Economic Update

Published 27 Mar 2016

Bucking global hydrocarbons trends, Oman is moving ahead with substantial investment across its upstream and downstream oil and gas industry.

In early February state-owned Petroleum Development Oman (PDO) announced plans to channel some $10bn into three major onshore projects over the next five to 10 years in a two-fold bid to expand operational capacity and output.

Industry players are confident that the new ventures will make a major contribution to the sultanate’s economy longer term, although with per-barrel oil prices reaching 13-year lows in January, Oman is likely to remain under pressure from falling revenues in the near-to-medium term.

Expansions in the pipeline

The three initiatives earmarked for development – Rabab Harweel, Yibal Khuff and Budour – are all located in the south of PDO’s Block 6 concession.

Estimates suggest that the block’s reserves could contribute up to one-third of PDO’s future oil production and expand its gas output significantly. The company currently accounts for approximately 70% of all Oman’s crude production and nearly all of its gas supply.

In a separate development, the state-owned national petroleum investment company Oman Oil Company (OOC) and BP inked a deal in mid-February to extend their exploration and production-sharing agreement at the Khazzan natural gas field into a second development phase, which will see an additional 1000-sq-km block added to the project.

The Khazzan field, which will now cover a total area of 3700 sq km, will be developed in phases, with plans for it to be fully operational by 2020. Developers expect production in the order of 1.5bn standard cu feet (scf) of gas per day, equivalent to 40% of Oman’s current output.

Estimates suggest that the field holds at least 10.5trn scf of recoverable gas reserves. Bob Dudley, CEO of BP, is confident that the $16bn project, which involves more than 325 wells over 15 years, as well as construction of a three-train central processing facility, will deliver long-term value.

“Khazzan is a major resource with the potential to produce gas for Oman for decades,” he said in a statement in February.

Additional gas supplies will provide welcome feedstock for processing, supporting Oman’s plans to expand its downstream and petrochemicals sectors. Supplies will be used for domestic energy consumption and channelled into the country’s growing network of chemical plants, including the $3.6bn Liwa plastics development at Sohar, which is due to come on-line in 2019.

New set-up for OOC

News of further moves within Oman’s energy industry came from OOC in mid-February, when the company announced a major restructuring aimed at streamlining operations ahead of future expansion.

Under the revamp, OOC will establish separate units for managing domestic investments, oil exploration and production, and infrastructure. The parent company will retain direct control of the group’s international investment portfolio.

The restructuring also foresees the privatisation of smaller domestic assets, such as drilling services contractor Abraj Energy Services, though recent statements from Isam Al Zadjali, CEO of OOC, suggest this may not move forward until next year at the earliest.

Prioritising the deficit

Despite welcome prospects of new investment, the current economic climate could see borrowing costs rise this year.

Earlier this year, Standard & Poor’s cut Oman’s credit rating by two notches to “BBB-”, citing the weak outlook for oil. The downgrade comes three months after the agency lowered Oman’s sovereign debt rating from “A-” to “BBB+” amid concerns over the impact that sustained low oil prices were having on Oman’s fiscal and external balances.

While still rated as investment grade, the move has seen average yields on government bonds climb.

In a mid-February auction average yields on a five-year OR100m ($259.7m) development bond stood at 4.3%, well up on the previous issue in August, which saw average yields of 2.5% on OR300m ($779.9m) worth of notes.

In a move aimed at addressing concerns, the government has announced plans to reduce the budget deficit by 27% to a more manageable OR3.3bn ($8.6bn) this year, mostly through lower outlays. Spending is expected to be in the region of OR11.9bn ($30.9bn), down from OR14.1bn ($36.6bn) in 2015.

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