenues to the country, but also serves its people directly in the form of electricity, to support desalination and other industrial and domestic uses. "Today, Shell seconds around 450 people to PDO and many thousands more have lived and worked here during their careers. Between 1989 and 1993, I personally had the privilege to be one of those who worked in PDO. "In those days we faced different but equally complex challenges as those of today. I remember the design, construction and start-up of production facilities at Lekhwair, at that time recorded in the Guinness Book of Records as 'the hottest place on earth where people worked'. It certainly used to feel like it. "I was also lucky enough to be here when PDO discovered the large gas reserves in Central Oman which, though plentiful, required pioneering massive fracturing technology to make them produce at economic rates. I am immensely impressed to see the rapid development of those gas reserves that now supply the world-class LNG [Liquefied Natural Gas] facilities we see at Sur today. "The development of the nation's hydrocarbon resources has never been easy. There have always been technical and practical challenges, but by being at the forefront of technological development the venture has successfully met those challenges time and again. I'm certain it will be able to continue to do so in the future." He went on to say, "As we look forward, we can see that there are also broader global economic and political uncertainties. While energy prices in 2004 have been at highs not seen for a long time, primarily as a result of high demand in the Far East, particularly China, their recent decline shows that the energy markets are likely to remain volatile. "In addition to managing these global uncertainties, the Government of Oman, like so many other Governments in the region, also has to address its own economic and social challenges. But if the past is any indication of the future, His Majesty's Government will continue to make the Sultanate one of the most successful countries in facing these challenges. "It is a tribute to His Majesty's vision and recognition of the need for stability in these turbulent times that he signalled his wish to see the current concession agreements renewed some eight years before the old agreements end in 2012." Malcolm Brinded concluded his address by saying, "There will be many changes as Oman progresses towards 2044, but the Private Shareholders look forward to playing their part in that progress. As PDO's Technical Advisor, Shell in particular is committed to continue to deploy our people and our technology to help Oman and Omanis to realise their aspirations. In this regard I continue to look forward to seeing many Omanis working overseas in other Shell operating companies, helping the exchange of technology and experience that is so vital to our business. "I am sure that we all share a common goal - the progress and prosperity of Oman. Our long shared history, and the strength of the relationships we have built over the years, mean that we have a strong basis from which to achieve that goal. We can build on this deep mutual understanding to develop the new initiatives that will ensure that the Sultanate of Oman continues to secure the full and long-term value of its energy reserves," he said. His Excellency Dr Mohammed bin Hamad bin Saif Al Rumhy, Oman's Minister of Oil and Gas and Chairman of the Board of Directors of PDO.
"The decision to extend the concession agreement for the duration of 40 years was not a random decision. The 40-year contract entails more than a commercial and technical agreement. It represents the relationship, friendship and understanding between the Sultanate and Shell, between the Sultanate and Total and between the Sultanate and Partex. "Another significant message is that Oman will be producing oil for at least another 40 years. "The last important message here is that our partners, Partex, Total and Shell, have shown full confidence in Oman by entering into this long-term commitment to our oil industry. "Finally, I would like to acknowledge the efforts of the negotiating teams who worked very hard over the last 12 months to make this signing a reality and one which all parties are proud to have achieved. "We pray that these agreements will meet the challenges of the 40 years ahead," he concluded.
"This successful year was rounded off by the Omani Government's agreement to extend the Block 6 concession that it awarded to Shell, Total and Partex to explore for and produce oil. A second agreement between the three Private Shareholders then confirmed that PDO would continue to act as the operating company for the concession. "The decision to renew the concession ensures long-term focus for PDO's activities, which currently include major investments in new projects to raise our levels of oil production. These investments are substantial, running into billions of dollars, but they will allow us to produce oil for decades. "The concession renewal at the end of 2004 also put PDO in a sound position to implement a sweeping transformation of its business processes at the start of 2005. The aim is to take US $1.8 billion out of the expenditure for the period 2005-2008, to grow our production back to 800,000 barrels of oil per day, to add at least as much as we remove from our reserves base, and to adopt new behaviours in the areas of leadership, accountability and teamwork. This is no small task. "We look forward to efficiently delivering increased levels of oil production in the forthcoming years from the combination of business investment and transformation," he concluded. Green light given for PDO's first full-scale EOR project Following the signing of the concession agreements, the Shareholders of PDO took the final decision in December 2004 to invest in the company's first full-scale enhanced oil recovery (EOR) project as part of the development of a cluster of oil fields near Harweel, in south Oman.
The principle of the EOR technique being applied at Zalzala, that of miscible-gas injection, is based on the blending of the gas with the oil in the reservoir rock, to form essentially one fluid. The single-fluid nature of the mixture makes it move much more easily through the reservoir and into the producing wells. In essence, the injected gas acts as an oil solvent that 'cleans' the reservoir of its oil. Without the miscible-gas injection, only about 10 per cent of the oil originally in place in the Harweel-cluster reservoirs could be expected to be recovered. But with the application of miscible-gas injection, the percentage of oil recovered can be increased to 33 per cent or more. Part of the gas to be injected into the Zalzala reservoir will be produced from the nearby Government-owned Rabab gas field and transported by pipeline to the oil-production facilities, where it will be compressed into deep injector wells. The hydrocarbons flowing from the producing wells will be separated into oil and gas components. The oil will then be shipped by pipeline to the coast, but the gas will be re-compressed and re-injected again and again until as much oil as economically possible has been produced from the fields in the cluster.
