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Iran’s Newest Escape Route To Key Asian Oil Markets

In a remarkably prescient move just after the implementation of the nuclear deal with Iran at the beginning of 2016, China signed a massive land lease agreement to establish a huge industrial park in Duqm, which would include a number of multi-billion dollar investments, including the Duqm oil refinery. According to the Duqm Refinery and Petrochemical Industries’ chief executive officer, Salem al Huthaili, last week, the US$6 billion Duqm Refinery Project is now more than 25% complete and progress is fast. Overtly, this would allow China to take delivery of refined products from the Middle East free of any increased security threats from – or closure of - the Strait of Hormuz, as Oman has long coastlines on the Persian Gulf, the Arabian Sea and the Gulf of Oman. The Strait remains the world’s most important oil transit chokepoint – and the key route from the Arabian Gulf to the Far East - with roughly 35% of all seaborne oil and about a third of global liquefied natural gas supplies passing through it. Covertly, it would also allow China to take delivery of oil and all other necessary products from Iran should sanctions ever be reintroduced, as has proven the case.

When completed – with an initial test run officially due in 2021 – the Duqm Refinery will be able to process at least 230,000 barrels per day (bpd) of crude oil in the first phase and will be a vital cog in Oman’s petchems infrastructure, and the ability of China to diversify its oil and petchems supplies from the Middle East. Specifically, the refinery will function alongside the US$4.6 billion Liwa Plastics Project (LPP) industrial complex and close as well to the Oman Oil Refineries and Petroleum Industries Company’s (Orpic) Sohar refinery in the Special Economic Zone Authority of Duqm (Sezad). This has been designed with a view to enabling Oman to capitalise on the synergies with the existing refinery and the growing global market for plastics. Industry estimates are that the global demand for polypropylene is estimated to increase by 3.7% every year until 2021, with a corollary yearly rise in revenues of 5.3% over the same period. A fully operational LPP would allow Oman to increase its production capacity of polypropylene (PP) and polyethylene (PE) – the two most utilised plastics products in the world and in high demand from China – by one million tonnes per year, to 1.4 million tonnes per year, in line with Orpic’s own estimates.

Up until relatively recently, a lack of funding was threatening to stall progress on the Duqm Project, given that Oman has one of the largest budget deficits in the region and its bonds were downgraded to junk by Fitch, which makes raising money more difficult. This was compounded by the UAE’s International Petroleum Investment Company ending its association with Duqm in 2016 on the basis that the project no longer fitted its overall investment strategy in light of the its impending merger with the Mubadala Development Company. In late November 2016, though, a memorandum of understanding was signed between the Oman Oil Company (OOC) and the Kuwait Petroelum Corporation (KPC) for co-operation on the construction of the refinery and a then-undisclosed financing line. This involvement was expanded in February 2017, when the Kuwaitis formally acquired a 50% stake in the refinery.  Related: Will We Really See An Oil Glut In 2020?

Since then, Kuwait has agreed with Oman that at least 65% of the future feedstock for the Duqm refinery will come from Kuwait, with the remainder coming from Oman. In addition, Kuwait’s Supreme Petroleum Council approved the disbursement of US$2 billion in funds by one of the KPC’s subsidiaries to fully finance its half of the US$4billion that is to be provided evenly between it and Oman’s Duqm Refinery and Petrochemical Industries Company (DRPIC). The remaining US$4.5 billion required to meet the latest budget estimate for the Duqm Refinery was supposed to come from around 29 international and regional institutions, but, given Oman’s deleterious financial outlook this has not gone entirely to plan: cue China. “China has made it clear that it is more than happy to come up not only with this US$4.5 billion if and when required but also the US$2 billion share for which DRPIC is liable as part of its agreement with KPC,” a senior legal source close to ORPIC told OilPrice.com. “Oman is already a steady ongoing source of oil for China, with around 90% of all its oil being taken by the Asian economy every year and no plans for this to change,” he said. “It’s also fair to assume that China will take pretty much everything that the Duqm refinery produces in the way of petchems output as well, given that it is Asia’s biggest importer of petchems products as well as oil resources,” he added. “It also means, of course, that with greater pressure being brought to bear by the U.S. on China over its continued imports of oil and LPG [liquefied petroleum gas] that Oman can offer another conduit for these products from Iran to China, in addition to those that currently come directly from Iran or via Iraq,” he underlined.

Given the marginal effectiveness of every US$1 spent in Oman on its ultimate use to China, Beijing money was also used in the final part of Oman’s plan to build its integrated refining and petrochemical business - the 290 kilometre-long Muscat Sohar Product Pipeline (MSPP). The US$336 million pipeline connects the refineries of Mina Al Fahal and Sohar to an intermediate distribution and storage facility at Al Jifnain. Split into three sections - 45 kilometres between the Mina Al Fahal and Al Jifnain Terminal, 220 kilometres between the Sohar and Jifnain Terminal, and 25 kilometres between the Al Jifnain Terminal and Muscat International Airport – the project is integral to the delivery of more than 50% of Oman’s fuel via the state-of-the-art storage facility in Al Jifnain. Related: What’s Stopping Oil From Breaking Out?

This broader strategic importance of Oman to China – which China regards as a key link in its Maritime Silk Road of the ‘One Belt, One Road’ initiative - was further evidenced when Beijing pledged that it would invest at least US$10 billion in the first instance into the Duqm area via a land lease agreement and made clear that there would be more if required. The focus initially will be on completing the Duqm Refinery, in the first instance dedicated to processing crude oil from the tanks of the Ras Markaz storage facility. Progress on this was made with the awarding of the third engineering, procurement and construction (EPC) package to a consortium between CB&I and Saipem, which included a product export terminal in Duqm Port and Duqm Refinery-dedicated crude storage tanks in Ras Markaz.

In addition to the specific Duqm refinery projects, Chinese money will go 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. According to the plans, all of which will be ready within the next 10 years, according to analysts, in the light industrial zone there will be 12 projects, including the production of 1 gigawatt (GW) of solar power units, and of oil and gas tools, pipelines and drilling equipment. The mixed-use sector will focus on projects designed to improve the infrastructure for Omanis, including the construction of a US$100 million to build a hospital, and US$15 million towards a school. The heavy industry sector will also see 12 projects, dealing with the production of methanol and other chemicals, much of which will go straight to China as well.

By Simon Watkins for Oilprice.com


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