OMAN - LNG Is Coming On Stream; Two Additional Trains Depend On Gas Reserves.

With its first 3.3 million tons/year train completed in late 1999 and now being commissioned, Oman Liquefied Natural Gas Company (Oman LNG) is to send its first shipment to South Korea in April. Its second 3.3m t/y train is to be on stream in May. The contractor, Chiyoda/Foster Wheeler, will formally hand over the plant to Oman LNG in mid-2000.

A state-of-the-art, deep sea LNG terminal has been built at Qalhat, near Sur. The terminal is fitted with sophisticated loading equipment capable of handling 130,000 CM LNG tankers.

This could not have come at better times since the early 1990s. The Asian crisis is over, oil prices are close to their 1990 Gulf crisis record (see OMT), world demand for energy is once again growing at a good rate, and the Shell-led Oman LNG has lined up buyers for the whole of its output.

In 1998 Oman LNG was facing huge problems which emanated from Asia's financial crisis. Although it had already secured most of the project finance required for its plant, with a package of commercial loans raised at low interest rates, Oman LNG could not find suitable markets to take its gas from 2000. The Asian crisis then affected all the LNG ventures of the Middle East. South Korea in late 1997 cancelled a contract to take 800,000 t/y of Abu Dhabi LNG. Thailand had to suspend arrangements to buy LNG from Oman. Yemen's LNG project, which was to depend on the South Korean market to a large extent, had to be delayed. The US credit rating agency Moody's downgraded Qatar's second LNG venture Rasgas which in late 1996 had secured $1.2 billion in bonds and another $1.35 billion in a mixture of commercial and concessionary loans. That venture, led by Mobil, was downgraded because of its heavy dependence on South Korea.

Japanese banks cut their credit lines to some local banks in the GCC area by up to 50%, in view of the Asian crisis. This made it harder for them to re-confirm letters of credit opened by Japanese importers, including companies buying oil from Oman. Like Qatar, Oman was more exposed to the Asian crisis than the other GCC states because it depended on Asian banks to finance its various projects including an aluminium smelter, a fertiliser plant and a polyolefin complex (see Downstream Trends No. 6).

All that is over now. In addition to term clients secured, Shell has reserved 11 cargoes of LNG, each 125,000 cubic metres, for its US affiliate Coral Energy Resources under an agreement signed in late 1999. Already, technically at least, Oman LNG is sold out for the design capacity of its plant (see following pages).

Judging by the experience of all other Shell-led LNG ventures around the world, however, the actual operating capacity of the two trains is expected to exceed 7.5m t/y. So there is still room for a few short-term sales deals to be made. These will bring in additional profits.

The JV: The $2.5 bn Oman LNG venture is 51% owned by the government. Its partners are: Shell, the project leader holding 30%; TotalFina, 5.54%; a South Korean consortium called Korea LNG Co., 5%; Mitsubishi Corp., 2.77%; Mitsui & Co., 2.77%, Partex, 2%; and Itochu Corp., 0.92%. Oman LNG is limited to the downstream element, while the upstream is fully owned by the government.

On Nov. 16, 1996, Sultan Qaboos of Oman inaugurated construction of the liquefaction plant at Qalhat. The sultan's then Oil Minister Said Bin Ahmad Al Shanfari said at the ceremony: "The LNG venture...should generate $24 billion for the sultanate over the next 25 years". The Deputy Oil Minister and Chairman of Oman LNG, Salem Bin Mohammed Shaaban, later said that the project would generate a total of $29 bn, with about $12.4 bn to come from the upstream element.

On Nov. 14, 1996, Oman LNG had awarded the EPC contract for the LNG plant to a consortium made up of Chiyoda Corp. of Japan and Foster Wheeler of the US. The value of the contract was $1.2 bn, with the Chiyoda Foster Wheeler partnership to subcontract work to qualified local companies. (The Chiyoda/Foster Wheeler EPC contract was won against competition from Comprimo, Fluor Daniel and a partnership of Bechtel, Snamprogetti and Technip). The front-end engineering and designs for the downstream element had been done by the MW Kellogg-JGC partnership under a contract signed on Nov. 11, 1994. .

