x Abu Dhabi, UAE Thursday 20 July 2017

A tale of two countries to give hope to others

A not so obvious connection between Colombia and Oman is that they both are significant non-OPEC producers that have recently reversed their declining production.

What do Oman and Colombia have in common? Sunny weather, nice beaches and friendly people, perhaps. A less obvious connection, though, is vital for oil markets: both are significant non-OPEC producers that have recently reversed their declining production. How did they achieve this and why is it important? Driving south from Muscat, you follow the dramatic Semail Gap through the Oman Mountains. These recede into the distance and old forts, villages and luxuriant oases give way to a dry, barren gravel plain, broken occasionally by low hills and rocky outcrops. Green, humid Salalah is still 600km further south.

To the right, after the major oil complex of Qarn Alam, a road heads towards the outermost dunes of the famous Rub al Khali, the Empty Quarter beloved by explorers. Taking this road, you reach Al Ghubar, which translates appropriately as "the dust". Martin Stauble, the exploration director at the state-controlled Petroleum Development Oman (PDO), says here is "one of the largest oil discoveries ever made in Oman".

A billion barrels of oil is a substantial find anywhere, although the thick, heavy oil requires special technologies to extract, and only about 30 per cent is likely to be recoverable. Why is Oman looking for such fields? In 2001, production reached its highest level, just short of 1 million barrels per day (bpd). It then went into sharp decline, dropping by more than a quarter over the next six years. With petroleum accounting for 80 per cent of the budget, this was a perilous path.

Supporters of "peak oil" - the idea that global oil supply will soon enter irreversible decline - seized on this as evidence. One prominent peak oil commentator, the US investment banker Matt Simmons, forecast a continuing collapse in Omani output. Another, Dr Colin Campbell, predicted that by this year, Oman would be pumping just 610,000 bpd. But actual output is running 40 per cent higher than this dismal view. Production rose in 2008 and last year, and is expected to gain again this year. The sultanate began a measured but far-reaching programme to sustain its petroleum sector.

PDO, with the support of shareholder Shell, gave up non-core areas to others, increased exploration and started enhanced recovery projects to coax additional oil from difficult and mature fields. New entrants were encouraged, including smaller companies willing to take on fields below PDO's radar. The large Mukhaizna heavy oil field, and deep and "tight" (difficult to extract) gasfields went to firms with special technical skills.

On the other side of the world another country, Colombia, was tackling its oil challenges similarly. To deal with a decline that started in 2000, the government restructured state-controlled Ecopetrol and reduced extraction taxes. A number of new entrants made additional discoveries and stepped up output at known fields, especially in the country's heavy oil belt. As a result, production is up by almost a fifth in the last two years.

Two other factors are unique to Colombia. First, the security situation improved. The number of attacks on pipelines dropped off dramatically. In the eastern jungle area, intensive development finally began at the large Rubiales field, long known but previously impeded by rebel activity. Second, after a strike in opposition to the Venezuelan president Hugo Chavez was followed by mass sackings, thousands of oil workers from the neighbouring country arrived in Colombia.

Most prominent were Luis Guisti, the former president of Petroleos de Venezuela (PdVSA), and Ronald Pantin, a former PdVSA executive now leading development at Rubiales. Colombia and Oman may not be stars of the oil world. Their combined output, at about 2 per cent of global production, is small but not negligible. More importantly, they show that declining production can be reversed. Governments have to cut bureaucracy and perhaps tax burdens, make regulation less onerous, attract new players and restructure national companies.

Oil companies need to invest intensively in existing assets, apply innovative technologies, and look with fresh eyes at well-worn fields and exploration areas. Who else might benefit from such an approach? Bahrain has recently started to revitalise its old onshore oil field by bringing in the US-based Occidental oil company and Abu Dhabi's investment arm, Mubadala Development. Meanwhile, Indian output has essentially been flat for the last decade and a half, but the country is now seeing solid results from its strenuous efforts to attract investors in Rajasthan and the eastern offshore.

Indonesia had to leave OPEC when it ceased to be a net exporter, yet bureaucracy, corruption and onerous tax terms deter investors from developing its huge, petroleum-prone territory. Other candidates for revival include Mexico, Turkmenistan, Brunei and Argentina. Collectively, non-OPEC states account for more than half of global production. Despite ageing fields, they have proved remarkably persistent in maintaining and even increasing output. Particularly at this time of fiscal stringency and high oil prices, new petroleum investment is not just appealing to governments, but vital.

Although less glamorous than opening up new exploration frontiers, reviving mature areas is at least as important. So, as well as flying out in helicopters over the deep waters of the Gulf of Mexico or the ice-floes of the Arctic, oil executives also need to drive the dusty road to Al Ghubar. Robin M Mills is a Dubai-based energy economist, and author of 'The Myth of the Oil Crisis' (Praeger, 2008)

robin@oilcrisismyth.com