US embassy cable - 05MUSCAT480

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, Economic Affairs 
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. 
 
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Sohar: Just hot air? 
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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. 
 
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Turning to Iran 
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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. 
 
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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. 
 
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Comment 
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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