Oman is of vital strategic importance to the U.S.-Europe-Japan axis and the China-Russia axis because of its uniquely advantageous geographical position, which makes it one of key oil and gas hubs in the world. The Sultanate has long coastlines along the Gulf of Oman and the Arabian Sea offering unfettered access to the markets of the West and the East 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. Vital to Oman’s ability to choose how to position itself geopolitically in the Middle East is the state of its own finances and a crucial development in this context – the finalisation of the flagship multi-element Duqm Refinery Project (DRP) – is entering its final phase right now.
With only around five billion barrels of estimated proved oil reserves, barely the 22nd largest in the world, Oman has long been looking to create added value from these resources by using them as a feedstock to build out its own world-class petrochemicals sector. However, the problem for Oman in choosing this approach is that building up a major petrochemicals presence requires a lot of upfront spending before any significant revenues start to be generated. The financial strain on Oman as it sought to bring its petrochemicals’ ambitions to fruition was dramatically increased when Saudi Arabia began the Second Oil Price War of 2014-2016, analysed in depth in my latest book on the global oil markets. This War devastated the economies of all OPEC countries, but had a disproportionately greater effect on Oman, as although its oil and gas reserves are relatively small they still comprise over 80 percent of its government revenues. Moreover, the cost of the DRP has spiralled from US$6 billion to around US$18 billion.
This added financial pressure left Oman particularly vulnerable to the chequebook-centric wooing of China. Already accounting for around 90 percent of Oman’s oil exports and most of its existing petrochemicals exports, China was quick to leverage this to sign a US$10 billion investment in the Duqm oil refinery in 2016. The focus of this was initially on completing the Duqm Refinery, but also included a product export terminal in Duqm Port and the Duqm Refinery-dedicated crude storage tanks of the Ras Markaz Oil Storage Park. 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.
China ultimately wants to secure sufficient control over the Sultanate to control all the major crude oil shipping route chokepoints from the Middle East into Europe that avoid the more expensive and more nautically-challenging Cape of Good Hope route and the more politically-sensitive Strait of Hormuz route. This is entirely aligned with Beijing’s broad strategic goal encapsulated in its ‘One Belt, One Road’ multi-generational power-grab project. China already has effective control over the Strait of Hormuz through its all-encompassing 25-year deal with Iran, first reported exclusively by me back in 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 also established a stranglehold.
China has another use for Oman, which is to enable its core Middle Eastern partner, Iran, to finally build out its liquefied natural gas (LNG) business. The plan is for Iran to utilise at least 25 percent of Oman’s total 1.5 million tons per year LNG production capacity at the Qalhat plant. This was part of the broader co-operation deal made between Oman and Iran in 2013, extended in scope in 2014, and fully ratified in August 2015 that was centred on Oman’s importing at least 10 billion cubic metres of natural gas per year (bcm/y) from Iran for 25 years through an underwater pipeline. The deal was to have begun in 2017, with the amount equating to just less than 1 billion cubic feet per day and worth around US$60 billion at the time. The target was then changed to 43 bcm/y to be imported for 15 years, and then finally altered to at least 28 bcm/y for a minimum period of 15 years. Specifically, the land pipeline of the project that would move gas from Iran’s supergiant South Pars and North Pars fields in the first instance would comprise around 200 kilometres of 56-inch pipeline to run from Rudan to Mobarak Mount in the southern Hormozgan province. The sea section would include a 192-kilometre section of 36-inch pipeline along the bed of the Oman Sea at depths of up to 1,340 metres, from Iran to Sohar Port in Oman.
This deal was intended to allow for the completely free movement of Iranian gas (and later oil) via Oman through the Gulf of Oman and out into the world hydrocarbons markets. The route was designed to allow Iran the same sanctions-free flows that it was operating via Iraq, as also analysed in depth in my latest book on the global oil markets. Given the potentially sanctions-busting nature of the project, though, the U.S. included the prevention of this Iran-Oman LNG project in its efforts to stop Iran from expanding its hydrocarbons export routes into the booming market of Asia. Before the Saudi Arabia-led blockade of Qatar erupted in 2017, the U.S.’s main alternative for Oman was that it increased its uptake of gas from Qatar, via the Dolphin Pipeline running from Qatar to Oman through the UAE, or in LNG form, but Oman refused. Oman’s desire to re-energise the plans for the Iran-Oman gas pipeline was also fanned by the UAE’s demands for an increasingly large fee for allowing the transit of gas from Iran through its waters, again part of the U.S. strategy to persuade Oman to take its gas from Qatar.
However, as it now stands, with some help from both China and the U.S., the Duqm Refinery and Petrochemical Industries Company, announced the start of the trial operation for the crude oil distillation unit at the Duqm Refinery. The refinery has a capacity of 230,000 barrels per day and will function alongside the US$4.6 billion Liwa Plastics Project (LPP) industrial complex, also near the Oman Oil Refineries and Petroleum Industries Company’s Sohar refinery in the Special Economic Zone at Duqm. The final part of Oman’s vision of building an Omani integrated refining and petrochemical business, is the 290-kilometer-long Muscat Sohar Product Pipeline for transporting refined products. 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.
By Simon Watkins for Oilprice.com
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