With a fiscal breakeven oil price of US$87.55 per barrel (pb) of Brent in 2020 and 80 per cent of its revenues still coming directly or indirectly from the hydrocarbons sector, Oman is looking at all options to raise money for key projects related to its preferred source of hydrocarbons income, the high value-added petrochemicals sector. The key elements of this drive are: re-organising its oil and gas sector to increase output that can provide feedstock and money for petchems development, building out the required and corollary infrastructure, and cementing the Sultanate’s already solid relationship with its dominant global partner, China.
To effect the first of these objectives, Oman’s Oil and Gas Minister, Mohammed bin Hamed Al Rumhi, announced that nine core businesses of the Oman Oil Company (OOC) and of the
Oman Oil Refineries and Petroleum Industries Company (Orpic) Group are being integrated with the ultimate aim of increasing oil production from 655,000 barrels per day (bpd) to 1 million bpd by 2030. The new business – to be branded ‘OQ’ – will then utilise this new output in various petchems projects that will, in turn, increase the value per barrel by US$25 by the same date, so increasing the absolute contribution of the business to Oman’s GDP from around US$10 billion per year to US$20 billion per year, according to the plans.
In logistical terms, the seven other companies that are to be integrated with OOC and Orpic in such a fashion will be: Oman Oil Company Exploration and Production, the Oman Gas Company, the Duqm Refinery, the Salalah Methanol Company, Oman Trading International, OXEA, and Salalah Liquefied Petroleum Gas. More specifically, they are to be organised according to four distinct business functions (comprising general commerce, finance and strategy, people and culture, and projects and technology) across two distinct business lines (upstream and downstream). Related: Expect More Writedowns From Oil Majors
A cornerstone of this remains the flagship Duqm Refinery and future Duqm Petrochemicals projects, run by the Duqm Refinery and Petrochemical Industries Company (DRPIC), for which the government has increased the planned investment from the initial US$6 billion (for the Refinery element) to a combined US$18 billion. This figure would be rolled into the overall extra investment figure of US$28 billion for petchems-related projects (including increased feedstock initiatives) by the new integrated firm. Overall, according to the Oil Ministry’s plans, downstream production will increase from its current 15 million tonnes to 24 million tonnes by 2030, while the commodity sales volumes will nearly double from 21 million tonnes to 40 million tonnes by the same date.
Spending money is easy, of course, the difficult bit is making it, and in this area Oman has found problems before and for the very same projects. For the originally planned 230,000 bpd Duqm Refinery and petrochemical complex, Oman struggled to find anywhere near the initially envisaged US$6 billion, and eventually appointed global investment bank, Credit Agricole, to advise on the optimal methods to obtain the funding for the project. The French bank, OilPrice.com understands, just told the Omanis to focus on bond issues and foreign investment, which Oman has done, although it also has been relatively effective in cutting back on the spending side of the broad government budget as well.
Some time ago, the Sultanate’s Financial Affairs and Energy Resources Council announced that it had formed a specialised working group to study public spending and the means to reduce it, and the Omani government announced would apply zero-based budgeting in the ninth five-year plan of approving allocations for development projects only after all feasibility studies and real cost analysis of each of them had been completed. In the face of ongoing historically low-end oil prices, the Council also underlined that it aimed to avoid having any additional requests for funding from developers after any project had been started. This ethos has been fairly rigorously adhered to, bolstered perhaps by the lack of leeway afforded Oman by its small-scale sovereign wealth fund that has a net worth only of around US$7 billion, and not in easily realisable near-cash assets. Related: The Complete Guide To Cementing
At that point, the Kuwait Petroleum Corporation (KPC) entered into a memorandum of understanding (MoU) with the DRPIC’s state owner, the Oman Oil Company (OOC), to co-operate on the refinery, including a large – albeit undisclosed - degree of funding. Aside from Kuwait’s involvement, though, Oman has been expanding its relationship with China, given that already around 90 per cent of Oman’s oil goes to the country, as does the vast bulk of its petchems products. For China, Oman is a vital piece in its ‘One Belt, One Road’ project, particularly as its long coastlines on the Arabian Sea and the Gulf of Oman allow China to take delivery of refined products and oil from the Middle East free of any increased security threats from – or closure of - the Strait of Hormuz. In line with these plans, then, 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, just after the implementation of the nuclear deal with Iran at the beginning of 2016.
Oman, however, is cognisant of a complete reliance on China and is looking at other ways in which it can finance the build-out of its new oil and gas operation, in keeping in fact with advice given to it by the French bank some time ago. At the time that the bank was appointed, Petroleum Development Oman (PDO) was successful in raising a US$4 billion five-year pre-export facility that included participation from a wide range of international banks, led by HSBC Bank Oman. At around the same time, Bank Muscat did a US$500 million Eurobond issue, under its Euro Medium Term Note programme, that was three times oversubscribed, on a diverse mix of regional and Western bidders, on a coupon of just 3.75%. Indeed, OilPrice.com understands from legal sources in Oman that the government is ‘very aware’ that a carefully structured syndicated loan by a well-connected global investment bank could mean a lower spread than a bond, given that it would be tied to project that has many synergistic elements, including the Ras Markaz oil storage terminal project, and the Muscat-Sohar Product Pipeline project.
Alternatively, or in tandem with a Duqm-specific syndicated loan or bond, it might be that Oman decides that it will resuscitate the idea of floating a part of the newly integrated OOC/Orpic via an initial public offering (IPO) or a private placement. Al-Rumhy raised this possibility last week as well, stating that, as a first step, a study will be undertaken in 2020 to assess the viability of a stake sale either via an IPO or the sale of a minority shareholding to a strategic partner (private placement). He added that the potential size of stake that might be offered would be 15 to 25 per cent, although the exact figure would ultimately depend on the valuation of the integrated group, among other factors. “It will depend on the sort of soundings that we get from the global investment community: if they are good then we would sell the whole 25 per cent to a range of buyers but if they are not then we would not want to sell all of it to China but instead we would place 15 per cent with the Chinese,” said the legal source.
By Simon Warkins for Oulprice.com
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