The sombre mood in Muscat is unsurprising; low oil prices mean the country’s oil revenues for the first five months of 2016 plunged by 44.7% to $3.34bn compared to the same period in 2015. The World Bank estimates that Oman lost $10bn in revenues last year. Unsurprisingly, the sense of urgency to find solutions is palpable throughout Oman’s ministries, as the oil and gas sector accounted for almost 90% of government revenues in the five years ending in 2015, and almost 70% of exports.
Oman, which is the largest non-OPEC oil producer in the Middle East, has been the Gulf country hardest hit by low oil prices, bar Bahrain. The strain has spilled over into the job market – a narrative that applies to all energy producers. Just over 2,000 Omani oilfield workers were successfully placed elsewhere within the industry earlier this year as part of a retrenchment, though the Oman Society of Contractors (OSC) warned in late-2015 that up to 55,000 Omani construction workers risked losing their jobs this year if poor market conditions continued. State-owned Petroleum Development Oman (PDO) is unusual in that it plans to add another 7,200 new jobs this year, which is at parity with 2015.
Staying the course
There is relief from the troublesome outlook as PDO’s growth – in part underpinned by advanced enhanced oil recovery (EOR) strategies – was largely responsible for Oman reaching a record high oil production rate of 1mn bpd in July. PDO, which typically accounts for 70% of Oman’s crude-oil production and nearly all of its natural-gas supply, also set a new in-house record of combined oil, gas and condensate production of 1.29mn bpd in 2015. This marked an average daily oil production of 588,937bpd, which is the company’s highest production level since 2005. A hallmark of PDO’s operating ethos is cost efficiency throughout the value chain, which is expected to save $1.6bn on planned expenditure this year.
“Sustainability and continuous business improvement are at the heart of PDO’s approach to business and output has continued to be strong in 2016. Notwithstanding the challenging economic background, PDO has reached our new sustainable long-term oil production plateau of 600,000bpd well before our initial 2019 target date,” Raoul Restucci, managing director of PDO, told Oil and Gas Middle East. PDO plans to invest another $20bn over the next five years to sustain oil and gas production.
While allies are most valuable during times of strife, Muscat needs to diversify its contact book. China, the world’s second largest crude oil importer after the US, imported 73% of Omani crude oil exports in the first half of this year, according to Oman’s National Centre for Statistics and Information (NCSI).
“It is widely believed that China’s surge of imports will slow down in the second half of this year. In this case, Oman’s exports to China may well be undermined by rising exports from Iran and Iraq,” Philip Andrews-Speed, a principal fellow at the Energy Studies Institute of the National University of Singapore, told Oil and Gas Middle East. “Both are countries with which Chinese importers are likely to develop long-term and strategic relations on account of the scale of their oil reserves.”
Oman’s ties with Chinese investors will deepen with the building of an industrial park at the southern port of Duqm, which lies 550km south of Muscat and will include a refinery, automobile assembly plant, a $150mn hotel and a $100mn school. The park, which is strategically located near the oil transit chokepoint of the Strait of Hormuz, is expected to attract $10bn of investments by 2022 – a cash injection that would be welcomed by Oman’s strained treasury.
Omani crude oil is also exported to South Korea, Taiwan, Japan and India, with the latter potentially increasing as the International Energy Agency (IEA) expects India to be the fastest-growing crude consumer up to 2040.
Oman also has strong energy ties with Iran, with the latest collaboration to build a 400km gas pipeline between the two countries more likely to gain traction following the lifting of the majority of Western-imposed sanctions on Iran on 17 January. The gas pipeline will enable Iran’s position as the home of the world’s second largest gas reserves to ease Oman’s gas shortage, and was valued at $60bn over 25 years when last comprehensively discussed by Muscat and Tehran in 2013.
International oil companies’ (IOCs) appetite for Oman’s energy sector has not significantly diminished since the cracks in the robustness of the country’s economy began to widen in late-2014. Occidental Oman is the largest independent oil producer in Oman, with over three decades in-country and a current focus on the Mukhaizna Field in south-central Oman, the Safah and Wadi Latham fields and Block 62 in northern Oman. Total began operating in Oman in 1937 – two decades shy of a century – and is a partner in Block 6, from which 75% of Oman’s oil and condensate are produced, as well as Block 53. Others include Partex, BP, CNPC, KoGas and Repsol.
Innovative spirit
Aside from a rise in oil prices, innovations that boost operational efficiency and cut costs represent the release valve that could ease the intensifying pressure on the energy sector. The country’s EOR technologies are emerging as a template for the wider Gulf, especially as the region’s list of maturing and challenging oilfields inevitably grows. PDO expects EOR projects to account for 25% of total production by 2025, which is lower than the initial goal of 33% by 2023 as production focuses on cheaper conventional assets.
