The Oman government is racing against time to expand the country's oil production capacity following years of declining output. Oil production has been sliding over the last few years, thereby denying the sultanate the opportunity to benefit from the current high oil prices in international markets.

Crude oil output fell from 771,000 barrels per day (bpd) in 2002 to an estimated average of 750,000 bpd in 2005. But other sources put current production rate below 700,000 bpd level.

Now Oman wants to raise output to 900,000 bpd by end of decade. Oil Minister Mohammad Bin Hamad Bin Seif Al Rumhy has said that the sultanate will invest some $10 billion over the next five years in the oil and gas sector.

Petroleum Development Oman (PDO) is reportedly willing to give up control of certain sites to new developers. Of the new seven blocks offered for developers, five are at present held by PDO.

Over the last few years, PDO has come under attack for overstating its reserves. In particular Royal Dutch Shell Group, which has a 34 per cent stake in PDO, is blamed for overstating proven reserves in the sultanate's oilfields. The issue came to light in a report published by the New York Times. The article suggested that Shell had overstated Oman's oil reserves by 40 per cent. Internal documents showed that output from Yibal, the largest field, has been declining by an average of 12 per cent annually in the period 1997-2002, according to the report. Earlier, Shell claimed that horizontal drilling would allow it to extract additional capacity from mature fields. PDO controls oil production in the sultanate by virtue of accounting for about 90 per cent of output. Aside from Shell, the Omani government owns 60 per cent of PDO, with the balance held by Partex of the US and Total of France.

Complex geology of Omani fields makes the use of advanced techniques in extracting oil a necessity. The sultanate's fields are typified as being relatively small, widely scattered and less productive compared to other fields in the GCC. According to a report by the US Department of Energy, the average well in Oman produces about one-tenth volume per well compared to other wells in the region. The average producing cost in Omani wells stands anywhere between $3-$5 per barrel, which is considerably higher than costs in other GCC wells. The average cost in Kuwait is about $1 per barrel.

The new spending plans make economic sense in view of the high oil prices. The petroleum sector contributes more than 80 per cent to Oman's export earnings, 75 per cent of revenues and 40 per cent of the GDP. More importantly, all indications suggest that the average oil price would remain firm in the foreseeable future amid geopolitical tensions in the Middle East.

However, the desire to expand oil capacity contradicts a key economic goal of Oman. Vision 2020, the blueprint for Oman's economy, aims to diversify the sultanate's economy and reduce dependence on the oil sector.

The author is assistant professor, College of Business Administration, University of Bahrain.