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Simon Watkins

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…

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Oman Is Vital To Iran And China’s Energy Agenda

Although Oman’s fiscal breakeven price per barrel of Brent crude oil has fallen to US$61 this year, the fact that it was over US$90 on average for much of the past decade has resulted in long-term financial problems that need quick solutions.

Even before its dire economic situation was made worse by another Saudi-instigated oil price war in 2020, the Sultanate had been facing a budget deficit for that year alone of at least 18 percent of GDP and budget deficits averaging at least 15 percent per year over the next five years.
Oman has very limited natural resources itself by regional standards that it can use to extricate itself from its financial malaise - only around five billion barrels of estimated proved oil reserves (barely the 22nd largest in the world) and minimal natural gas reserves – so has explored multiple options to bolster its budget. None of these options have panned out to the degree required to meaningfully impact Oman’s bottom-line budget position so last week it signaled an apparent intention to broaden and deepen its already close relations with the Iran-China axis which promises unlimited funding albeit at a potentially very heavy price. The signal that Oman may now have moved decisively into the Iran-China sphere of influence – the ‘Hotel California’ of global power alliances (‘You can check out any time you like, But you can never leave’) – 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.

This pipeline plan was part of a broader co-operation deal made between Oman and Iran in 2013, extended in scope in 2014, and fully ratified in August 2015 that was centered on Oman’s importing at least 10 billion cubic meters of natural gas per year (bcm/y) from Iran for 25 years beginning in 2017 (equating to just less than 1 billion cubic feet per day and worth around US$60 billion at the time). The target for this was then changed to 43 bcm/y to be imported, albeit for a shorter period, of 15 years, and then finally to at least 28 bcm/y for a minimum period of 15 years. According to a statement at the time of the signing of the 2014 memorandum of understanding on the deal from the then-managing director of the National Iranian Gas Export Company (NIGEC), Mehran Amir-Moeini, the Iranian company was already working on the different contracts’ mechanisms for the key phases of the project, principally comprising the onshore and offshore pipeline sections, the gas pressure and measuring stations in Iran, and the gas receiving facilities in Oman. Specifically, the land section of the project would comprise around 200 kilometers of 56-inch pipeline (to be constructed in Iran), to run from Rudan to Mobarak Mount in the southern Hormozgan province, whilst the sea section would include a 192-kilometer section of 36-inch pipeline along the bed of the Oman Sea at depths of up to 1,340 meters, from Iran to Sohar Port in Oman. 

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Not only was this deal intended to allow for the completely free movement of Iranian gas (and later oil) via Oman through the Gulf of Oman and out into the world oil and gas markets – Iran was sanctioned at that time as well, of course, and this route would augment the same sort of sanctions-free route that it was operating via Iraq – but it would also allow for the advancement of Iran’s long-planned entry into the global liquefied natural gas (LNG) market. Iran had long sought to become a world leader in the export of LNG – and this ambition remains intact – and to this end had arranged as part of the 2013/14/15 deal with Oman to utilize at least 25 percent of the sultanate’s own LNG production facilities.

Once converted, the Iranian LNG would be loaded onto the specialized LNG vessels for export in return for commission payments to Oman but this process would only begin after the completion of the land and the sea pipelines. This Oman-based LNG supply would also act as a starting point for any Iran-Pakistan-China pipeline and would augment the other LNG projects that Iran was looking at that time to roll out. Iran’s recent activities in its huge North Pars gas site do not mark the onset of this process of Iran looking to become a force in the global LNG sector but rather marks a change of tactics due to ongoing sanctions in order to achieve the target laid out nearly 20 years ago. This target was, as a senior oil and gas industry figure spoken to by OilPrice.com highlighted again last week: “To become the largest exporter of gas – natural gas, LNG, and LPG [liquefied petroleum gas] combined – to Europe and Western Asia, with a focus on China, and later on South Korea, and India, doubling the amount of gas currently exported to these two regions within five years of the base facilities [a combination of factors, analyzed here] being established.”

Another extremely beneficial synergy for the Iran-China axis of this direct route from Iran to Oman would be that it would coincide with the recent completion of Iran’s equally sanctions-busting Goreh-Jask pipeline that is set to eventually transport at least 1 million barrels per day of oil from its major oil fields via Goreh in the Shoaybiyeh-ye Gharbi Rural District of Khuzestan Province 1100 kilometers to the port of Jask in Hormozgan province on the Gulf of Oman. The Goreh-Jask pipeline has, of itself, expedited the finalization of the Iran-Oman gas pipeline, given the infrastructure build-out associated with it.

This includes the minimum of 20 huge oil storage tanks that will be built in Oman’s Jask, each capable of storing 500,000 barrels of oil, in the first phase (10 million barrels total) for later loading onto very large crude carriers (VLCCs) headed from the Gulf of Oman and into the Arabian Sea and then on to the Indian Ocean. The storage capacity for Iranian oil in Oman will be increased over the next two years or less to at least 30 million barrels and the shipping facilities at Jask will be built out further to allow for extended in-port stays of all sizes of very large crude carriers and Jask will also see the creation of multiple single-point moorings (SPMs), and other infrastructure features for the import and export of crude oil and other products. Moreover, according to Oman’s Rumhy, Muscat is more than happy to act as a conduit for the gas pipeline that would begin in Iran’s supergiant South Pars non-associated natural gas field and run to Sohar in the north of Oman to link up to the existing pipeline that runs from there to Salalah near the Yemeni border, whereupon it could be extended deeper into Yemen. 

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As with all Iran-China (and Russia) plans for the Middle East, each piece fits beautifully together in the whole jigsaw, and this plan is clearly no exception. Not only does the Iran-Oman gas pipeline (from Iran’s biggest gas fields) align perfectly with the already-in-place plans for the Iran-Oman oil pipeline (from Iran’s biggest oil fields) from every conceivable strategic and business perspective but Iran’s increased presence in Oman on both of these projects will neatly fit into the increasing presence of China on the ground in Oman (and Oman is a vital link in the land and maritime routes of Beijing’s multi-generational power-grab project, ‘One Belt, One Road’). China has steadily built up its presence in Oman for many years and already accounts for around 90 percent of Oman’s oil exports and the vast majority of its petchems exports.

Leveraging this, China signed a US$10 billion investment in 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 also included a product export terminal in Duqm Port and Duqm refinery-dedicated crude storage tanks in Ras Markaz. Chinese money is also being funneled towards the construction and building out of an 11.72 square kilometer industrial park in Duqm in three areas - heavy industrial, light industrial, and mixed-use. According to the plans, all of which will be ready within the next 10 years, according to Beijing, in the light industrial zone there will be 12 projects, including the production of 1 gigawatt (GW) of solar power units, and of oil and gas tools, pipelines and drilling equipment. The mixed-use sector will focus on projects designed to improve the infrastructure for Omanis, including the construction of a US$100 million hospital, and a US$15 million school. The heavy industry sector will also see 12 projects, dealing with the production of methanol and other chemicals. 

By Simon Watkins for Oilprice.com

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