Oman is preparing to offer a new batch of onshore oil and gas concession areas by the end of this month and a new batch of offshore oil and gas blocks by the end of June, according to the Sultanate's energy ministry last week. Oman has been targeted by China in the previous year or so especially, given its much greater significance in the Middle East than its relatively paltry 5.4 billion barrels of estimated proved oil reserves (only the 22nd largest in the world) might imply. The groundwork for China's latest chequebook and charm offensive in Oman and neighbouring countries was laid in a series of meetings in January 2022 in Beijing between senior Chinese government officials and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain, plus the secretary-general of the Gulf Cooperation Council (GCC). At these meetings, as analysed in depth in my last book on the global oil markets, the principal topics of conversation were to finally seal a China-GCC Free Trade Agreement and to forge "a deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat." Consequently, the U.S. and China had everything to play for in securing these new concessions in this vital Middle East hub. The Sultanate of Oman occupies a crucial geographical and geopolitical position in the oil and gas world. The country has long coastlines along the Gulf of Oman and the Arabian Sea offering unfettered access to the markets of the East and the West. As such, Oman and its key ports and storage facilities offer the only true alternative in the Middle East to the Strait of Hormuz, controlled by Iran, through which passes at least one third of the world's crude oil supplies. The extreme narrowness of the Strait of Hormuz means that it is relatively easy to disrupt the flow of oil through it carried in tankers that can be attacked either by other ships in the Strait or from the shoreline. It was precisely due to such an incident, the 2011/12 Strait of Hormuz Dispute, that the appeal of Oman as one of the world's great oil storage and trading hubs - alongside the Far East's Singapore hub, Europe's ARA (Amsterdam-Rotterdam-Antwerp), and the U.S.'s Cushing - gained true momentum. This Dispute began in December 2011 when Iran threatened to cut off oil supply through the Strait should economic sanctions limit, or halt, Iranian oil exports, and it included a 10-day military exercise in international waters near the chokepoint.
What China wants from Oman is to control all the major crude oil shipping chokepoints from the Middle East into Europe that avoid the more expensive and more nautically-challenging Cape of Good Hope route around South Africa and the more politically-sensitive Strait of Hormuz route. This is aligned with Beijing's broad strategic goal encapsulated in its 'One Belt, One Road' multi-generational power-grab project. China already has effective control over the Strait of Hormuz by dint of its all-encompassing 25-year deal with Iran, uncovered by me in a global exclusive on 3 September 2019 and also analysed in depth in my last book on the global oil markets. The same deal also gives China a hold over the Bab al-Mandab Strait through which oil is shipped through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards. This has been achieved as the Bab al-Mandab Strait lies between Yemen (which is being disrupted by Iran-backed Houthis, just as China wants) and Djibouti, over which China has also established a stranglehold.
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In the lead-up to a major meeting of GCC countries in December 2021, China had been using its standard chequebook diplomacy to expand its presence in Oman. Already accounting for around 90 percent of Oman's oil exports and most of its petrochemicals exports, China was quick to pledge a further US$10 billion immediately for investment into Oman's flagship Duqm Refinery Project. Although further investment from China was notionally geared towards completing the Duqm Refinery, Chinese money was also funnelled towards the construction of an 11.72 square kilometre industrial park in Duqm in three areas - heavy industrial, light industrial, and mixed-use. This enabled China to plant a flag in deeply strategic areas of land in the Sultanate. The signal that Oman may have moved into the Chinese sphere of influence came with comments just before the GCC meetings. In June 2021, Oman's Oil and Gas Minister, Mohammed al-Rumhy, said that the Sultanate wanted to revive plans to import Iranian gas via a pipeline should the JCPOA be reinstated and was 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 centred on Oman's importing at least 10 billion cubic meters of natural gas per year (bcm/y) from Iran for 25 years. This was to have begun in 2017, with the amount equating to just less than 1 billion cubic feet per day and worth around US$60 billion at the time. The target was then changed to 43 bcm/y to be imported for 15 years, and then finally altered to at least 28 bcm/y for a minimum period of 15 years. According to a statement at the signing of the 2014 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 contract mechanisms for the key phases of the project. Specifically, the land section of the project would comprise around 200 kilometres of 56-inch pipeline (to be constructed in Iran), to run from Rudan to Mobarak Mount in the southern Hormozgan province. The sea section would include a 192-kilometre section of 36-inch pipeline along the bed of the Oman Sea at depths of up to 1,340 metres, from Iran to Sohar Port in Oman. This deal was 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, and this route was designed to allow for the same sanctions-free flows that it was operating via Iraq.
