Oman's significance in the Middle East, and therefore the world, is much greater than its 5.4 billion barrels of estimated proved oil reserves (the 22nd largest in the world) implies. Its true importance to both the U.S. and China is its critical geographical position, which makes it perhaps the most important oil and gas hub in the world. Specifically, the Sultanate has long coastlines along the Gulf of Oman and the Arabian Sea offering unfettered access to the markets of the East and the West equally. As such, Oman and its key ports and storage facilities offer the only true alternative in the Middle East to the Strait of Hormuz, controlled by Iran, through which passes at least one third of the world's crude oil supplies. Therefore, any major developments in Oman are minutely scrutinised by Washington and Beijing alike. And much has been happening recently in the Sultanate of interest to both sides. The key to all these developments is that the Western alliance finally appears to have noticed that it was losing out in Oman to China, as has been happening in so many other countries in the Middle East in recent years, particularly after the unilateral withdrawal from the Joint Comprehensive Plan of Action ('nuclear deal') with Iran in May 2018. As highlighted repeatedly by OilPrice.com over this period, China has used its standard chequebook diplomacy to expand its presence in Oman. Already accounting for around 90 percent of Oman's oil exports and most of its petrochemicals exports, China was quick to pledge a further US$10 billion immediately for investment into Oman's flagship Duqm Refinery Project. Although further investment from China was notionally geared towards completing the Duqm Refinery, Chinese money was also funnelled towards the construction and building out of an 11.72 square kilometre industrial park in Duqm in three areas - heavy industrial, light industrial, and mixed-use. This has enabled China to plant a flag in deeply strategic areas of land in the Sultanate.
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What China really seems to want from Oman is to control all the major crude oil shipping route chokepoints from the Middle East into Europe and the West that avoid the more expensive and more nautically-challenging Cape of Good Hope route around South Africa and the more politically-sensitive Strait of Hormuz route. This is entirely aligned with Beijing's broad strategic goal encapsulated in the 'One Belt, One Road' multi-generational power-grab project. China already has effective control over the Strait of Hormuz by dint of its all-encompassing 25-year deal with Iran, in a worldwide exclusive by me published on 3 September 2019. The same deal also gives China a hold over the Bab al-Mandab Strait, through which crude oil is shipped upwards through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards. This has been achieved as it lies between Yemen (which is being disrupted by Iran-backed Houthis, just as China wants) and Djibouti (over which China has established a stranglehold, as highlighted by OilPrice.com).
Given the money that China had already spent in the Sultanate, Beijing was ready to move into the next phase of its standard colonialisation plan - as seen recently across the Middle East and elsewhere, but most notably perhaps, in Iran, Iraq, Sri Lanka, and Djibouti - which is to switch Oman into longer-term 'Hotel California' deals ('You can check out any time you like/But you can never leave'). The phase after that involves Beijing just waiting for the time at which the host country can no longer afford the dramatically rising principal and interest payments at the back end of the contract period, whereupon China rolls out its standard loan shark-style debt recovery methods and seizes the strategic lands that had been pledged by the host country as collateral for the deals.
Cue - the West, which may seem to China to be a collection of soft-skinned accountancy types, but it didn't get to build the two greatest empires since that of Rome - Great Britain's and the U.S.'s - without knowing a thing or two worth knowing. A key development in this context was the signing of an exploration and production sharing agreement (EPSA) deal between Oman's Ministry of Energy and Minerals and Shell Integrated Gas Oman BV, a subsidiary of Britain's Shell, along with its partners, Oman's OQ, and France's TotalEnergies to explore, appraise and develop natural gas resources and condensate in Block 11. The key geopolitical positive about these types of deals in particular is that they require a significant on-the-ground presence of foreign nationals, including security personnel and other support staff, as part of the deal.
This deal is no different, establishing Shell as the operator of Block 11, holding a 67.5 percent working interest, with OQ and TotalEnergies holding 10 percent and 22.5 percent respectively, according to information released by the companies. The EPSA exploration activities will see seismic acquisition of 1,400 square kilometres in late 2022, with several planned exploration wells to follow. As highlighted by Oman's Minister of Energy and Minerals, Eng Salim bin Nasser al Aufi: "This agreement strengthens the strategic relations with partners in the sector such as Shell, TotalEnergies, OQ and others to ensure Oman's energy security and attract more foreign investment, adding the highest value to the local supply chain."
Following this, according to legal sources exclusively spoken to in Oman by OilPrice.com last week, further investments may be forthcoming from Western companies, even in the matter of Duqm and through work undertaken with the Oman Investment Authority (OIA). Duqm, to begin with, is the landmark petrochemicals-centred project for Oman that has been delayed in completion for several years as the Sultanate struggled with budgetary constraints due to low oil prices. As highlighted in several pieces in OilPrice.com over the years, the now US$8 billion+ Duqm Refinery project occupies 900 hectares of the Special Economic Zone of Duqm and is a 50-50 joint venture between OQ Group and Kuwait Petroleum International (KPI). In addition to the main site of the Duqm refinery, the Refinery Project also includes the build-out of storage and export facilities for liquid and bulk petroleum products at Duqm Port, crude oil storage facilities at Ras Markaz, and an 80-kilometre crude oil pipeline line from Ras Markaz to the refinery. When operational, the Duqm refinery is expected to refine 230,000 barrels per day of crude oil products. According to a very recent comment from Shafi al Ajmi, the chief executive officer of KPI, Duqm will start its commercial operation in 2023.
The OIA, in the meantime, is looking for would-be international investors is a series of planned stock flotations of several of Oman's key assets. Founded in 2020 following the merger of Oman's State General Reserve Fund and Oman Investment Fund, the OIA is seen as the key to the 'Oman 2040' development plan that aims to reduce hydrocarbons' contribution to GDP to less than 10 percent by that year. The OIA controls assets in its National Development Portfolio and Futures Generations Fund, with the former vehicle holding stakes in around 160 national assets and companies, while the latter holds mainly foreign assets and includes public and private market investments.
Among the many high-value state assets under the OIA's control are state oil and gas producer OQ, the Muscat Stock Exchange, and Oman LNG. OQ itself comprises the previously separate assets of the Oman Oil Company, Oman Oil Refineries & Petroleum Industries Company, and the Oman Gas Company. In 2019, Oman sold 49 percent of its Electricity Holding Co to the State Grid Corporation of China for around US$1 billion. However, given the renewed awareness in the West of Oman's crucial strategic importance to the Middle East's oil and gas flows, it would appear unlikely that it will allow China free reign to buy everything else on offer in the future.
By Simon Watkins for Oilprice.com
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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… More