Shell sees a competitive hydrogen future in OmanJuly 18, 2023
Walid Hadi, senior vice-president and country chair of Oman Shell, talks to The Energy Year about the company’s key initiatives to support Oman’s energy industry and the opportunities and challenges in the production of hydrogen and synthetic gas. Shell is active across Oman’s energy industry, with joint venture and independent activities ranging from R&D and E&P to trading and retail.
Oman you walk us through the key initiatives taken by Oman Shell to support the country’s energy industry?
We believe that we continue to support Oman’s energy industry by investing in all aspects of the Omani energy system where we can add value and have a competitive advantage. In Petroleum Development Oman (PDO), we are working with our partners to simultaneously grow and decarbonise oil production, which is expected to remain the bedrock of the Omani economy in the foreseeable future.
We are also extending our partnership with the Omani government in Oman LNG, which we expect to provide the highest financial yield of gas use cases to the sultanate into the 2030s. We have recently started up our Block 10 gasfield, which is Shell’s first directly operated venture in Oman, and are actively exploring for further gas potential. We are also maturing several material low-carbon energy value chains to support the country’s 2050 NZE [net-zero emissions] ambition.
In addition, Shell recently entered the Green Energy Oman (GEO) green hydrogen consortium and is also maturing blue hydrogen at scale. And in January 2023, we signed an MoU with the government selecting Oman as the first country in the world where we will seek to deploy synthetic gas at a commercial scale. Shell has conducted a few pilots around the world to develop this technology, and now we hope that we will be able to build the first plant in Oman. In the downstream, Shell Oman Marketing, a publicly listed venture on the Muscat Securities Market, is laying the foundations for low-carbon products offerings, particularly in the mobility sector.
What are your thoughts regarding the main trends and dynamics around the development of hydrogen-related activities in Oman?
In 2023, we took a 35% stake in GEO, the consortium that is developing the country’s largest green hydrogen project, and we are excited about this. The launch of Hydrom in October 2022 and the subsequent world’s first green hydrogen licensing round manifest the government’s intent to develop a green hydrogen economy in Oman and for the country to become a pivotal green hydrogen hub in the region.
MEM [the Ministry of Energy and Minerals] is also demonstrating a strong commitment to ensuring the systematic development of the necessary infrastructure to support the growing hydrogen economy. This encompasses a wide range of elements, such as freshwater production, utility corridors, electricity transmission systems, grid integration, transportation options and the corresponding support network. The renewable energy fundamentals and Oman’s long history with large-scale energy projects make the country an ideal location to develop hydrogen at scale.
There are still many developments that we need to see before hydrogen becomes cost competitive and commercially viable. On the production side, we expect technology and scale to systemically reduce the production costs in the balance of this decade, and for markets to develop commercial and pricing models that create premiums for the low to zero carbon content of this niche and critical future fuel. Blue hydrogen is currently more competitive but also competes for valuable gas resources that have high economic impact use cases and it will most likely become a bridge to competitive green hydrogen.
What are the main opportunities and challenges in combining the production of hydrogen with synthetic gas?
As of today, most hydrogen worldwide is produced from natural gas, in a form of what is called “grey hydrogen.” If the world is to track a credible energy transition journey, we will need low-carbon hydrogen to start playing a bigger role in the global energy systems, particularly in what is described as “hard to abate” sectors.
The biggest challenge facing low-carbon hydrogen is the need to develop commercially viable solutions to transport hydrogen from competitive production sources such as Oman to high-value destination markets such as East Asia and Europe. Our best alternative is to work closely with our government partners to attract new industries to Oman to co-locate with green hydrogen production facilities.
Other possible viable export vectors are green ammonia and synthetic gas. We have an agreement with MEM to explore opportunities to produce liquefied synthetic gas, or LSG, in Oman. This is produced when renewable hydrogen is combined with captured carbon dioxide to produce natural gas, which is then liquefied. This agreement represents a big step ahead because we believe that hydrogen produced in the country can be very competitive and that LSG could prove to be a commercially viable “plug and play” low-carbon fuel. In reality, I believe we will need to develop multiple use cases and export vectors to be able to develop low-carbon hydrogen at scale and LSG could emerge as one of those leading export vectors.
How receptive do you think the domestic industrial market will be to this shift towards hydrogen?
If you look at the distribution of project sites and licensing locations, it becomes apparent that most of the projects are concentrated near Duqm or Salalah, both of which are ports and industrial areas. Instead of exclusively exporting green hydrogen to other countries, it would be beneficial to attract domestic demand for hydrogen, which would significantly decrease production costs, enhance companies’ competitiveness and lower their carbon footprint.
As the industry continues to de-risk technologically and commercially viable options to transport green hydrogen to global markets, domestic demand continues to be an important cornerstone to develop a hydrogen economy, particularly given the economic multiplier that industrial projects will create for low-carbon energy.
How do you evaluate Oman’s position within the global LNG landscape?
Last January, we signed an agreement with Oman LNG, marking Shell’s first long-term LNG offtake from Oman. It will supply us with 800,000 tonnes per year for 10 years, starting from 2025.