It would also allow for the advancement of Iran's planned entry into the global liquefied natural gas (LNG) market. This type of gas is quick to secure and to move to where it is needed, being available in its own spot market. Conversely, gas available through pipelines requires a lot more time and money being invested in infrastructure build-out and maintenance before supplies become available. In the current era of gas needed urgently to replace lost Russian supplies, LNG has become the 'swing gas' supply of the gas supply complex. Iran had long sought to become a world leader in the export of LNG and this ambition remains intact. To this end, Iran had arranged as part of the 2013/14/15 deal with Oman to utilise at least 25 percent of the Sultanate's own LNG production facilities. Once converted, the Iranian LNG would be loaded onto the specialised LNG vessels for export, in return for commission payments to Oman. This process would begin after the completion of the land and the sea pipelines.
Another highly beneficial synergy for the China-Iran axis of this direct route from Iran to Oman would be that it would complement Iran's sanctions-busting Goreh-Jask pipeline, also analysed in my last book on the global oil markets. The Goreh-Jask pipeline has the capacity to transport at least 1 million bpd of oil from its major oil fields and runs from Goreh in the Shoaybiyeh-ye Gharbi Rural District of Khuzestan Province 1100 kilometres to the port of Jask in Hormozgan province on the Gulf of Oman. According to Oman's Rumhy at the time of the signing of the Iran-Oman gas deal, and on several occasions afterwards, Muscat is happy to be a conduit for the gas pipeline that would begin in Iran's supergiant South Pars gas field and run to Sohar in the north of Oman. This pipeline would then link up to the existing pipeline that runs from there to Salalah near the Yemeni border. It could then be extended deeper into Yemen, in which the Iran-backed Houthis are fighting a war against arch regional nemesis, Saudi Arabia.
By Simon Watkins for Oilprice.com
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Comments
It is true that it has long coastlines along the Gulf of Oman and the Arabian Sea offering unfettered access to the markets of the East and the West but so is Iran and UAE’s Emirate of Fujairah.
China accounts for around 90% of Oman’s oil exports and most of its petrochemicals exports. It has already pledged a further $10 bn for investment in Oman’s flagship Duqm Refinery Project and Chinese money was also funneled towards the construction of an 11.72 km industrial park in Duqm in three areas: heavy industrial, light industrial, and mixed-use.
The author says that what China wants from Oman is to control all the major crude oil shipping chokepoints from the Middle East into Europe that avoid the more expensive and much longer Cape of Good Hope route and the more politically-sensitive Strait of Hormuz route. If this is the case, then Iran could fulfil this goal via its recently opened Goreh-Jask oil pipeline with a capacity to transport 1.0 million barrels a day (mbd) from the Iranian Khuzestan Province to the port of Jask in on the Gulf of Oman where Iran has also built huge storage areas for shipping oil to both the Asia-Pacific region and also Europe.
The same objective could be achieved via UAE’s Fujairah port which also bypasses the Strait of Hormuz.
Moreover, China already has effective control over the Strait of Hormuz by dint of its all-encompassing 25-year cooperation agreement with Iran. It also has a hold over the Bab al-Mandab Strait through its presence in Djibouti.
And while the United States would prefer to have control over the Strait of Hormuz by a military presence in Oman’s Musandam right on the Strait, it is already achieving that goal through its huge naval presence in the Gulf of Oman and also in the Bahrain.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert