As Russia’s invasion of Ukraine and climate change continue to disrupt market dynamics, the transition to cleaner sources of energy has never been in sharper focus. Oman’s policy response is guided by Oman Vision 2040, which aims to put the economy on a more diversified and sustainable footing, while protecting the environment and improving livelihoods. Other notable initiatives include the country’s goal of becoming a net-zero economy by 2050, and an international leader in the export and production of hydrogen. This includes adding 25 GW of captive solar and wind capacity to serve green hydrogen projects. Oman has also pledged to reduce its greenhouse gas emissions by 7% compared to the business-as-usual scenario by 2030.
Oversight
The Ministry of Energy and Minerals (MEM), which was created in 2020 to broaden the remit of the former Ministry of Oil and Gas, is responsible for implementing policies and regulating the sultanate’s energy sector. Hydrocarbons development falls under the auspices of the 2011 Oil and Gas Law, which stipulates government ownership of all of the country’s hydrocarbons assets.
In June 2022 Sultan Haitham bin Tarik Al Said appointed Salim Al Aufi the new minister of energy and minerals as part of a cabinet reshuffle, replacing predecessor Mohammed Al Rumhi. Al Aufi is tasked with overseeing efforts to help Oman advance its goal of creating a less carbon-intensive future.
In addition to hydrocarbons, the MEM also oversees renewable energy and industry development. Oman aims to be a leading producer and exporter of hydrogen made using electricity generated by renewable sources. To this end, the sultanate announced its national green hydrogen strategy in October 2022. Global demand for green hydrogen is likely to increase as the world continues to move towards lower-carbon targets. With this in mind, the MEM has been allocating access to sites for green hydrogen development, establishing a legal framework for the segment and encouraging the adoption of hydrogen in heavy industries.
In line with these efforts, the government established Hydrogen Oman (Hydrom), a company launched in October 2022 to guide the hydrogen segment’s development. Hydrom has a mandate to create a master plan for the sector, allot government-owned land, structure large-scale green hydrogen projects, manage their dispersal to developers, and oversee the building of related infrastructure, industries and facilities. The company is fully owned by Energy Development Oman (EDO), which itself was established in December 2020 to pursue new sustainable growth opportunities in the energy sector. EDO’s budget is not linked to the Ministry of Finance, allowing it to raise corporate debt and self-fund projects. In addition to Hydrom, EDO owns 60% of the Block 6 oil concession and 100% of the Block 6 non-associated gas concession.
Structure
The Petroleum Development Oman (PDO) was responsible for roughly 64% of the country’s oil reserves at the end of 2021, according to the MEM’s 2021 annual report. The government controls 60% of PDO through EDO, while UK-based Shell Global has a 34% interest, France-based TotalEnergies a 4% stake, and PTT Exploration and Production (PTTEP) of Thailand a 2% stake. Shell and TotalEnergies are founding members of PDO, a legacy of their longstanding involvement in Oman’s energy sector. Gas fields and processing plants are operated by PDO exclusively on behalf of the government and EDO. Looking to the future, Oman is prepared to move away from the shared ownership structure that is typified by PDO, allowing both domestic and international players to operate more independently. Indeed, private companies are increasingly encouraged to enter Oman’s hydrocarbons sector. The contracts utilised in this space are concluded in the form of exploration and production sharing agreements (EPSAs).
OQ, the government-owned oil company known as the Oman Oil and Orpic Group until a rebrand that streamlined its nine core businesses in December 2019, provides solutions across the hydrocarbons value chain. OQ is a key partner for international energy companies and government-owned partners looking to invest in new projects, both in Oman and abroad. OQ’s alternative energy unit was created in June 2020 and operates under three pillars: energy efficiency, energy assets and green molecules (namely hydrogen and ammonia). Notably, Abraj Energy Services, OQ’s drilling and oil services unit, is preparing to launch the trading of its shares in March 2023, with Saudi Omani Investment Company the anchor investor in the initial public offering.
Downstream, Oman Oil Refineries and Petroleum Industries Company – one of the nine businesses streamlined during the OQ rebranding – oversees the refining sector, and owns Oman’s operating refineries at Mina Al Fahal and Sohar. International media reported in November 2022 that the Duqm Refinery, a joint venture between OQ and Kuwait Petroleum International, would start commercial operations by the end of 2023, refining 230,000 barrels of crude oil products per day once in full operation. OQ Gas Network is the dominant gas transporter, delivering natural gas to industrial consumers by pipeline, while Oman Tank Terminal Company provides 2m barrels of floating oil storage. Oman Oil Marketing Company handles the domestic marketing and distribution of fuel and lubricants.