“Oman’s complex and often challenging geology makes embracing new ideas and cutting-edge technologies an essential requirement of any oil and gas company wishing to operate in the sultanate,” Restucci said, adding that PDO is testing, reviewing, or piloting between 50-70 technologies at any one time. “It is important to highlight that our focus is less about technology development and more about proficient and widespread deployment.”
PDO’s novel approaches include solar power, water treatment, miscible gas injections, thermal applications, chemical EOR, company and contractor fleet management, IT subsurface technology and collaborative working.
In a bid to diversify the energy sector, Oman’s State General Reserve Fund (SGRF) led a $53mn investment in 2014 in GlassPoint, the leading supplier of solar for the energy sector, along with Shell and others, to ramp up the deployment of solar EOR. The $600mn-worth Miraah project, which means ‘mirror’ in Arabic, will be one of the world’s largest solar plants, with a peak output of 1,021MW when the project is fully completed, with plans to start coming online next year. The project uses concentrated sunlight to generate 6,000 tonnes of solar steam per day to heat the oil, which will make the extraction of viscous crude easier and cheaper.
“Deploying solar on this scale will help drive down the cost of solar energy and accelerate a virtuous cost cycle. As costs decline, solar power becomes economic for a wider range of oilfield applications, which increases volume and drives costs down even further,” Rod MacGregor, president and chief executive of GlassPoint told Oil and Gas Middle East.
The benefits of the Miraah project stretch far beyond Oman’s borders. The project provides an innovative EOR template for fellow Gulf countries’ oil production strategies – Saudi Arabia, Kuwait and the UAE face challenging and inaccessible fields, for example. The project also highlights the value of energy management, as Miraah’s automated washing system will recapture 90% of used water. This will help alleviate the arid Gulf’s strained water-food-energy nexus, ease the immediate pressure on scaling up expensive desalination projects, and reduce emissions as per the commitments made during the global climate change conference (Cop 21) in Paris last December. Oman’s capacity to share knowledge at home and abroad also supports the country’s National Vision 2020 to establish a research and development (R&D) ecosystem.
Uneasy economics
Oman has been lingering at the crossroads of economic diversification for far longer than its Gulf neighbours, hence the country’s status quo being distinctly derailed by low oil prices. Oman is expected to run a deficit of OMR3.3bn ($8.6bn) this year, despite government measures to cut spending on wages, benefits and defence, as well as capital investments by civil ministries. The cash-saving strategies are expected to reduce expenditure in 2016 by $4.5bn – 8% of GDP – but this will largely be offset by the bearish impact of low oil prices, according to the International Monetary Fund (IMF).
Oman’s low level of outstanding debt by the end of 2015 of 9.2% of GDP means the country still has room to borrow, however. This was most recently illustrated by a $4bn, five-year loan secured by PDO in late-June. HSBC Bank Oman advised PDO on the internationally syndicated deal, which was competitively priced for a first-time borrower in the Middle East at 160 basis points over the London interbank offered rate (Libor).
Muscat also tackled the politically sensitive plan to start reducing subsidies. Gulf governments’ hushed conversations amid fears of triggering another Arab Spring gained traction on the public stage last year. Oman reduced diesel and petrol subsidies from mid-January, which increased prices by a third. Oman’s state budget this year has a subsidy tab of OMR400mn ($1bn), which is 64% lower than the OMR1.1bn ($2.85bn) approved in 2015, according to the World Bank.
Sultan Qaboos bin Said, whose long-running health issues add to the undercurrent of uncertainty in Oman, gave the green light in late-July for a National Programme for Enhancing Economic Diversification that leverages the economic model adopted by Malaysia. The programme will action the content of endless theoretical strategies that have been passed from desk to desk in Oman’s ministries by finally enhancing the country’s non-oil growth, such as logistics, manufacturing, tourism, finance, and strengthening the local market.
Changes in Oman’s ownership laws are aimed at incentivising foreign investment, such as allowing expatriates to own 100% of a company versus current law in which a minimum of 35% of the company must be owned by a local.
On a longer-term basis, Oman’s ability to diversify its economy rests primarily on enhancing the education and career prospects of the country’s population of 4.3 million. Oman needs to ramp up local skills in critical thinking and science, technology, engineering and mathematics (STEM) to ignite the entrepreneurial spirit required to strengthen the small- and medium-sized enterprises (SMEs) sector – a key spoke in Oman’s economic wheel.
The unpredictable narrative of oil prices makes it impossible to pin down the length of Oman’s economic tightrope. However, PDO’s cost-cutting acumen, energy allies and rejuvenated economic diversification plans will help Muscat keep its balance – for now.