In mid-November 1997, Oman LNG signed an agreement with a consortium of 41 local and international banks for a multi-tranche loan of $2 bn. This covered the downstream element, mainly construction of the two-train liquefaction plant and a terminal at Qalhat south-east of Muscat, with construction work begun in late 1996. The loan also covered installations related to the LNG venture. The loan included facilities of up to 12 and a half years, with repayment starting in 2001. Some of the facilities were guaranteed by export credit agencies from the US, the UK, Italy, the Netherlands and Spain. Chase Manhattan Bank acted as financial advisor to Oman LNG, under a contract signed in early 1995.

The funding was provided at competitive interest rates despite the fact that on Nov. 5, 1997, Thailand's state company PTT suspended its August 1996 MoU with Oman LNG. With the Thai economy then badly hit by a financial crisis, PTT hinted that its purchase of Omani LNG would be delayed by four years to 2007.

The Upstream Element: On Oct. 22, 1996, the government and the partners in Oman LNG had signed two agreements for related upstream development projects worth $3.4 bn. Under one agreement, the main concessionaire Petroleum Development Oman (PDO) undertook to develop the gas reserves and build the upstream element on behalf of the state. Upstream work included drilling for and production and transportation of the gas by pipeline from the fields in central Oman to the liquefaction plant and to new industrial ventures to be built at Sur.

The second agreement covered the government's sales of the natural gas feed to the LNG plant and a pledge by Oman LNG's foreign partners to arrange $1.4 bn in financing for the upstream element. The government wwas to reimburse Oman LNG's foreign partners from 2001 to 2006, out of revenues from sales of gas to the joint venture's liquefaction plant as well condensates associated with the gas.

PDO is owned by the government (60%), Shell (34%), TotalFina (4%) and Partex (2%). Under the first agreement, PDO was to manage for 25 years the upstream projects and supplies of natural gas to the LNG plant as well as to industries and an electric power plant to be built in Sur. The latter projects do not involve Oman LNG.

In February 1995, PDO had awarded two contracts for the upstream part: one to McDermott affiliate Delta Catalytic Hudson of Canada for the design and front-end engineering of fields facilities, and the other to RG Brown of Singapore for laying a 42-inch pipeline from the fields to Sur and Qalhat. In February 1996, PDO contracted Electrowatt Engineering of Switzerland to do the front-end engineering and designs for an integrated power supply system to serve the upstream project, with a power plant to have a capacity of up to 60 MW. In early November 1996, a consortium of Saipem, Snamprogetti and the Athens-based CCC won the contract to build and install the gas supply pipeline from the gas fields in central Oman to Sur and the Qalhat plant, with completion set for the first half of 1998. The group was to subcontract related work to local companies. Later Dodsal of India was contracted to build the gas gathering system and pipelines between the fields. The other main upstream facilities were awarded to a consortium of Bechtel and Snamprogetti, together with the local company Galfar Engineering & Contracting. The facilities were to include a central processing plant near Qarn Al Alam.

Initially, the government had dedicated 7 TCF of their proven reserves for the LNG project. But when Oman LNG decided to scale the downstream project up to 6.6m t/y, the volume of dedicated reserves was raised to 8.4 TCF, with the venture to receive 880 MCF/day (up from the original 775 MCF/day target) for a period of 25 years from late 1999.

All the upstream projects were executed according to plant and were completed in late 1999. The pipeline which was built to Sur and Qalhat, about 400 km, has the capacity to supply both the LNG plant and a set of industries to be built at Sur. These will include an ammonia/urea complex to be a JV between Oman Oil Co. (OOC and Indian companies (see Downstream Trends No. 6).

The fields producing the gas are Saih Nihayda, Saih Rawl and Barik in central Oman (see their profiles in Gas Market Trends No. 6). Development drilling there began in the first half of 1997. The fields came on stream before end-1999. In January 1997 PDO got four heavy drilling rigs, two from a Schlumberger affiliate Sea & Land and the other two from Essar of India. They were to drill up to 60 wells at depths of about 4,500 metres. PDO had drilled appraisal wells since late 1992 and done 3D seismic surveys at the fields.