Although Oman cannot be considered a big LNG player on a global scale, it has world-class LNG infrastructure and a competitive presence in the market as a reliable supplier. The type of relationships it has built over the years, particularly in the Far East, and its approach of diversifying its markets to Europe, Turkey and China position Oman as a niche LNG country which is able to attract premium LNG prices
Several countries and important parts of the global gas customer base are looking at synthetic LNG as a possible way to decarbonise power and industrial sectors as it avoids the sometimes prohibitive costs of repurposing production facilities, receiving terminals or pipelines, and all those infrastructures are already present in Oman. We expect the highest demand to materialise from Europe and the Far East and eventually, as technology evolves and costs of production decrease, it could soon become part of the world’s mainstream energy mix.
The production of synthetic LNG is more expensive than the extraction of natural gas. Therefore, establishing a framework with mandates, incentives, guidelines and directions from the customer or receiving countries is essential to ensure the commercial viability of this vector. However, we are confident that Oman is moving in the right direction and that the necessary mechanisms will be implemented by 2030.
What have been Oman Shell’s main steps to decarbonise its operations?
In 2021, we launched Qabas, a 25-MW solar plant in Sohar helping the SOHAR Port and Freezone to become more sustainable. It was a project ahead of its time, the first in Oman and one of the first of its kind in the whole Middle East, as a “captive generation power plant,” which produces electricity for a single customer – a ferrochrome smelter facility in this case.
There are several large-scale solar developments already on stream in the country. And within hydrocarbons operations the trend of the electrification of oil and gas activities is rising.
Then, if you look at other steps taken to decarbonise, carbon capture, utilisation and storage (CCUS) will play an important role in the country’s future. This is particularly true of the utilisation because CO2 is also a resource with value in applications from upstream to synthetic LNG to industry.
In this regard and in May 2022, we signed an agreement with PDO to jointly study opportunities, with the aim of assessing aspects of reinjecting and storing CO2. This includes technical matters, project timeframe and cost, and possible support for a regulatory and fiscal framework for CCUS in Oman. We are excited about this collaboration because of the diversity of reservoirs in PDO’s portfolio, while on our side we can transfer them the technology and the know-how that Shell has accumulated around the world. CCUS will also be a pillar for the blue hydrogen value chain, which is in turn important because it can be competitive earlier, helping accelerate the conversion from grey to green.
CCUS is a highly capital-intensive, complex technology with significant commercial intricacies. However, with gradual progress, it is possible to witness projects focusing on either the “U” or “S” segments of carbon capture being implemented and coming on line by the 2030s.
In January 2023, the Mabrouk field started gas production. What are your expectations for the future of Block 10?
Historically, we have operated in the country through joint ventures with government partners. Block 10 is a very special project for us because we run it in collaboration with OQ and other partners, but it is the first business in Oman that we directly operate. We signed the agreements in December 2021 and in just over a year, in January 2023, we were able to kick off production, having drilled all the wells that were slated for the initial phase.
Our expectation is to reach a plateau of 500 mcf [14.2 mcm] per day by early 2024 and the produced gas will be supplied to the OQ Gas Network, feeding local industries and export facilities. We believe Oman has room to grow in gas, both because the country needs it and because we see an attractive resource base still within Block 10, but also in the exploration fields that we are developing at the moment in Block 11, where we are trying to accelerate exploration paired with some other parts of Block 10.
The aim now is to stabilise the start-up of the existing phase in Block 10, get it to plateau, while understanding the “behaviour” of the field – the reservoirs, the subsurface facilities, etc.
How will the increased development of gas resources impact the country’s industrialisation?
Gas is an industrial fuel, with a positive impact on industrialising the country and on its local supply chain, supporting in-country value (ICV). My expectations are that as long as we mature both financial and carbon resilient resources, there will be a market for gas, pushing us to undertake further developments.
The best service we can deliver to the country lies in developing gas resources as competitively as possible, which means that the government can then attract more industries in different segments. If you combine price competitiveness with the lowest possible carbon footprint, it will be the biggest economic multiplier, able to increase the appetite of all those downstream players who will come – for example, to Duqm, carrying out metals, petrochemicals and ethanol projects, which are all gas-dependent. To put it briefly, if you offer competitively priced gas, investors will knock.
What is the company’s contribution to ICV promotion?
We are working with multiple local companies to enhance the quality of life of Omani workers and boost the country’s supply chain. For example, we awarded Galfar Engineering USD 80 million-plus for the construction of the field operating base in Block 10. Together, we are building it up to host not only Shell personnel but also the staff of our contractors because we want to provide to all our partners the highest standard of accommodation.
Moreover, we have managed to develop around 40 SMEs throughout the years, following our aim of investing in their management systems and safety performance capabilities to help them be competitive on their own.
In the solar business in particular, besides having installed solar capacity to power the needs of 25 schools in different parts of the country, we have worked with local companies to develop solar installation projects and now we see some of them working for PDO and in the GCC region, which makes us proud.