Oil
Oman has leaned on oil and gas to fuel its economy since production first began in 1967. The sultanate plans to continue to orient its economy around this sector, even as it looks to shift the emphasis away from crude towards natural gas and downstream developments. Oman had 5.2bn barrels of oil reserves and 24trn cu feet of gas reserves as of June 2022, though the sultanate continues to bring new production on-line, such as the Bisat oilfield commissioned at the end of January 2023.
At peak production, Oman can produce more than 1m barrels per day (bpd) of crude and condensates, making it the GCC’s largest oil producer that is not a member of the Organisation of the Petroleum Exporting Countries (OPEC), even as Oman is a member of OPEC+. The oil industry has accounted for more than an average of 30% of Oman’s real GDP every year from 1970 to 2014, reaching as high as 81% of GDP in 1979. However, oil rents have not exceeded 30% of GDP since 2014.
Even as Oman has worked to diversify its economy away from its traditional reliance on hydrocarbons, it is still vulnerable to energy market shocks. Its GDP contracted by 3.2% in 2020, according to the IMF, straining the fiscal budget and underscoring the urgency with which Oman is pursuing diversification. The framework aims to increase the non-oil sector’s share of economic activity to more than 90%.
However, the recovery in the global economy and sustained higher oil prices led Oman’s GDP to expand 3% and an estimated 4.4% in 2021 and 2022, respectively. Improvements in Oman’s capacity and efficiency – such as enhanced oil recovery techniques, including the use of solar steam to extract oil from deposits located deep underground instead of natural gas – are expected to let it allocate more resources for higher value segments.
Natural Gas
Oman’s reserves of natural gas are set to play a leading role in fuelling the country’s industrial growth in the coming years, as processes that currently use fossil fuels begin to switch to green hydrogen, allowing Oman to step up exports of its surplus gas as liquefied natural gas (LNG). This is because Oman converts a large proportion of its natural gas into grey hydrogen in steam-methane reformers, and uses it as feedstock for electric power plants, other industrial processes such as mining and cement production, and oilfield services. When emissions from this process are captured, the result is known as blue hydrogen.
Oman has intensified its focus on natural gas development, underlined by a December 2022 announcement that the government plans to create a national company to manage its natural gas assets. Interest in this had been rising since BP announced in June 2021 that it had ramped up production in its Block 61 concessions to 1.5bn standard cu feet per day (scfd). New supply is set to lift the export outlook as well, as OQ, Shell and TotalEnergies are developing Block 10, with the aim of producing 500m scfd.
As of August 2022 Oman LNG delivered 16% of sales on the spot market versus 84% via contracts. All sales contracts are set to be renegotiated ahead of their expiration between 2024 and 2026, and Oman is expected to increase its LNG production to meet rising demand after Europe reduced its gas imports from Russia. Oman produced 10.6m tonnes of LNG in 2021, an increase of nearly 4% from 2020. In 2021 Oman set a goal to increase LNG exports by about 2bn cu metres per year. Oman exported a record 11.6m tonnes of LNG in 2022, according to commodity analytics firm Kpler, compared to 10.3m tonnes in 2021, exceeding the sultanate’s previous high of 10.5m tonnes in 2019.
Export growth was driven by Asian buyers, as nearly 40%, or 2.3m tonnes, of Oman’s 5.9m tonnes of LNG exports for the first half of 2022 were delivered to South Korea. Japan received 1.5m tonnes, and the remaining 2.2m tonnes were sold to China, India, Taiwan and Thailand. In December 2022 Japanese companies – including Mitsui & Co, ITOCHU Corporation and JERA – secured a deal to procure an additional 2m tonnes per year from Oman over 10 years starting from 2025 as Japan seeks to lock in long-term contracts to shore up its energy security.
Performance
Oman’s total oil production approached 1.1m bpd in 2022, up 9.6%, and the MEM announced in June 2022 that production capacity could rise by as much as 100,000 bpd by 2025.
Oil exports, which are delivered entirely by ship due to an absence of export pipelines, were up 10.6% to 319.5m barrels in 2022, with China accounting for 260.8m barrels, up 7.6% compared with 2021. Deliveries to Japan rose 179% to 11.7m barrels, while shipments to India totalled 31.2m barrels, up 7.8% against 2021. Oman does not import crude oil, although it does import some refined petroleum products for use in the domestic market.
