Oman is pushing ahead with a costly programme to reverse a steady decline in its crude production and experts believe a surge in its petrodollar income would allow the country to achieve the 900,000 barrels per day (bpd) target.
The programme envisages an investment of $10 billion (Dh36.7bn) until 2011 and involves the costly enhanced oil recovery (EOR) technique that substantially boosts field recovery rates but requires large quantities of gas.
Besides this highly advanced but expensive technique, the development of Oman's oilfields requires much more investment as they are dwarfed by the mammoth oilfields in the UAE and other Gulf states.
According to a report by the Kuwait-based Global Investment House (GIH), the average output rate of an oil well in Oman is about 400bpd, while it could be as high as 4,000bpd in nearby Gulf oil giants.
"Given the nature of oilfields in Oman, their development costs are much higher than those in other Gulf countries," said Mohammed Zainy, a senior oil analyst at London's Centre for Global Energy Studies.
"They are relatively small, more complex, and more scattered," he added.
In 2006, Oman's oil minister Mohammed Rumhi announced plans to pump up to $10bn during the 2007-2011 development plan into project to expand crude output capacity to 900,000bpd from less than 800,000bpd at present.
The investments also cover expansion of domestic gas output and import from such major gas producers as Qatar and Iran.
The announcement coincided with a steep decline in Oman's oil production from a peak 328 million barrels in 2002 to 299 million barrels in 2003, 285 million barrels in 2004, 283 million barrels in 2005 and 269 million barrels in 2006. Production dived to 259 million barrels in 2007, but the governemnt said output will recover this year as it based its 2008 budget on higher oil output.
The EOR technique, which is widely used in the UAE and other Gulf producers, has been the focus of Oman's oilfield expansion plans and this has prompted the country to raise its gas output for higher injection rates.
Experts believe Oman would be able to attain the targeted crude and gas output after strong oil prices sharply boosted its revenue despite lower production. Although Oman has echoed oher Gulf countries in overshooting forecast expenditure, its budget has recorded annual surpluses since 2000.
The surplus hit a record high of OMR434.3 million (Dh4.14bn) in 2007 after revenues climbed to an all-time high of OMR5.806bn and actual expenditure peaked at Dh50bn.
Early this year, Oman announced a record budget for 2008 and forecast a deficit of OMR400m, unchanged from last year's projected shortfall. But analysts expect it to turn into a large surplus as the government assumed oil prices of around $45, below half its current level. The budget also projected oil production to increase to 790,000bpd this year from 710,000bpd in 2007.
"The investment plan announced by the minsister of oil involves boosting crude output to 900,000bpd and natural gas production to 70-80 million cubic metres per day. A lion's share of this effort will focus on enhanced oil recovery initiatives to improve recovery rates at several of the country's oil fields," the GIH report said.
"Oman also plans to increase exploration and production activities, although the natural gas sector will receive much of these investments. The oil and gas investments are expected to constitute about 23 per cent of the total investment of the country in 2008, up 12 per cent over last year."
At present output levels, Oman's oil reserves could last about 20 years and gas about 30 years, which compare unfavourably with at least 100 years for other Gulf states.
At the end of 2007, Oman's proven crude resources were estimated at about 5.5 billion barrels and gas at 34 trillion cubic feet, which are a fraction of the UAE's 98 billion barrels of oil and 200 trillion cubic feet of gas.
To meet its soaring domestic needs, Oman has been locked in a drive to maximise gas output and import the rest from neighbouring countries. The surge in domestic use was a result of exports to the UAE, injection into oil wells to boost recovery rates, a switch to gas in power generation and other domestic uses, and growing supplies for the country's liquefied natural gas plant in the southern port of Sur, which was expanded by 50 per cent in 2006 to nearly 10 million tonnes from 6.6 million tonnes per year.
The expansion, along with exports to the UAE and higher domestic output, sharply boosted Oman's gas revenue to a record high of Dh7.7bn.
According to the GIH report, the country's gas production peaked at nearly 71 million cubic metres in 2007, which was enough to cover local demand.
"To cater to the increasing demand in the coming years, Oman has entered into a MoU with Iran for importing up to 28 million cubic metres per day of natural gas.
"Also, they currently have an arrangement with Qatar for importing up to 5.6 million cubic metres per day, using the Dolphin pipeline," it said.
Citing government estimates, the report said the surge in crude oil and gas revenues allied with higher public spending and a steady expansion in the non-oil sector to boost growth in Oman. It expected the country's gross domestic product to grow by five to six per cent this year.
"We believe the Omani economy is likely to achieve about five to six per cent growth in real GDP in 2008. We consider that the manufacturing and natural gas sectors should play pivotal roles to realise the diversification plans," it said.