However, it was not the unprecedented nature of the recovery technique that made the project particularly challenging for PDO; it was the sheer scale of the endeavour. "The compressors required to inject the gas must generate tremendous pressures and are consequently huge," says Steven. "We also need pipelines to bring in the gas and large separators to process the gas/oil mix that is eventually produced. Moreover, the gas we are using contains hydrogen sulphide, which is highly corrosive. So the materials we use have to be of a special type. All of these things make this project a costly one, but we have made it commercially viable." The Harweel Phase 2A/B development will constitute one of the largest oil-field projects that PDO has undertaken in many years. By adopting a phased approach to the development of all the Harweel-cluster fields (the first of which was discovered in 1997), PDO has minimised the overall investment risk. Phase 1 confirmed the viability of miscible-gas injection at Zalzala whilst delivering some 18,000 barrels a day by the end of the year. Phase 2A/B will confirm the viability of miscible-gas injection at Sakhiya whilst delivering 50,000 barrels of oil a day by the end of 2007. Investment proposals for further follow-up projects are currently being prepared that, if approved, could grow the oil production from Harweel even further, to some 100,000 barrels per day in 2010.
"Shell is the second largest shareholder in PDO after the Government itself and is also the Technical Advisor responsible for the development and transfer of technology and the technical training of staff. "As Technical Advisor, Shell is also responsible for the secondment of Shell staff to PDO. Currently, there are 450 Shell technical experts at PDO, ranging from petroleum engineers to operations and maintenance specialists, as well as staff involved in human resources, finance and IT. "PDO has for a long time been one of the jewels in Shell's crown when it comes to exploration and production joint ventures. Indeed, the production of crude oil from PDO represents as much as one per cent of the world's total crude oil production, and a significant percentage, some eight per cent, of the Shell Group's total daily production of oil and gas. "PDO and the complicated geology that is so characteristic of Oman have long been testing grounds for some of Shell's newest and latest technology, which has often been applied for the first time in Oman. "However, it is not just Shell technology which has been tried and tested in Oman but Shell people as well. Many senior Shell managers have spent time working at PDO and have been welcomed by a nation of friendly and hospitable people who, to this day, continue to welcome Shell staff to both PDO and the country. "Shell is very honoured to have had such a long relationship with PDO, the revenue from which has been used to help build Oman into one of the region's most developed and stable countries. Shell has also assisted, where possible, in the training and development of Omani people, both within and outside PDO, and today Shell is very proud of the level of Omanisation [currently standing at 84 per cent] which has been achieved at PDO. "I hope that the next 40 years will only serve to enhance and strengthen this relationship for the benefit of both the Omani people and Shell," concludes Andrew.
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PDO is the major exploration and production company in the Sultanate of Oman. It accounts for more than 90 per cent of the country's crude oil production and, under an existing separate agreement, operates on behalf of the Government nearly all of the country's natural gas supply. 
Malcolm Brinded, Shell's Executive Director of Exploration and Production, said at the signing in December, "The signing of the agreements to extend the term of PDO's Block 6 concession from 2012 to the year 2044 marks the beginning of a new era in the partnership between the Government of Oman and PDO's Private Shareholders that has been so successful over many decades. It is a partnership that gives us a great foundation on which to build for the future. 
"As Technical Advisor, Shell has been able to provide leading-edge technology, developed around the world, and I am glad that this partnership can now continue for another four decades, contributing to Shell's global existing oil production."
At the signing in December, H. E. Dr Mohammed bin Hamad bin Saif Al Rumhy, said, "The Ministry of Oil was given the task just over a year ago to examine the concession agreements, in negotiations with our main partner, Shell, with the aim of achieving this milestone.
"2004, like 2003, was another year in which pdo delivered what it promised to its shareholders. Our average daily production rate of 660,000 barrels of oil per day was actually 10,000 over target. Just as important is the fact that we made significant strides in improving the way we do our business, shrinking our underlying cost base by 10 per cent or about US $200 million," says John Malcolm, Managing Director at PDO.
The US $600-million field development, known as Harweel Phase 2A/B, builds on the earlier Harweel Phase 1 pilot project that resulted in four oil fields coming on stream in 2004, beginning with the Zalzala field in March. And it is the Zalzala field that has now been ear-marked for a full-scale EOR project. The other oil fields to be developed in Harweel Phase 2A/B - Sakhiya and Dafaq - will, for the time being, be developed by means of conventional recovery techniques.
"This EOR process is applied elsewhere in the world, but it has never before been done in Oman," points out Steven van Rossem, Harweel Project Manager.
"Shell is very pleased that the Government of Oman has renewed PDO's concession for a further 40 years from 2004 until 2044," says Dr Andrew Wood, Shell's Country Chairman for Oman.
