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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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China Secures Foothold In This Strategic Middle East Oil State

  • Oman continues to expand its cooperation with China as it looks to build out its petrochemical sector
  • Oman’s options to raise money through conventional bond offerings remain constrained
  • China already accounts for around 90 percent of Oman’s oil exports and the vast majority of its petrochemicals exports

The recent talks between Oman’s Assistant to the Chief of Staff for Operations and Planning, Brigadier Abdulaziz Abdullah al-Manthri, and the Chief of Staff of Iranian Armed Forces, Major-General Mohammad Bagheri, may mark a new phase in the already deep and broad relationship between Oman and Iran, and in the Sultanate’s drift into the Iran-China axis. “The two countries [Iran and Oman] have conducted several joint naval drills in recent years, within the scope of securing the waterway from the Persian Gulf through to the Gulf of Oman from smuggling and other threats, including terrorism, but these [recent] talks were concerned with expanding that cooperation both in terms of the armed services involved beyond just the navy and the scope of their joint activities beyond anti-smuggling and dealing with terrorist threats,” an Iranian source who works closely the Petroleum Ministry told OilPrice.com last week.  The basic catch-22 for Oman that has expedited its move towards the Iran-China power axis is that it lacks the scale of natural resources to generate the financing required to keep its economy ticking over without any further industry but the industry that it is looking to diversify its economy with – petrochemicals – requires a lot of upfront financing before it pays off. Consequently, with only around five billion barrels of estimated proved oil reserves (barely the 22nd largest in the world) and minimal natural gas reserves – Oman explored many options to bridge this financing gap but its budget problems were dramatically worsened by the Saudi Arabia-instigated Oil Price Wars of 2014-2016 and 2020. Even before the 2020 attempt by Saudi to severely disable the U.S.’s shale oil sector by using exactly the same strategy that had failed in 2014-2016 and had destroyed the budgets of its OPEC brothers as well, as analyzed in-depth in my new book on the global oil markets, Oman had been facing a budget deficit for that year alone of at least 18 percent of GDP and budget deficits averaging at least 15 percent per year over the next five years. 

In order to give it time to develop its answer to many of its financial problems – the rollout of the perennially-delayed but potentially game-changing Duqm Refinery Project and its corollary projects of a product export terminal in Duqm Port and Duqm refinery-dedicated crude storage tanks in Ras Markaz – Oman tried several options to raise money. So determined was Oman to keep its fiscal deficit within manageable proportions that not only did it implement measures (including lower expenditure on wages and benefits, subsidies, defense, and capital investment by civil ministries) that reduced expenditure (in 2016 by around 8 percent of GDP) but also moved to rein-in hydrocarbons-related spending as well. In this context, the Sultanate’s Financial Affairs and Energy Resources Council formed a specialized working group to study public spending and the means by which to reduce it. At the same time, it was made clear that the Omani government would apply zero-based budgeting in the ninth five-year plan of approving allocations for development projects only after all feasibility studies and real cost analysis of each of them had been completed. The Council also underlined that it aimed to avoid having any additional requests for funding from developers after any project had been started. 

However, Oman’s problems relating to the Duqm Refinery Project became worse in 2016 when the UAE’s International Petroleum Investment Company (IPIC) said that the Duqm project no longer fitted its overall investment strategy, in light of the impending merger at the time of IPIC with the Mubadala Development Company, and withdrew from the project. Although this was followed in November by the signing of a memorandum of understanding between the Oman Oil Company (OOC) and the Kuwait Petroleum Corporation (KPC) for co-operation on the construction of the refinery, OilPrice.com understands that this was not even half of the then-estimated cost of US$6 billion. Given the negative international credit ratings outlook, and ratings downgrades in previous years, Oman’s options to raise money through conventional bond offerings remained constrained, and so did the appetite of international investors to buy into any part-privatization of any of Oman’s state-owned companies, even the once much-fancied Oman Oil Refineries and Petroleum Industries Company’s (ORPIC).  

Related: Sentiment Shifts In Oil Markets As Demand Fears Fade

It was at this point that China saw its chance to expand its foothold in Oman, which is a key land and maritime hub in Beijing’s multi-generational power-grab project, ‘One Belt, One Road’ (OBOR). Specifically, at around the same time as IPIC withdrew from the project, the refinery operator – the Duqm Refinery & Petrochemical Industries Company (DRPIC) – in tandem with the OOC, appointed a number of global banks, led by regional heavyweight Credit Agricole, to advise on the optimal methods to obtain the funding for the project. These overtures found particular favor with China, which as part of a broad-based investment into Oman pledged the required funding to cover the completion of the Duqm Refinery. However, it came with the usual Chinese caveats of it being allowed to build massive far-reaching infrastructure projects. 

