Someone in the White House seems to have stumbled upon an atlas, seen where Oman is located, and worked out how crucial it is in the Middle East’s energy matrix. China worked this out a long time ago and has been busily broadening and deepening its ties with the Sultanate, which is a crucial part of both the land and maritime routes of its multi-generational power-grab project, the ‘One Belt, One Road’ (OBOR) program. Up until the apparent discovery of the White House atlas, it looked like Oman was entering the final stage of joining the China-Russia-Iran axis of influence in the Middle East but now that the U.S. knows where Oman is it might be the case that it is not just allowed to fall into Beijing’s grasp, like much if the rest of the Middle East already has. Oman’s main problem for years has been that it has very limited natural resources by regional standards - only around five billion barrels of estimated proved oil reserves (barely the 22nd largest in the world) and minimal natural gas reserves. To counter this deficit, Oman determined upon the strategy of maximizing the returns from these raw hydrocarbons resources by turning them into a range of value-added petrochemicals products, with this effort largely focused on a group of interconnected projects centered on the Duqm projects. The only drawback with this strategy is that it requires a lot of upfront investment over many years before the necessary infrastructure is ready to begin to generate meaningful financial returns. At the time when Oman began in earnest to pursue this petrochemicals strategy – in the middle of 2013, notably, the Oman Refineries and Petroleum Industries Company (ORPIC) announced that it was proceeding with a US$5 billion program to boost processing capacity at its refinery in Sohar and build a nearby petrochemicals complex – the Brent crude oil price was over US$100 per barrel and looked steady around that level. Just a few months after this, though, Saudi Arabia instigated the first of its disastrous oil price wars aimed at destroying the then-nascent U.S. shale oil sector by organizing OPEC members to produce at full capacity, pushing oil prices through the floor, and bankrupting the shale producers. Although Saudi Arabia was spectacularly unsuccessful in destroying the U.S.’s shale sector, it did manage to destroy the finances of the Kingdom itself, fellow OPEC members, and all other countries whose economies were reliant on oil exports, including Oman. From that point, Oman has been in severe financial trouble and desperate to find an international superpower sponsor to allow it both to survive economically and to complete its plans for a world-class petrochemicals sector and economic robustness.
Given that Oman was a key logistical node in China’s original maritime Silk Road route that dates back to before the birth of Christ and continued for another 1,500 years or so, it is entirely unsurprising both that Beijing regards Oman as a natural cog in its new iteration of the sea and land routes of the Silk Road - the ‘OBOR’ program – and that it has no doubt whatsoever that it will outflank the U.S. in achieving this aim. Already, as analyzed in depth every step of the way by OilPrice.com, China has developed an extensive on-the-ground presence in Oman through its huge multi-layered investments there. A prime example of this approach was the signing of a land lease agreement to establish a huge industrial park in the Duqm area that will allow a number of Chinese companies to invest in the Sultanate to the tune of at least US$10 billion in the first instance. Although initially focussed on expanding the capacity and product capabilities of the Duqm Refinery and associated operations, the deal then pans out into a much broader range of projects in three areas - heavy industrial, light industrial, and mixed-use - all of which will be ready within the next five to 10 years. The most recent signal that Oman had run out of any other realistic options to secure its future financially other than to decisively side with China came with comments from its oil and gas minister, Mohammed al-Rumhy, that the Sultanate wants to revive plans to import Iranian gas via a pipeline should the nuclear deal be reinstated and is also considering extending its pipeline network to Yemen. The full implications of this were analyzed by OilPrice.com here.
Nonetheless, Oman is not yet completely lost to Washington, as Muscat’s newest efforts to raise financing open the way for increased involvement – that is, any meaningful involvement at all – from the U.S. One element to this is that state firm, Energy Development Oman (EDO), is in talks with various international banks to raise US$1.5 billion in debt financing. EDO is a strategically vital company in Oman’s energy sector, as it was established last year to take ownership of the Sultanate’s largest oil and gas operation, Block 6. U.S. interests are already represented in this initiative, with JPMorgan leading discussions with EDO on potential financing plans. The U.S.’s key new player in the push to check China’s advance in the Middle East – the UAE – has also signaled a strong interest in playing a major part in any lending facilities and mechanisms, legal sources close to proceedings told OilPrice.com last week. Just over a month ago, Oman’s al-Rumhy stated that EDO would be looking for a total of around US$3 billion to finance its operations, which could potentially open up more direct investment opportunities for the U.S. in Oman’s broader infrastructure going forward.
One such opportunity may come with the sale by Oman state energy company OQ of its principal drilling unit, Abraj Energy Services, a sale that is currently in the early stages of discussion, according to the legal sources spoken to by OilPrice.com last week. “The options are to sell part, most, or all of the operation either via a private sale or through an IPO [initial public offering] or a combination of both,” said one of the legal sources. In this context, it is true that Oman’s June shariah-compliant bond (sukuk) offering was a success, with the Sultanate able to sell US$1.75 billion in nine-year sukuk after drawing in more than US$11.5 billion in orders for its second international bond issuance this year. It is also true, though, that this success is unlikely to translate into a similar success for a stock market flotation of any significant size, as the sukuk market is a highly specialized one that almost automatically attracts heavy bidding from its core investor community. Instead, stock market investors will focus more on the credit profile of Oman and this has steadily worsened since the Saudi-instigated oil price war from 2014 to 2016 and the same thing again in early 2020. Consequently, the Sultanate now stands as one of only two Gulf states with a ‘junk’ credit rating, with the other being Bahrain.
This poor credit profile is the reason why Oman’s previous idea of selling a stake via IPOs in the Oman Oil Refineries and Petroleum Industries Company’s (ORPIC) has so far come to naught. With ORPIC, and Oman Oil, now functioning under the new identity of ‘OQ’ (the ‘O’ stands for Oman, incidentally, and the ‘Q’ for former-Sultan Qaboos), these IPO plans have been paused but if the U.S. did want to begin to make a stand against China in an absolutely vital land and maritime point in the Middle East then buying as much of Abraj Energy Services as possible and then persuading the Sultan to sell it as much of OQ as possible would be a very good start. Aside from anything else, it would secure the U.S. effective control over the Gulf of Oman, which acts as the entry and exit point to the Persian Gulf and the key oil transit chokepoint of the Strait of Hormuz. It would also stymie all of Iran’s short-to-medium term plans to become a major liquefied natural gas (LNG) player by utilizing 25 percent of Oman’s LNG processing capacity at Qalhat and also Iran’s broader plan to build a 192-kilometer section of 36-inch pipeline running along the bed of the Oman Sea at depths of up to 1,340 meters from Mobarak Mount in Iran’s southern Hormuzgan province to Sohar Port in Oman for gas exports to the rest of the world. Perhaps more satisfyingly for the U.S. than any of that is that it would cause major problems for China in seamlessly rolling out its OBOR land and sea routes, as it has been allowed to do effectively unchallenged by the U.S. to this point.
By Simon Watkins for Oilprice.com
More Top Reads From Oilprice.com:
- Huge Dividend Cripples World’s Largest Oil Company
- The Ongoing Transformation Of ‘Big Oil’
- U.S. Gasoline Demand In 2021 May Have Peaked Already