Facing a budget deficit this year alone that may reach 18 per cent of GDP, according to S&P Global Ratings, and budget deficits averaging at least 15 per cent per year over the next five years, according to various analyst estimates, Oman’s economy is desperate to try to extricate itself from the financial hole dug for it by Saudi Arabia’s 2014-2016 and 2020 oil price wars. With a fiscal breakeven oil price of just over US$109 per barrel (pb) of Brent this year, according to the IMF, and over 80 per cent of its revenues still coming from the hydrocarbons sector, the Oman government stated last week that the Sultanate is planning to raise its crude production to up to 1.1 million barrels per day (bpd) when the current OPEC+ supply accord ends. However, this will be extremely difficult to do, forcing it into considering more extreme options.
Despite its still being so dependent on hydrocarbons revenues, Oman is far less blessed in the matter of oil reserves than many of its Middle East neighbours, making its comment last week on increasing oil production look even less feasible. Currently, Oman has slightly less than five billion barrels of estimated proved oil reserves - barely ranking as the 22nd largest in the world – and its plans to rapidly develop a world-class value-added petrochemicals sector to compensate for this deficit in the oil sector have been delayed many times in recent years, most notably with regard to its flagship, multi-layered Duqm Refinery and future Duqm Petrochemicals projects. The fact remains that to develop a viable petchems sector requires heavy upfront investment with little or no return in this initial development phase but, principally due to the two oil price wars launched by Saudi Arabia in less than five years, any financial provision that the Oman government had made for petchems development has been used for more basic social requirements.
Although the Oman government has spoken of increasing oil production to 1.1 million bpd after the end of the current OPEC+ deal, its ability to do so for any sustained period of time – or indeed at all – remains in question. It is true that Oman did manage to sustain oil production of just over 1 million bpd for two successive months last year (March and April), but after that the figure fell back to the usual circa-900,000 bpd level and then to markedly less than that, notably to around 720,000 bpd in December. This sudden drop was again a testament to Oman’s lack of available finance as it costs money to bring back wells that had been shut down as part of the ongoing OPEC+ oil production cut deals. Before the disastrous 2020 oil price war began, Oman had managed to average oil production of 970,900 bpd in 2019. Related: The 5 Best Utility Stocks In 2021
Moreover, in the run-up to last year’s fourth quarter US$2 billion sovereign bond offering by Oman, the Sultanate clearly stated in its overall issue prospectus information that it is facing a long-term slowdown in oil production, with limited future growth in reserves. More specifically, this information – that went to various financial institutions that might have been expected to participate in last week’s bond sale, and also to the agency that would assign a credit rating to the issue (S&P Global Platts) – stated that the maturity of Oman’s producing fields means that increasing oil exports may not reverse dwindling revenues, should crude prices continue to be depressed for a prolonged period. According to S&P Global Platts, the information went on: “Future growth in reserves is generally expected to be limited to successful implementation of enhanced oil recovery techniques,[…] As a result, if there is any failure to make use of such techniques, or if such techniques prove excessively costly (particularly in the context of low oil prices) or fail to help grow oil and gas reserves, a long-term slowdown in oil production may become more likely.” Unsurprisingly, the bond sale was not a success and does not bode well for any future bond offerings or similarly open finance raising initiatives either, which leaves Oman back where it started: unable to properly complete its world-class petchems development that will compensate for is lack of oil but unable to generate the necessary financing because of its lack of oil revenues or any alternative source of hydrocarbons-related income.
Given the relatively historically low oil price environment that persists, plans to sell part of its highly-regarded Oman Oil Refineries and Petroleum Industries Company (ORPIC) that have been considered by the Oman government since 2014 remain paused. This is despite potential attractiveness of this proposition to investors being enhanced by the integration of nine core businesses of ORPIC and Oman Oil under the new identity of ‘OQ’. 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 new OQ entity to be sold when oil prices turn to a longer-term bullish outlook, according to legal sources in Abu Dhabi. Related: The Surprising Rise And Fall Of A Shale Superstar
In a similar vein, Oman has been looking at raising funds by allowing the semi-state-owned Petroleum Development Oman (PDO) to operate on an even more independent basis, enabling it to issue its own bonds or take on syndicated loans to boost its capital base. Widely regarded as a well-run, solid oil company, with a steady oil production rate in Oman of at least 650,000-700,000 bpd, and holding 192 producing oil fields, 52 gas fields, 29 production stations and around 9,000 active wells, PDO already counts Royal Dutch Shell, Total, and Partex as shareholders in it (34 per cent, 4 per cent, and 2 per cent, respectively) in addition to the 60 per cent held by the Oman government. Persuading any of these international partners – or new ones related to Oman’s core drilling activities – to invest in PDO may well be a key reason behind the recent creation of the Sultanate’s new upstream oil and gas company, Energy Development Oman (EDO). According to government comments, EDO will have a stake in PDO and, crucially, will be able to develop its own projects including raising financing independently of Oman’s Ministry of Energy & Minerals. Such financing will legally be able to secure finance against specific projects, which would open the way for syndicated loans, conventional bond offerings and would even more importantly allow it to tap into the huge guaranteed pool of international money available for investment in Sharia-compliant bonds (sukuk).
If none of these options amount to what is required for Oman then realistically it will have little choice but to continue in its recently burgeoning alliance with China, which already accounts for around 90 per cent of Oman’s oil exports and the vast majority of its petchems exports. For Beijing, 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 US$10 billion investment the Duqm oil refinery - just after the implementation of the nuclear deal with Iran at the beginning of 2016 - which focuses initially on completing the Duqm refinery but the package includes a product export terminal in Duqm Port and Duqm refinery-dedicated crude storage tanks in Ras Markaz. In tandem with this, and China’s broader plans implicit within its ‘One Belt, One Road’ project, Oman’s ‘spare’ liquefied natural gas (LNG) capacity may end up being used by Iran. There have been concrete plans in place to do just this for at least seven years but these were shelved initially because of the U.S.’s unilateral withdrawal from the Joint Comprehensive Plan of Action in May 2018 and subsequently because of the low price of LNG. Nonetheless, 2013 saw the legal foundation for oil and gas co-operation between Iran and Oman laid out, with the signing of a deal based on Iran supplying Oman with at least 28 million cubic metres per year of gas for a minimum period of 15 years. This would allow for the gas to be sent to Oman, with some being used by Oman itself and the rest being turned into LNG by the Oman LNG plant in Qalhat for Iran, whereupon it would be exported by Iran worldwide.
By Simon Watkins for Oilprice.com
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