Oman Faces Tough Choices As Budget Deficit Deepens

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By Simon Watkins

Oman is looking at ‘all financing options’ following the lacklustre sale last week of a total US$2 billion bond offering, according to legal sources working with the Sultanate spoken to by OilPrice.com. Facing a budget deficit this year alone that may reach 18 per cent of GDP, according to S&P Global Ratings (S&P), and budget deficits averaging at least 15 per cent per year over the next five years, according to various analyst estimates, Oman has limited choices in extricating itself out of the financial hole dug for it by Saudi Arabia’s 2020 oil price war.  The experience of the last bond offering for Oman does not augur well for competitively-priced large-scale further debt issues in the near future. The original intention was to sell around US$3-4 billion of shorter-maturity bonds (beginning at three years), which would have allowed the country to cover the US$2 billion bridge loan it secured last month. It would also give it some financial breathing room to allow it to plan what to do next in terms of plugging the budget deficit. These plans for shorter-term, net cheaper, bonds, though, were derailed as S&P cut Oman’s long-term foreign currency debt rating to B+, four rungs below investment grade.

Consequently, the Sultanate had little choice but to offer longer maturities, with US$1.25 billion of seven-year notes and US$750 million of 12-year securities issued instead, although even these were not an easy sell. Looking at the recent US$2 billion bond sale from the only other junk-rated country in the region – Bahrain – as a comparable, the Kingdom was able to attract over US$7.6 billion in orders whilst Oman was only able to rustle up around half that level of interest. In secondary market trading as well, the Omani bonds fared poorly, with the 12-year paper dropping around 2.5 cents before regaining some ground whilst the seven-year lost 1.5 cents before firming slightly.
Given all of this, Oman has three main choices: first, produce more oil and gas, despite depressed prices; second, sell off state assets, despite depressed pricing because of the low pricing of oil and gas; third, get more money from China. It is a familiar story in many Middle East countries in the aftermath of the oil price war started by Saudi Arabia to damage the U.S. shale sector by overproducing to crash prices and force bankruptcies at a time when the COVID-19 outbreak was already destroying demand and crashing prices. History may well show that the 2020 Saudi-led oil price war was a key turning point in shifting some strategically vital Middle Eastern countries away from the U.S.-Saudi sphere of influence and into the  China-Russia-Iran one instead. For the first option, the outlook does not look that good, as Oman has only 4.8 billion barrels of estimated proved oil reserves (barely the 22nd largest in the world) but is still dependent on the hydrocarbons sector for over 80 per cent of its national budget revenues, with a fiscal break-even price this year of US$82 per barrel of Brent. Whilst oil production averaged 970,900 barrels per day (bpd) in 2019, Oman released as part of its overall issue prospectus information highlighting that it is facing a long-term slowdown in oil production, with limited future growth in reserves.

This information – that went to various financial institutions that might have been expected to participate in last week’s bond sale, and also to S&P Global Platts (the amalgamation of the ratings agency and hydrocarbons pricing agency) – stated that the maturity of Oman’s producing fields means that increasing oil exports may not reverse dwindling revenues, should crude prices continue to be depressed for a prolonged period. According to S&P Global Platts, the information went on: “Future growth in reserves is generally expected to be limited to successful implementation of enhanced oil recovery techniques,[…] As a result, if there is any failure to make use of such techniques, or if such techniques prove excessively costly (particularly in the context of low oil prices) or fail to help grow oil and gas reserves, a long-term slowdown in oil production may become more likely.”

Given this backdrop, the second option looks similarly likely to attract only rock-bottom pricing, should Oman go ahead with selling off any stakes in state enterprises, as top of the possible list of part-privatisation candidates since at least 2014 has been the Oman Oil Refineries and Petroleum Industries Company’s (ORPIC). The attractiveness of this proposition to investors, however, is genuinely greater than might be inferred from the state of Oman’s oil prospects, as it has significant interests in the value-added petrochemicals sector as well.

With last year’s integration of nine core businesses of ORPIC and Oman Oil under the new identity of ‘OQ’ (the ‘O’ stands for Oman, incidentally, and the ‘Q’ for former-Sultan Qaboos), the new company now offers more than 30 products sold to over 2,000 clients in over 60 countries. It had estimated revenue for the year of US$20 billion, with an EBITDA of US$2.2 billion and net profit of US$556 million, while the asset base stands at US$27.9 billion. The previous stake being considered was 15-20 per cent but the current thinking is for anything up to 25 per cent of the company to be sold, according to various legal sources in Oman and Abu Dhabi.

The final option remains in the background, with China having steadily built up its presence in Oman for many years and already accounting for around 90 per cent of Oman’s oil exports and the vast majority of its petchems exports. For Beijing, Oman is a vital piece in its ‘One Belt, One Road’ project, particularly as its long coastlines on the Arabian Sea and the Gulf of Oman allow China to take delivery of refined products and oil from the Middle East free of any increased security threats from – or closure of – the Strait of Hormuz. In line with these plans, then, China signed a US$10 billion investment the Duqm oil refinery – just after the implementation of the nuclear deal with Iran at the beginning of 2016 – which focusses initially on completing the Duqm refinery but the package will include a product export terminal in Duqm Port and Duqm refinery-dedicated crude storage tanks in Ras Markaz.

Chinese money will also go towards the construction and building out of an 11.72 square kilometre 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 to build a hospital, and US$15 million towards a school. The heavy industry sector will also see 12 projects, dealing with the production of methanol and other chemicals.

In tandem with this, as China now regards Iran as its key state in the Middle East, in line with its far-reaching 25-year deal, Oman’s ‘spare’ liquefied natural gas (LNG) capacity may end up being used by Iran after all. There have been concrete plans in place to do just this for at least seven years but these were shelved initially because of the U.S.’s unilateral withdrawal from the Joint Comprehensive Plan of Action in May 2018 and subsequently because of the low price of LNG. Nonetheless, 2013 saw the legal foundation for oil and gas co-operation between Iran and Oman laid out, with the signing of a deal based on Iran supplying Oman with at least 28 million cubic metres per year of gas for a minimum period of 15 years. “This would easily allow for the gas – and a lot more – to be sent to Oman, with some being used by Oman itself and the rest being turned into LNG by the Oman LNG plant in Qalhat for Iran, whereupon it would be shipped off to wherever Iran wanted it to go,” a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry told OilPrice.com.

Specifically, the plan was for a 400-kilometre land-sea pipeline running from Iran to Oman to be completed within 30 months. This would have comprised a 200 kilometre land line from Rudan to Mobarak Mount in the southern Hormuzgan province, and another 200- kilometre pipeline running on the seabed between Iran and Sohar Port in Oman. Alireza Kameli, the managing director of the National Iranian Gas Company, at the time stated that about 23 per cent of Oman’s LNG production capacity remains unused, which Iran would utilise under the agreement, paying Oman a commission for processing the gas into LNG form.

Crude Oil

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