On January 10, 2020 Qaboos bin Said, the Sultan of Oman passed away, leaving no heir. The official Omani legal statute would have provided the extended royal family 3 days to decide on the successor, in the absence of which they would need to open an envelope that the Sultan had farsightedly sealed three years ago. This never happened, of course. As soon as the Sultan passed away, being brought back from Belgium in terminal condition, the envelope was opened and Qaboos’ cousin, Haitham bin Tariq al-Said was announced as the new ruler of Oman. Despite Haitham having substantial foreign policy experience, having spent almost two decades at the Ministry of Foreign Affairs, his ascent begs the question whether Oman will be able to maintain its oil and gas stature.
If the first couple of weeks of Sultan Haitham in power are anything to go by, continuity is the crucial concept of Haitham’s oil policy. Building upon the tenets of Qaboos’ policy of non-alignment, Sultan Haitham would need to keep Oman’s neutrality in incendiary Middle Eastern issues. Yet he does not command the same level of trust and respect as Qaboos did, which might complicate matters a bit – especially given the necessity of bold economic decisions. It is one thing to balance geopolitically between neighboring Saudi Arabia and fellow Shiite Iran, yet an altogether different one to introduce long-mooted taxes and other basic forms of government revenue all the while extending and fortifying the domestic market.
Oman’s oil production is curtailed by the relative smallness of its reserves compared to other Middle Eastern peers – at 5.4 billion barrels, they have a production-to-reserves ratio of 15 years. Despite not being a member of OPEC, Oman has been meticulously sticking to its production quota ever since the onset of OPEC+ production curtailments. It committed to a quota of 970kbpd, quite sagely, since there’s almost no spare production capacity above that level anyway. Should the OPEC+ commitments remain in force going forward, Oman would be certainly welcoming it – almost all new production streams coming onstream in the short-to-mid-term are in the condensates category, exempt from the OPEC+ pact. In the long-term production rates are expected to fall gradually, however the demand side might present a challenge or two even before that. Related: The Complete Guide To FID’s
Coronavirus will most probably be the first complex test of Sultan Haitham’s flexibility. The thing is that Oman is the most China-dependent Middle Eastern oil producer – if Iraq supplies 23% of its exports to China and Saudi Arabia does so for 17%, Oman averaged 95% last year (a full 100% in the first half of 2019). The sudden drop in Chinese demand, with some analysts claiming that February demand might decrease by as much as 4mbpd, did not impact Omani supplies as of today but might easily do if the virus-induced ramifications get protracted. Yet as Oman’s oil and gas minister has stated, there’s always the option of exporting it elsewhere, especially given that most of the China deliveries were done by traders, not the Omani NOC.
Graph 1. Omani Crude Exports in 2017-2020 (million barrels per day).
(Click to enlarge)
Source: Thomson Reuters.
The bigger problem is that coronavirus dropped oil prices to the $50 per barrel range, i.e. with all Brent-Dubai differentials accounted for, Oman might be actually moving into negative territory in terms of balancing its budget (calculated at the annual average crude price of $58 per barrel). And even though Sultan Haitham was actually the one spearheading the Oman 2040 Vision, oil and gas still accounts for some 80% of government revenues. With an overwhelmingly young population that does not feel constrained in terms of letting itself heard, Sultan Haitham would need to implement potentially explosive measures.
Optimizing the bloated public sector, with almost 10% of the national GDP spent on paying the country’s bureaucracy, introducing the long-delayed VAT, eliminating the concept of free money to the populace so as to appease it – just a couple of ideas which are necessary but very unlikely given the circumstances. So what instruments does Oman have at hand to keep afloat? As odd as it may sound, the future of Omani oil might be the development of its natural gas. Oman has one of the most commercially attractive E&P terms in the Middle East and is widely expected to uphold that status. All but one of the exploration licenses in the 2016-2017 bidding sessions was allocated, a testament to the persisting interest of majors to invest in Oman. Related: U.S. Gasoline Prices Jump On Outages At Major Oil Refineries
Oman is believed to hold some 23.5 Trillion cubic feet (TCf) of gas, equating to an R/P ratio of 19 years. The Omani authorities have introduced mixed-status contracts, whereby the development of oil and associated gas is allocated separately from non-associated natural gas. It is exactly the latter that has seen a flurry of activity recently – Total has signed up to developing gas deposits in Block 12, Shell and Total have clinched deals on Blocks 10 and 11, all the while the BP-controlled Khazzan tight gas field is expected to reach phase-two production this year. A steady and gradually increasing stream of Omani LNG might alleviate Oman’s budget constraints and allow for a gradual introduction of reformist measures, i.e. gradual introduction of income taxes and elimination of handouts.
Oil might still come back into the equation. The Italian major ENI has started drilling its offshore Block 52 which might kick-start a new wave of offshore projects. Technically, Oman has already registered its first-ever offshore discovery, with Masirah Oil spudding the Yumna-1 well in 2014. Should the drilling activity lead to a palpable upgrade in Oman’s offshore reserve base, deepwater drilling might become the new well-spudding hotspot. The $9.5 billion investment into the upgrade of the Sohar Refinery and into the $6.5 billion Liwa Plastics Complex necessitate that Oman’s oil flow remains steady in the upcoming years and decades, too. All the economy diversification goals notwithstanding, oil and gas will be Sultan Haitham’s crucial policy tools, too.
By Viktor Katona for Oilprice.com
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