US embassy cable - 05MUSCAT27

C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 000027 
 
SIPDIS 
 
STATE FOR NEA/RA, NEA/ARPI, AND EB/ESC 
USDOC FOR 4520/ITA/MAC/AMESA/OME/MTALAAT 
DOE FOR INTERNATIONAL AFFAIRS 
 
E.O. 12958: DECL: 01/05/2015 
TAGS: EPET, PGOV, MU, ESTH, Economic Affairs 
SUBJECT: PDO SIGNS DEAL, BUT CAN IT DELIVER? 
 
REF: 03 MUSCAT 2417 
 
Classified By: Ambassador Richard L. Baltimore, III. 
Reasons: 1.4 (b) and (d). 
 
1. (C) Summary: Petroleum Development Oman (PDO) signed a 
40-year extension to its concession agreement with the Omani 
government on December 19.  The agreement was touted in the 
local press as symbolic of Oman's commitment to PDO as well 
as indicative of the Sultanate's capability to continue oil 
production for at least four more decades.  Meanwhile, the 
Omani government continues to revise its long-term production 
projections in an apparent effort to lower expectations while 
allowing PDO to restore its reputation.  American oil 
companies remain skeptical that PDO can deliver on its 
increasingly dubious promises, despite the lofty rhetoric. 
End Summary. 
 
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Fill 'er Up 
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2. (U) All major news outlets in Oman covered the December 19 
signing of a 40-year extension to the concession agreement 
between the government of Oman (represented by the Ministry 
of Oil and Gas) and PDO, the dominant oil firm in Oman. 
(Note: the government owns 60 percent of the shares in PDO, 
Shell owns 34 percent, Total four percent, and Partex two 
percent.  End Note.)  PDO's original concession agreement was 
scheduled to expire in 2012, so the signing comes a full 
eight years in advance.  Sultan Qaboos ratified the 
concession extension in a royal decree issued January 1. 
 
3. (C) For all intents and purposes, PDO is run by Shell. 
This has created significant tensions between the expatriate 
technicians and engineers and the Omani professional staff, 
according to numerous observers and contacts.  Moreover, 
Shell's battered reputation from an extended crisis regarding 
overestimated reserves and declining production means that 
the Omani Ministry of Oil and Gas is keeping a wary eye on 
PDO.  Throughout 2004, PDO's Managing Director and other 
officials made public pronouncements about containing costs, 
making critical investments to stem the production decline 
and enhance oil recovery, and embarked upon strategic 
restructuring within the company to restore public 
confidence.  While PDO officials and analysts expect 
production to bottom out in 2005, the company's ability to 
restore full production levels remains in question. 
 
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Shifting Baselines 
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4. (C) While laudable for its straightforward approach, PDO 
may be playing with numbers.  A noticeable trend in PDO 
accounting is to revise production estimates and projections 
downward in an effort to lower expectations.  Early in 2004, 
published reports indicated that PDO sought to restore 
production to nearly 900,000 barrels per day (bbl/d) by 2007. 
 By the end of the year, the figures had been revised to 
indicate a target production of close to 800,000 bbl/d by 
2009.  Moreover, PDO is also toying with its short-term 
estimates.  During a recent conference for chief executives 
in Muscat, PDO's director of procurement and contracting 
stated that July 2004 was the first time in nearly four years 
that PDO had achieved its target production.  Econoff noticed 
on the same graphic display that July 2004 coincided with a 
dramatic decrease in projected monthly oil production, 
thereby explaining the company's "recovery" without an 
increase in actual oil output.  Such shifting baselines call 
PDO's methodologies into question and cast doubts over its 
ability to deliver on lofty promises. 
 
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Developments in the Field 
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5. (C) While PDO is by far the largest player in the Omani 
oil patch, accounting for over 90 percent of Oman's crude oil 
production, other companies are chomping at the bit to gain 
additional ground in Oman.  Several American firms (Hunt Oil 
and Occidental) seek to expand their operations in the 
Sultanate, and Chinese and Thai firms are becoming 
increasingly aggressive in seeking (and winning) concessions 
on the margins of Block 6 (PDO's crown jewel, the largest and 
most prospective block in central Oman).  Meanwhile, PDO's 
only attempt at opening Block 6 itself consists of bringing 
in small-to-mid size international firms on a contract basis 
to rehabilitate marginal fields.  (Note: According to an 
executive from one such American firm, PDO's expertise 
appears to be in drilling wells, not in managing long-term 
production. End Note.)  Oilfield equipment suppliers told 
Econoff in late December that PDO's production costs range 
from $9-11 per barrel -- somewhat less in northern Oman, more 
in the south with its difficult terrain and heavy, viscous 
crude.  The suppliers went on to say that PDO is earmarking 
over $6 billion for the development of the Mukhaizna 
oilfields in southern Oman, which is also the target of 
Occidental's expansion plans (reftel).  These high lift costs 
and massive investment plans underscore the challenge facing 
PDO. 
 
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Budgets and Bottom Lines 
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6. (C) In announcing the state budget for 2005, Omani 
Minister of National Economy Ahmed bin Abdulnabi Macki 
January 2 revealed that the government used a revenue figure 
of $23 per barrel and an estimated average daily production 
of 753,000 bbl/d in its accounting.  Both figures deviate 
significantly from the Sixth Five Year Plan endorsed by the 
government, wherein oil production was estimated at 909,000 
bbl/d at an average price of $18 per barrel.  The chairman of 
the State Council's Economic Committee (a close Embassy 
contact) claimed that if oil prices were to collapse to 
levels last seen as late as 1998-99 ($10-15 per barrel), the 
government could not even meet its payroll.  In light of 
recent global price increases and oil revenue windfalls, such 
a warning falls on largely deaf ears in the government.  The 
official budgeted price of oil remains conservative, but it 
is definitely trending upward along with public spending. 
 
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Comment 
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7. (C) This signing represents perhaps the only good news for 
Shell in Oman all year.  Given its global and local 
difficulties with overstated reserves estimates and PDO's 
continuing production woes, this long-term concession 
salvaged an otherwise gloomy year for the Sultanate's oil 
giant.  Sultan Qaboos remains loyal to Shell, but this 
sentiment reportedly does not extend universally throughout 
the government.  PDO faces an uphill climb to restore 
production and the public's confidence, and sooner or later 
the shifting statistical baselines won't be enough to stop 
the leaks.  Huge investments in enhanced oil recovery (EOR) 
technologies are expensive, and PDO's reluctance to allow 
full foreign partners into Block 6 could prove even more 
costly in the long run.  While PDO is holding its head high 
following the recent signing of its concession agreement 
extension, the prevailing mood in the oil sector is far from 
celebratory in Oman. 
BALTIMORE