Higher oil prices have had a positive impact on Oman’s public finances, with the average price in 2022 at $95.40 per barrel, versus $64.30 per barrel in 2021. Indeed, Oman posted a budget surplus of OR1.2bn ($3.1bn) in 2022, helping ease fiscal and monetary pressures. Oman’s 2023 national budget used a benchmark of $55 per barrel as the average oil price and production of roughly 1.2m bpd.
Oman’s net oil revenue was up by 66% at nearly OR7.5bn ($19.5bn) in 2022, and gas revenue was up by 29% to roughly OR3.6bn ($9.4bn), according to the Ministry of Finance. Total estimated public revenue for 2022 was OR14.2bn ($36.9bn), compared to the budgeted revenue of OR10.6bn ($27.5bn). OPEC expects global demand for oil to increase by 100,000 bpd to an average of 2.3m bpd in 2023, highlighting further room for growth. Meanwhile, in December 2022 the Ministry of Finance estimated in its 2023 budget that domestic oil production would rise by more than 10% during the year to nearly 1.2m bpd. Brent crude prices are expected to remain elevated, at least higher than the $55 per barrel the ministry factored into its budget calculations, underpinning the IMF’s expectation that real GDP will grow by 4.1% in 2023, compared to 4.4% in 2022.
Exploration
Oman has had a gas surplus since the BP-operated Khazzan field increased production to 1bn scfd in 2017. Upstream exploration and development continues to take place in Oman, while contracts awarded during the initial years of the pandemic have made progress. For example, in October 2020 the MEM awarded Swedish company Maha Energy the rights to explore and develop the onshore Block 70. In August 2022 Maha Energy announced an agreement with Gulf Drilling Company, a subsidiary of multinational MB Petroleum Services, to drill at least six wells in the concession. Maha Energy then signed a joint operating agreement with Mafraq Energy in January 2023, concluding the transfer of a 35% interest in Block 70 to the Omani company.
Offshore exploration is also gathering momentum as Oman seeks alternatives to its ageing onshore fields. Italian major Eni began drilling Oman’s first deepwater well in Block 52 in February 2020, but the company’s first effort was unsuccessful. As of the fourth quarter of 2022 Masirah Oil, a subsidiary of Singapore-based Rex International Holding, was continuing to explore promising opportunities in Block 50, its Arabian Sea concession in which it holds a 100% stake. Oman was in discussions with Iran as of June 2022 on how to divide up the Hangam offshore field – the oil reserves in which are estimated at 700m barrels – between the two countries.
The majority of explorers, including multinationals such as Shell Global, BP, PTTEP and Malaysia’s Petronas are seeking to capitalise on Oman’s natural gas prospects. In September 2022 the government signed an EPSA for Block 11, establishing Shell as the field’s operator with a 67.5% stake, with OQ and TotalEnergies holding 10% and 22.5% stakes, respectively. In December 2021 Shell and OQ, along with Marsa LNG – a joint venture between TotalEnergies and OQ – signed a concession agreement with the MEM to develop and produce natural gas in Block 10. Under that deal, Shell has a 53.4% operating stake, with Marsa LNG holding 33.2% and OQ the remainder. In January 2023 Oman announced that the first natural gas had been produced at Block 10.
Midstream
As Oman seeks to ramp up its refining and petrochemical capacity, and export a greater proportion of refined and crude products, there is growing demand for midstream transport, processing and storage services. For example, OQ announced in November 2022 that it had started operations at a third crude processing plant at the Bisat oilfield in Block 60, which is expected to reach a capacity of around 60,000 bpd in early 2023. In December 2022 Oman completed a second crude oil product export terminal at Ras Markaz on the Strait of Hormuz. The facility has an initial storage capacity of 26.7m barrels, and it is expected to help Oman handle surplus crude production, as well as supply a new refinery at Duqm via pipeline.
Downstream
OQ is partnering with Kuwait Petroleum International in a 50-50 joint venture to build a new $8bn refining facility in the Duqm Special Economic Zone (Duqm SEZ) capable of refining 230,000 bpd of crude oil products. The project was initially slated to come on-line in the third quarter of 2020, but pandemic-related delays resulted in the start of operations being pushed back until the end of 2023. Engineering, procurement and construction was licensed to multiple international partners, including the UK’s Petrofac, South Korea’s Samsung Engineering, Spain’s Técnicas Reunidas, South Korea’s Daewoo Engineering & Construction, US Chicago Bridge and Iron Company, and Italy’s Saipem. An 80-km pipeline will link the refinery in the Duqm SEZ with storage facilities in Ras Markaz.
