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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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Oman’s New Petrochemical Project Could Be A Game-Changer

  • Oman has just announced a new oil and gas field start-up and a final date for the finalization of the Duqm refinery, a potential game-changer for the small Middle East country.
  • With just five billion barrels of estimated proved oil reserves, any new oil production in Oman is a considerable boost to its hydrocarbons revenue streams.
  • 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 to sign a US$10 billion investment in the Duqm oil refinery.

Oman has been looking to build a presence in the higher-value petrochemicals industry in earnest for over a decade, given that on the one hand more than 80 percent of its budget revenues come from the oil and gas sector but on the other, it has a relative paucity of hydrocarbons reserves compared to its neighbors. “The problem for Oman has perennially been financing these ambitions, as building up a petrochemicals presence requires a lot of upfront spending ahead of being able to generate returns further down the line,” Richard Bronze, a cross-energy analyst for global energy consultancy, Energy Aspects, in London, exclusively told OilPrice.com. Since the Saudi Arabia-instigated Oil Price War of 2014-2016, analyzed in-depth in my new book on the global oil markets, Oman’s financing problem worsened, leaving it especially vulnerable to potentially poisoned-chalice deals with China. In just the past few weeks, Oman has announced a new oil and gas field start-up and a final date for the finalization of the Duqm refinery, itself a key part of the game-changing Duqm Project. With only around five billion barrels of estimated proved oil reserves, barely the 22nd largest in the world, any new oil production in Oman is a considerable boost to its hydrocarbons revenue streams and the Yibal Khuff Project (YKP) is certainly that. According to the site’s developer - Petroleum Development Oman (PDO) – the field is the second largest development in its history, with the potential to deliver at least 20,000 barrels per day (bpd) of crude oil and five million cubic meters of gas per day. September saw the opening of the site’s first sour wells, which will direct oil to the YKP Central Processing Facility, and first oil has started being exported to the Main Oil Line, according to reports form PDO. Not only will YKP generate considerable export revenues but it will also help to meet Oman’s domestic demand for oil and gas, and may find further application in the Duqm Project, according to PDO. 

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This aligns with the recent statement from the head of project management for the US$8 billion+ Duqm Refinery, Yousuf Al-Jahdhami, that the 230,000 bpd facility is set to come online in the first quarter of 2023. Now at 87 percent completion, according to Al-Jahdhami, the refinery will receive 65 percent of its crude oil volume from Kuwait, with the remainder coming from Omani fields. This is in line broadly with the fact that the facility is jointly owned by Oman’s state-owned OQ (formerly the Oman Oil Company) and Kuwait Petroleum International. All feeder oil stock to be stored at the Ras Markaz Oil Storage Park in the Duqm Special Economic Zone, according to company reports, which will have an initial capacity of 25 million barrels starting in Q1 2022, but later the capacity is set to be increased to 200 million barrels. The Ras Markaz Oil Storage Park will be connected to the Duqm refinery through an 80 kilometer pipeline. Located at the Special Economic Zone Authority of Duqm (SEZAD) on Oman’s Al Wusta coast, the Duqm Refinery will function alongside the US$4.6 billion Liwa Plastics Project (LPP) industrial complex, located near the Sohar Refinery, as a vital cog in Oman’s intended petrochemicals infrastructure. The Duqm Refinery and the LPP have been specifically designed to enable Oman to capitalize on the synergies with the existing refinery and the growing global market for plastics. In this context, the LPP will include a nominal 900,000 tonnes per annum ethylene cracking plant, a high-density polyethylene plant, a linear low-density polyethylene plant, a new polypropylene plant, a methyl tertiary butyl ether plant, a butene-1 plant, and associated utilities and off-site facilities. Industry estimates prior to the global outbreak of COVID-19 were for global demand for polyethylene (PE) and polypropylene (PP) combined to increase by around five percent per year to total at least 180 million metric tons by 2023, with the majority of this going to China, a key target market for Oman. 

It is these commercial interests, and Oman’s ideal geographical position outside the politically-sensitive Strait of Hormuz and offering equally beneficial access to markets both East and West, that appeal, especially to China. 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 to sign a US$10 billion investment in the Duqm oil refinery - just after the implementation of the nuclear deal with Iran at the beginning of 2016. The focus of this is initially on completing the Duqm Refinery but also includes a product export terminal in Duqm Port and the Duqm Refinery dedicated crude storage tanks of the Ras Markaz Oil Storage Park. Chinese money is also being 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. 

A long-mooted adjunct to China’s direct plans has been the utilization by Beijing’s key Middle Eastern ally in its ‘One Belt, One Road’ project - 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. 

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This said, there have been tentative signs recently that the U.S. is not just going to accept this drift of Oman into China’s sphere of influence. As highlighted by OilPrice.com, Muscat’s newest efforts to raise financing open the way for involvement from the U.S. One element to this is that state firm, Energy Development Oman (EDO), is in talks with various international banks to raise US$1.5 billion in debt financing. EDO is a strategically vital company in Oman’s energy sector, as it was established recently to take ownership of the Sultanate’s largest oil and gas operation, Block 6. U.S. interests are already represented in this initiative, with JPMorgan leading discussions with EDO on potential financing plans, according to Oman. U.S. ally, the UAE, also signaled a strong interest in playing a major part in any lending facilities and mechanisms. 

Additionally, August saw the investment minister of another U.S. ally in the region - Saudi Arabia’s Khalid al-Falih – visit Oman to discuss such opportunities and this, in turn, followed talks earlier this year over the possibility of Saudi developing an industrial zone in Oman, according to Saudi statements. Following these initiatives, September saw a further statement from Nasser Al-Hajri, chairman of the Saudi-Oman Joint Business Council, that: “Saudi businessmen are looking for major investments in Oman’s industrial, petrochemical [including in Duqm, OilPrice.com understands], chemical manufacturing, fish farming, mining, food, animal feed, tourism and real estate sectors.” 

By Simon Watkins for Oilprice.com


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