Already accounting for around 90 percent of Oman’s oil exports and the vast majority of its petrochemicals exports, China was quick to leverage this by further pledging US$10 billion immediately for investment into the Duqm Refinery Project’s adjunct oil refinery - just after the implementation of the nuclear deal with Iran at the beginning of 2016. At that point, Oman announced that the budget for the Duqm Refinery Project was being increased from the longstanding figure of US$6 billion to a combined US$18 billion for all elements of the Project. This, Oman’s government announced, would enable downstream production to increase from its current 15 million tonnes to 24 million tonnes by 2030, while the commodity sales volumes would nearly double from 21 million tonnes to 40 million tonnes by the same date.

Although further investment from China was geared towards completing the Duqm Refinery – including the export terminal in Duqm Port and the crude storage tanks of the Ras Markaz Oil Storage Park - Chinese money was also funneled towards the construction and building out of an 11.72 square kilometer industrial park in Duqm in three areas - heavy industrial, light industrial, and mixed-use. This has enabled China to secure deeply strategic areas of land in the geopolitically vital Sultanate vitally important Oman, which has long coastlines along the Gulf of Oman and along the Arabian Sea, away from the extremely politically sensitive Strait of Hormuz. It also offers largely unfettered access to the markets of South Asia, West Asia, and Africa, as well as to those of its neighbors in the Middle East. Following the usual Chinese template of investment, it has also given China the opportunity to populate these areas its own people, from project managers to security personnel.

In line with these developments, the addition of Oman to its Middle East territorial acquisitions means that Beijing can fast-track the transport routes between Iran and Oman.  A long-mooted adjunct to China’s direct plans in this context has been the utilization by Iran of Oman’s unused liquefied natural gas (LNG) capacity. This plan, long talked about between Tehran and Muscat, is part of Iran’s plans to become an LNG superpower based on its massive South Pars and North Pars non-associated gas fields. Oman for its part would allow Iran to use 25 percent of the Sultanate’s total 1.5 million tons per year LNG production capacity at the Qalhat plant. This could be done as part of a broader plan to build a 192-kilometer section of 36-inch pipeline running along the bed of the Oman Sea at depths of up to 1,340 meters from Mobarak Mount in Iran’s southern Hormuzgan province to Sohar Port in Oman for gas exports. This, in turn, would re-open the possibilities for further pipeline routes running from Iran to Oman and then into Pakistan and then into China, and the other way around, all under the security protection of China, irrespective of any plans that the U.S. might have in the southern part of the Shia crescent of power in the region, as also analyzed in-depth in my new book.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on January 06 2022 said:
    Oman is a proud and moderate nation that aims to main its geopolitical neutrality from the influence of major powers in the Gulf region like Saudi Arabia and Iran and superpowers like the United States and China.

    Economically, its objective is to maximize the benefit from whatever meagre natural resources it has and to seek financial support where it can get without prejudicing its neutrality. Therefore, it matters not a jot whether help comes from Iran, China or the United States as long as it doesn’t impinge on its neutrality.

    Iran and Oman have strong friendships dating back particularly to the Dhofar rebellion from 1963-1976 against the Sultanate of Oman armed and supported by leftist South Yemen. It was Iranian troops sent by the late Shah and Jordanian troops sent by the late King Hussein of Jordan who crushed the rebellion with support from the UK. Therefore, Oman will always feel a debt of gratitude to Iran. This gratitude continues to this day under the Islamic republic of Iran.

    Furthermore, both Iran and Oman are directly responsible for the security of the Strait of Hormuz being part of their territorial waters under UN rules.

    In terms of gas development, Iran would like to develop its huge gas and LNG potential by using part of Oman’s LNG production capacity to produce its own LNG.

    All in all, Iran and Oman benefit mutually from their cooperation. This shouldn’t be portrayed simplistically as Oman moving into Iran-China axis as the author suggested.

    China as a superpower and the world’s largest economy based on purchasing power parity (PPP) will always be looking for opportunities to enhance its economic and geopolitical influence in areas around the world underpinned by its highly successful Belt and Road Initiative (BRI) which is deepening the integration of its economy into the global trade system and opening great opportunities for it. Like Iran, Oman fits well with China’s BRI. And it was within the context of BRI that China and Oman’s interests and cooperation overlapped.

    Therefore, the author is absolutely wrong in trying to portray Oman as China’s latest addition to its Middle East territorial acquisitions. He should refrain from his habit of interpreting events in geopolitical terms all the time. Both Economics and geopolitics have their own place in the scheme of things with economics trumping geopolitics most of the time.

    It is also important for the author to remember that Oman has always maintained its neutrality even when it hosted the secret negotiations between the United States and Iran that ended in the 2016 nuclear deal and it will continue to defend its neutrality when it deals with Iran and China without having to join what the author describes scathingly as the China-Iran axis.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Craig Walters on January 07 2022 said:
    Thank you, a very considered comment - they sound quite organised in Oman. Difficult position to be in; takes energy and resources to make energy.

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