“Efforts to diversify Oman’s economy are still in their early stages, and the Duqm SEZ is a positive step in the right direction, as the country is focusing on high-potential segments such as renewable energy and industry,” Mohammed Ajmal Basha, acting CEO and COO of transformer manufacturer Voltamp, told OBG. “Similar development projects are needed throughout Oman to consolidate and sustain the sultanate’s future economic growth.”
Oman is investing heavily in petrochemical facilities as part of Vision 2040. In December 2021 the OQ-led OR2.7bn ($7bn) Liwa Plastics Industrial Complex (LPIC) at the Sohar Port opened for business. The facility promises to produce an additional 838,000 tonnes of polyethylene and about 215,000 tonnes of polypropylene per year, raising total production of both products in Oman to 1.4m tonnes per year from around 1m tonnes, according to OQ. LPIC will enable OQ to utilise products from its refineries and its aromatic plant as feedstock for more valuable, higher-margin products, while also producing by-products that can be fed back into its refineries and the aromatics complex.
In December 2022 OQ signed a project development agreement with SABIC, Saudi Aramco’s trading arm, and Kuwait Petroleum International to develop a new petrochemical project at the Duqm SEZ comprising a steam cracker unit and derivatives units. The integrated downstream complex is expected to manufacture products that can be used in energy transitions, clean technologies and durable goods.
Oman’s first liquefied petroleum gas (LPG) extraction plant started trial production in May 2021 under the guidance of OQ LPG, a subsidiary of OQ established with an investment of $826m. The plant is designed to strip propane, butane and condensates from 8.8m cu metres of gas per day, before pumping the “lean” LPG back into the grid. The purpose of the plant, which was officially inaugurated in January 2022, is to export LPG to South Asia from new storage facilities built at the nearby Port of Salalah.
Incentives & Opportunities
As of September 2022 the US International Trade Administration considered the oil and gas sector to have some of the best prospectives for investment, suggesting that the sultanate’s ageing oil industry infrastructure was ready for replacement, providing opportunities for providers of pipelines, wellheads, pumps and related equipment. As Oman turns its attention towards more geologically complex exploitation options, there is also a market for 3D seismic analysis and remote monitoring equipment that can reduce labour costs. Oman has also shown interest in fracking technologies. In January 2022 the authorities signed a 10-year contract with UK player KCA Deutag worth $550m, when including options, to build four new automated drilling rigs in Oman. Notably, 40% of KCA Deutag’s approximately $100m investment to build the rigs will go towards local suppliers.
Renewables
In November 2022 Oman reaffirmed its commitment to addressing the energy transition when Abdullah Nasser Al Rahbi, Oman’s ambassador to Egypt, announced decarbonisation investments worth $190bn at the COP27 UN Conference on Climate Change in Egypt. These include energy efficiency projects such as those that aim to reduce natural gas and methane emissions by using advanced monitoring techniques like satellites and thermal cameras. This followed the official announcement in October 2022 that Oman aims to achieve net-zero emissions by 2050. With this in mind, the Oman Investment Authority, which holds a broad remit as both the national sovereign wealth fund and the guiding implementation agency of key government policies, is actively seeking investment in renewable energy, as evidenced in September 2022 by an agreement with Abu Dhabi-based ADQ to conduct feasibility studies on over $8bn in investment opportunities in renewables projects in Oman.
Hydrogen
Abdulaziz Said Al Shedhani, director-general of renewable energy and hydrogen at the MEM, told local media in June 2022 that the country would create an enterprise to lead the green hydrogen drive, with an eye to introducing new laws and incentives to attract foreign investment. To that end, in October 2022 the government launched Hydrom to oversee the development of the green hydrogen industry. The transition to this greener source of energy may be relatively easy for Oman, as it can repurpose its existing energy infrastructure and trade relationships towards the exporting and industrial usage of green hydrogen.
The sultanate has significant potential for producing renewable energy due to its wind and solar resources. One of the reasons why it is so well suited for this segment is because of its climate, as the wind tends to pick up at night to compensate for solar downtime (see Utilities chapter). Geographically, Oman is also well positioned as a politically stable leader in global molecule supplies, and there is already industrial capacity to produce the components that the green energy industry requires, such as wind turbines and electrolysers.
Hydrogen is used as a feedstock for industrial processes and an energy carrier or transition fuel that can be converted into electricity. For example, it can be used in cars that run on hydrogen-cell fuel. As such, hydrogen is expected to be a key industry in Oman as it works towards achieving its net-zero goal. The country is targeting the production of 1m tonnes per year of green hydrogen by 2030, and this figure is expected to rise to between 7.5m tonnes per year and 8m tonnes per year by 2050, a target that the sultanate expects will require an estimated $140bn in investment to achieve.
