Abu Dhabi, UAETuesday 29 September 2020

Economic challenges a priority as Oman looks to life after Sultan Qaboos

The sultanate went ahead with the first major privatisation outside the hydrocarbon sector in December with a 49% stake sale of the electricity transmission system to China’s State Grid

Oman attracted $4.2 billion in foreign direct investment inflows in 2018, up from $2.9bn in 2017, according to the United Nations Council on Trade and Investment. Focusing on the Sultanate's economy is key moving forward. Getty Images
Oman attracted $4.2 billion in foreign direct investment inflows in 2018, up from $2.9bn in 2017, according to the United Nations Council on Trade and Investment. Focusing on the Sultanate's economy is key moving forward. Getty Images

The passing of a ruler after fifty years on the throne is inevitably a momentous occasion. The departure of the man who built modern Oman comes at a time of political and economic uncertainty. The new sultan, Haitham bin Tariq, expressed his desire to build on the legacy of Sultan Qaboos bin Said. He will need to press on with the country’s economic reform agenda and lessen its reliance on oil.

The late Sultan Qaboos came to power in 1970, with the intent of spending fast-rising petroleum revenues on national infrastructure, citizens’ welfare, defence and a modern state. Oil, found at Fahud just south of the Oman mountains in 1964, had begun to flow by 1967. After the Arab-Israeli October War of 1973, world oil prices escalated hugely. The defeat of the Marxist-backed separatists in Oman’s southern Dhofar region by 1976 allowed development of Marmul and other big fields, and national output ramped up quickly from the mid-1980s.

Still, despite its oil wealth Oman had to spend carefully. In light of declining oil output, stagnant gas, and the downgrade of its reserves by Shell in 2004, the Sultanate understood it had to realise more value than simply exporting crude, setting up an oil-trading venture and the Dubai Mercantile Exchange, and reducing subsidies on domestic gas and fuels.

Petroleum Development Oman (PDO), the state-led oil firm with participation by Shell and others, undertook large enhanced oil recovery projects, along with the development of heavy oil at Mukhaizna by Occidental and Mubadala. This took production above the aspired 1 million barrels per day for the first time in 2016, though adherence to the Opec+ pact has kept output slightly below this level since.

The country also began investing heavily in a new industrial port, refinery and oil storage hub at Duqm on the south-east coast. BP’s development of the giant tight Khazzan gas field ended gas shortages and has even led to a surplus.

The smooth succession process is a reassurance to international investors. With its exclave of Musandam overlooking the Strait of Hormuz, Oman has a key strategic position.

Looking ahead Sultan Haitham needs to address existing economic challenges. Debt has ballooned since the 2014 oil price crash, and economic growth has been slow. The share of the budget devoted to investment is about 22 per cent, with most going on wages, subsidies and welfare. Big business oligopolies have too much of a grip on the economy.

The new sultan has a business background, which could be vital. The government will have to spend intelligently and selectively in infrastructure and seeding new businesses, while relying on international investment and privatisation. It has to streamline bureaucracy, build a more commercial mindset in state companies, and find the sectors where it has a competitive advantage and does not duplicate what neighbours have already done.

In December, the first major privatisation outside the hydrocarbon sector went ahead, when 49 per cent of the electricity transmission system was sold to China’s State Grid. Also slated is a sale of electricity distribution firms, and a public offering of Oman Oil, which has assets in oil and gas fields, refineries, petrochemicals and mining. Oman has a range of minerals, including chromite, copper, manganese and rare earths, and last year’s new mining law may encourage more activity.

Despite a wealth of resources, renewable energy has only recently started to take off, with the award of solar and wind power projects. The sultanate also has the world’s largest system to generate steam from solar heat for enhanced oil recovery. PDO aspires to become Energy Development Oman, including renewable and other energy sources.

A common gas grid with its GCC neighbours would help make best use of its current surplus while covering for potential future renewed deficits. If its renewables plans grow, excess cheap electricity could also be shared with other Gulf states or even exported to south Asia via undersea cables.

In the 19th century, the sultan’s writ stretched from Gwadar in Pakistan to Zanzibar in modern Tanzania. Today its strategic maritime location could attract Chinese investment into infrastructure, logistics and heavy industry as part of its ‘Belt and Road’ initiative.

Oman has a number of things on its side: political goodwill, a new leader potentially with fresh ideas, advanced oil industry skills, natural resources, attractive and strategic geography. Perhaps even more importantly, it has the economic urgency to drive change. Sultan Haitham has a challenging job to grasp these opportunities to bring Oman’s economy into a new era.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: January 12, 2020 02:46 PM

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