OMAN "SHELL"-SHOCKED BY GAS SHORTFALL, TURNS TO

C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 000480

SIPDIS

STATE FOR EB/ESC, NEA/ARPI
USDOC FOR 4520/ITA/MAC/AMESA/OME/MTALAAT
DOE FOR INTERNATIONAL AFFAIRS

E.O. 12958: DECL: 03/22/2015
TAGS: EPET EIND MU IR
SUBJECT: OMAN "SHELL"-SHOCKED BY GAS SHORTFALL, TURNS TO
IRAN

REF: KUWAIT 1089

Classified By: Ambassador Richard L. Baltimore III.
Reasons: 1.4 (b) and (d).


1. (C) Summary: Recent conversations with senior technical
advisors at the Ministry of Oil and Gas have revealed strong
evidence that Oman's natural gas reserves are significantly
smaller than previously reported. Oman is signing agreements
to import large quantities of gas from Iran in order to
satisfy booming demand from gas-based industries in Sohar and
elsewhere in the Sultanate. Meanwhile, Shell is being forced
to de-book large quantities of proven gas reserves in Oman,
continuing its recent string of disappointments for the Omani
government. End Summary.

--------------
Sohar: Just hot air?
--------------


2. (C) Following routine newspaper reports of Oman's signing
an MOU with Iran to import gas beginning in 2008, Econoff
made discreet inquiries with Ministry of Oil and Gas (MOG)
officials to ascertain the reasons why a net gas exporter
would be seeking gas imports. The direct and unambiguous
answer is that Oman's sprint toward gas-based
industrialization in Sohar, combined with increasing exports
of liquefied natural gas (LNG) to Asia and Europe, have
completely outpaced gas development in the Sultanate.
Khalifa al-Hinai, Technical Advisor to the Minister of Oil
and Gas and Chairman of the Board of Oman Gas Company, summed
it up by saying "we're running out of gas; too many
industries are knocking at our door." Projects underway or
envisioned for Sohar include an aluminum smelter, a second
oil refinery, a large petrochemical plant, a polypropylene
plant, a methanol factory, a fertilizer plant, three power
plants (one with a desalination facility),and a steel
factory. All of these industries hope to capitalize on cheap
electricity and/or guaranteed long-term supplies of natural
gas at favorable rates.

--------------
Turning to Iran
--------------


3. (C) According to al-Hinai, discussions with Iran began
about four years ago. Hinai and several others were sent on
missions to Tehran to explore the possibilities of bringing
gas from Iranian fields into the Sultanate. As talks
deepened, MOG Under Secretary Nasser al-Jashmi and officials
from the Oman Oil Company (a 100 percent government-owned
investment company responsible for many of the major projects
in Oman) held talks with their Iranian counterparts. On
March 15, an agreement was signed between Oman and Iran
whereby Oman would import 30 million cubic meters of Iranian
gas daily, beginning in 2008. The amount would then increase
to 70 million cubic meters per day, although no further
details were released. While Omani newspapers reported that
an MOU had been signed between the countries, a senior
expatriate MOG advisor told Econoff that the actual signing
consisted of agreeing on the minutes of recent discussions
between the sides. Furthermore, the advisor confided that
the gas under discussion will come from still-unexplored
fields in Iran.


4. (C) One sticking point is the absence of pipelines to
bring the gas across the Strait of Hormuz and into Oman.
Such a pipeline would involve construction at over 4000
meters of depth underneath the Gulf of Oman, an extremely
costly proposition that would make maintenance and repairs
treacherous. Moreover, it is unclear whether Oman or Iran
would undertake the necessary investment, and whether it
would be a government or private sector initiative. The
newspaper reports indicated that a specialized company would
be hired to study and identify the nearest maritime pipeline
link between the countries.

--------------
Shell continues to crack
--------------


5. (C) Shell's woes continue unabated in Oman, as the company
is now being compelled to de-book over 5 trillion cubic feet
(tcf) of gas from Oman's proven reserves, which represents
over 17 percent of Oman's total proven reserves (29 tcf at
the end of 2004). MOG officials are complaining about their
inability to conduct effective planning in the face of
Shell's erratic system for booking reserves.

--------------
Comment
--------------


6. (C) The government has been very clear that gas-based
industrialization is a cornerstone of Oman's diversification
plans. The underlying assumption has always been that Oman
possessed sufficient quantities of natural gas to satisfy the
growing demand; but this assumption is now in serious
question. Coming on the heels of similar reports from Kuwait
of cross-border gas deals with Iran (reftel),Oman's attempt
to secure its own pact with Tehran indicates a formal
recognition of this vulnerability. Combined with Oman's
participation in the Dolphin energy project that eventually
will bring Qatari gas to the UAE and Oman, the Sultanate is
being pragmatic in the face of its own gas deficiencies. The
wild card in all of this is Shell, which continues to lose
credibility due to chronically overbooked hydrocarbon
reserves. The Omanis stand to lose much face, as they
prematurely extended Shell's lease in Oman for another 40
years on January 1 despite grave misgivings within the
industry about Shell's performance.
BALTIMORE