International Players
Japan’s Marubeni, Germany’s Linde and the UAE’s Dutco Group signed a joint development agreement with OQ in October 2021 to conduct feasibility studies on the development of a green hydrogen and green ammonia production facility in the Salalah Free Zone in southern Oman. The project’s tentative launch date was set for the first quarter of 2028 as of December 2022. Green ammonia is a key input for agricultural fertiliser and has potential as a future clean shipping fuel. The project, dubbed SalalaH2, aims to produce up to 1m tonnes of green ammonia per year, utilising OQ’s existing ammonia plant in Salalah, as well as develop a 400-MW electrolysis facility to produce green hydrogen for ammonia production.
SalalaH2 is set to be powered by Green Energy Oman, a new 25-GW renewables project dedicated to green hydrogen that was unveiled in May 2021. EnerTech, a Kuwaiti government-backed energy investor, OQ and Hong Kong-based InterContinental Energy are partnering to develop the project, the goal of which is to produce 1.8m tonnes per year of green hydrogen and up to 10m tonnes of green ammonia in total. In January 2023 it was reported that Shell had acquired a 35% stake in the project.
The green hydrogen project in the most advanced stage of development is Hyport Duqm, a 50-50 joint venture between OQ’s alternative energy unit and Belgium’s Deme Concessions slated for launch in 2026. The facility will be connected to a new export terminal in Duqm, as well as to storage infrastructure and liquid jetties. This is in line with the Vision 2040 goal of the port becoming a global gateway for the delivery of competitive decarbonised molecules.
Oil giant BP entered the green transition market, announcing in January 2022 that it had partnered with Oman to explore a potential multi-GW renewable energy and green hydrogen development by 2030. The deal comprises work on a renewables strategy, regulation, the establishment of a renewable energy centre and the reskilling of local workers.
If Oman does achieve its goal of generating 8m tonnes of green hydrogen per year by 2050, revenue is expected to reach about $20bn-22bn, which is roughly equivalent to the country’s current revenue from oil and gas. That being said, the International Renewable Energy Agency suggested in a January 2022 report that the hydrogen industry’s income would not be sufficient to replace lost fossil-fuel revenue, although Bloomberg New Energy Finance forecasts that by 2050 green hydrogen could be produced in most of the world at a cost that would make it competitive with natural gas.
Oman is consequently focusing on developing the hydrogen value chain. Once sufficient green hydrogen is available, Oman intends to transition various industries to cleaner forms of production and attract large players into Oman. For example, in April 2022 Munich-headquartered Hydrogen Rise started to produce green steel, using green hydrogen instead of traditional fossil fuels, at Jindal Shadeed Iron & Steel’s Port of Sohar complex. Trial production is underway, with the eventual goal being to scale up from a 35-MW electrolysis facility to a 350-MW Hydrogen Rise-operated plant. Production is anticipated to start in mid-2024.
In-Country Value
Another key element of Oman’s energy strategy is the MEM-led drive towards in-country value (ICV). Launched in 2013, the ICV strategy mandates that part of procurement and contracting expenditures goes to local companies and small and medium-sized enterprises. The share of the total proportion of expenditures channelled to SMEs through the ICV programme increased from 18% in 2018 to 28.7% in 2020, with the MEM redirecting more than OR2bn ($5.2bn) to the local economy during that same period. Since the ministry is in charge of driving the green transition, it is likely to include provisions for ICV as well.
“The ICV programme is led by the country’s oil and gas sector. It has received strong support from the government, as well as the local business community,” Ahmed Al Azkawi, upstream chief executive at OQ, told OBG. “We see local skills and capabilities rapidly evolving, and they are being supported by more opportunities for knowledge sharing thanks to online technologies and digitalisation.”
Outlook
Elevated oil prices have provided a respite for Oman as it continues to move ahead with its energy transition plans and looks to diversify away from being reliant on its reserves of unrefined hydrocarbons. An openness to international businesses and its diplomatic efforts have helped the government sign partnership agreements with neighbouring Gulf countries that promise to significantly boost the energy sector.
Foreign corporate partners are also comfortably embedded in the national energy landscape, ensuring that the sultanate will be able to benefit from their oil exploitation technologies as they become available. Oman could work to legislate around its energy transition policy to ensure that new fossil-fuel exploitation efforts require the use of decarbonisation and energy-efficient technologies from the start. The same is true for its energy transition plans, as many international majors want to see firmer legal frameworks before they fully commit to investing and participating in a project.
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