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Simon Watkins

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This Gulf State Faces An Impossible Decision As Oil War Rages On

Given the twin facts that Oman has only around five billion barrels of estimated proved oil reserves (barely the 22nd largest in the world) but is still dependent on the hydrocarbons sector for over 80 per cent of its national budget revenues, the ongoing oil price war is posing some very big problems for the Sultanate. Even before the outbreak of outright hostilities between Saudi Arabia, Russia, and the U.S. began, Oman had a budget breakeven price per barrel of Brent of over US$85 and this is going higher by the day. As it stands, according to legal sources in Abu Dhabi spoken to by OilPrice.com last week, the Sultanate needs to raise at least US$7 billion very quickly just to keep the budget from falling off a cliff, and nearer US$10 billion to keep rolling funding going for key projects, including the flagship Duqm programme.

“The key problem that Oman has faced has been that it has had no real choice - given its lack of oil and gas reserves - but to focus on building a presence in the higher-value petrochemicals sector, which it started to do in earnest the last time that the Saudis engaged in a price war, beginning in 2014,” a senior oil industry source in Muscat told OilPrice.com last week. “It was, and is, a very good idea in the circumstances but the problem with it is that it involves a lot of upfront spending in advance of big returns flowing in much later down the line, and this leaves a mid-range funding gap, which is what we have now,” he added. “The effects of this have been magnified by the lack of revenue offset that comes from the oil that Oman does manage to produce as a result of the slide in world oil prices,” he underlined.

In fact, Oman’s entire national hydrocarbons strategy hangs in great part on its finishing the landmark Duqm Refinery Project (DRP). As of the end of 2019, the entire construction and development work at the site was just 45 per cent complete. Given that it was around 5 per cent complete at the beginning of that year, this might be regarded as an achievement but the project has been treading water now for a number of years. In fact, as long ago as 2014, various comments from the Sultanate stated that it would begin to award the engineering, procurement and construction (EPC) contracts worth US$65 billion from that year. Related: Russia’s Plan To Bankrupt U.S. Shale Could Send Oil To $60

Spread over a 900 hectare site, the joint venture between the Oman Oil Company (OOC) and Kuwait Petroleum International (KPI) is intended to have a 230,000 barrels per day (bpd) capacity in the first instance and will be the lynchpin of the Duqm Special Economic Zone. Despite it taking one full year from the official commencement of work on the DRP in 2018 to the beginning of 2019 for it to make just 5 per cent progress, the official view was that it was going to be completed by the end 2021. This has now moved to 2022 but the truth is that it is impossible to say when precisely because the money is not there.

The key turning point in this regard for the project came towards the end of 2016 when the UAE’s International Petroleum Investment Company (IPIC) said that the Duqm project no longer fitted its overall investment strategy, in light of the impending merger at the time of IPIC with the Mubadala Development Company, and withdrew from the project. This was followed in November by the signing of a memorandum of understanding (MOU) between the OOC and the Kuwait Petroelum Corporation (KPC) for co-operation on the construction of the refinery. This included an undisclosed degree of funding, although OilPrice.com understands that this was not even half of the then-estimated cost of US$6 billion (the estimate is now US$7 billion). This involvement was expanded in February, when KPI formally acquired a 50 per cent stake in the refinery.

At around the same time as IPIC withdrew from the project, the refinery operator – the Duqm Refinery & Petrochemical Industries Company (DRPIC) – in tandem with the OOC, appointed a number of global banks, led by regional heavyweight Credit Agricole, to advise on the optimal methods to obtain the funding for the project, which included not just bond issues but also direct investment from foreign sources. These overtures found particular favour with China, which as part of a broad-based investment into Oman pledged the required funding to cover the completion of the Duqm refinery. However, it came with the usual Chinese caveats of being allowed to build massive far-reaching infrastructure projects. “Oman has little choice but to accept the Chinese conditions but it [Oman] wants to try to use as much of its own funding as it can for these key strategic projects to limit Chinese power where possible,” said the Muscat source.

In this context, the Duqm refinery will be a vital cog in Oman’s intended petchems infrastructure. It 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 (ORPIC) Sohar refinery in SEZAD. These are specifically designed to enable 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 will increase by nearly 4 per cent every year until the mid-2020s (with a corollary yearly rise in revenues of around 5 per cent over the same period), and 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 – by one million tonnes per year, to 1.4 million tonnes per year. Related: How COVID-19 Could Spark The Next Recession

In order to avoid even more Chinese influence, Oman is currently looking at raising funds both as a consequence of the reorganisation of its oil and gas sector and through the possible sale of part of one or more of its state hydrocarbons companies. In the case of the former, according to the Muscat source, allowing semi-state-owned Petroleum Development Oman (PDO) to operate on an even more independent basis would enable it to issue its own bonds or take on syndicated loans to boost its capital base. “It’s a decent prospect, as it steadily produces around 600,000 barrels per day of oil, although extraction in Oman is not the easiest in the world, and it has plans to increase this figure to around 700,000 [barrels per day] within the next five years,” he added.

“Maybe one of the partners will buy more [Shell holds 34 per cent of PDO, Total 4 per cent, and Partex 2 per cent, with the remainder held by the Oman government], or maybe one of the companies working elsewhere in Oman would have an interest,” he underlined. Only recently, Italy’s Eni began drilling activities in Block 52, and separately Oman’s Oil & Gas Ministry signed a new exploration and production sharing agreement with a joint-venture consortium comprising French super-major, Total, and Thai state-owned PTT Exploration and Production (PTTEP), for the rights to explore and develop the non-associated gas resources within Block 12. In addition, BP has maintained an upstream presence in Oman since 2007 and is currently working on the Khazzan tight gas field.

In the case of the latter, meanwhile, the part-IPO of part of ORPIC has been considered by the Oman government since 2014. The attractiveness of this proposition to investors was enhanced by last year’s integration of nine core businesses of ORPIC and Oman Oil under the new identity of ‘OQ’ (the ‘O’ stands for Oman, incidentally, and the ‘Q’ for Sultan Qaboos, in characteristically modest Middle Eastern style). According to official figures, in 2019 the new company offered more than 30 products sold to over 2,000 clients in over 60 countries. It had estimated revenue for the year of US$20 billion, with an EBITDA of US$2.2 billion and net profit of US$556 million, while the asset base stands at US$27.9 billion. The previous stake amount being considered was 15-20 per cent but the current thinking is for anything up to 25 per cent of the company to be sold, according to legal sources in Abu Dhabi.


By Simon Watkins for Oilprice.com

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