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Oman Increases Its Appeal To China And Iran With Game-Changing Duqm Project

The long-awaited US$8.5 billion 230,000-barrels per day (bpd) Duqm Refinery Project (DRP) - and its ancillary projects (costing another US$10 billion or so) - were officially inaugurated on 7 February, increasing the already significant allure of the sultanate to China and nearby Iran. The Duqm project was envisioned by Oman as being the key method by which it could maximise the returns from its relatively low oil and gas reserves (only around five billion barrels of oil reserves and about 24 trillion cubic feet of gas) by refining these into higher-value petrochemicals products. The major problem that the sultanate encountered in the mammoth Duqm undertaking was that building up a petrochemicals presence requires huge upfront spending ahead of being able to generate returns much further down the line, and this left a massive gap in its finances. China had long recognised the much greater strategic importance of Oman than either its modest oil and gas resources, or its refinery plans, as analysed in full in my new book on the new global oil market order. So, it was quick to leverage the fact that it already accounted for around 90 percent of Oman's oil exports into a US$10 billion investment in the Duqm refinery project, followed by multiple other deals.

The Duqm Refinery Project is certainly a worthwhile undertaking for Oman. The refinery part of the project will function alongside the Liwa Plastics Project (LPP) industrial complex, and the 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-kilometre-long Muscat Sohar Product Pipeline (MSPP) for transporting refined products. The MSPP connects the refineries of Mina Al Fahal and Sohar to an intermediate distribution and storage facility at Al Jifnain. China will also have some use for these facilities but they are of little overall interest to Beijing. What is of enormous interest to it in multiple ways, though, is the fact that its completion by Oman using Chinese funding - which must be repaid on an unwavering schedule with the forfeits for non-payment being Beijing's right to seize assets (including strategically important pieces of land and sea) - will give China even more control over the sultanate than it had before.

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Crucial to China is Oman's geographically-strategic position, with long coastlines along the Gulf of Oman and the Arabian Sea offering unfettered equal access to the markets of the West and the East. According to a senior source who works closely with Iran's Petroleum Ministry spoken to by, China's long-held objective in seeking to secure control over Oman has been to have mastery over all the key crude oil shipping route chokepoints from the Middle East into Europe that avoid the Cape of Good Hope route (more expensive and more nautically challenging) and the Strait of Hormuz route (more politically sensitive). This is fully aligned with Beijing's broad strategic goal encapsulated in its 'Belt and Road Initiative' (BRI) multi-generational power-grab project. China already has effective control over the Strait of Hormuz through the all-encompassing 'Iran-China 25-Year Comprehensive Cooperation Agreement', as first revealed anywhere in the world in my 3 September 2019 article on the subject and as also analysed in full in my new book on the new global oil market order. 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 (the Houthis having been long supported by Iran) and Djibouti (over which China has also established a stranglehold through similar loans extended under the cover of the BRI.

The second major use that China has for Oman is to use part of its liquefied natural gas (LNG) processing capability to enable Iran to finally build out its LNG business into a world-scale operation. 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. Such an idea was originally 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. That deal was to have begun in 2017, at which time it was worth around US$60 billion. 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, also for a minimum period of 15 years. 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, running out through the Gulf of Oman and then 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 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. offered an alternative for Oman, which was that it increased its uptake of gas from Qatar. This would come 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 at that time 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.

Following the recent China-brokered resumption of relationship deal between Iran and Saudi Arabia, as also analysed in my latest book, the UAE's willingness to be utilised by the U.S. in its fight against this planned new network of pipelines appears to have evaporated. A major new gas pipeline being planned will run along a 2,000-kilometre corridor via Oman - and the UAE - through the Arabian Sea and into India. This will allow gas to be gathered in from Oman and the UAE themselves, and from Iran, Saudi Arabia, Qatar, and Turkmenistan. These countries together have, by very conservative estimates, just under 2,895 trillion cubic feet (tcf) of gas reserves - Iran 1,200 tcf, Qatar 858 tcf, Saudi Arabia 333 tcf, Turkmenistan 265 tcf, UAE 215 tcf, and Oman 24 tcf. Critically as well, although there will be one major pipeline running from the Middle East to India in the first instance, several other extensions of this pipeline plan are readily available. As also detailed in full in my new book, finished plans for an Iran-India pipeline and an Iran-Pakistan pipeline - both of which could be extended to China - have long been in place.

By Simon Watkins for

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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… More