By Robin M Mills
In 1955, a curious cavalcade of vehicles set off from Oman’s southern port of Salalah, heading for the interior. Sultan Said bin Taimur and his entourage, including British travel writer Jan Morris, used oil company tracks on the way to Fahud, south of the Oman mountains. This first crossing of Oman by car asserted the sultan’s control over the inland tribes and the potential oil wealth. Since then, the sultanate has maximized use of its relatively limited hydrocarbon resources to build a modern state. Yet, with 79-year-old Sultan Qaboos, son of Sultan Said, in increasingly frail health, the country’s economy and outward political stance are newly vulnerable. Moreover, its continued dependence on oil is today its handicap, while its experiment with diversification will be closely watched in the region.
Oman was a relative latecomer to petroleum, following neighboring Abu Dhabi and Saudi Arabia. In 1964, after BP left the consortium following negative results, the Shell-led venture struck it lucky at Fahud, just 400 meters from the original dry well, and numerous other fields followed. Despite the arrival of oil revenues, however, Sultan Said was not a believer in “development.” By the time his son deposed him in 1970, the country had six miles of paved roads, three schools and two hospitals.
Sultan Qaboos used his more limited oil funds as other Gulf rulers used theirs, establishing a strong centralized state, overcoming the southern Dhofari separatists by 1976 with the help of Britain and the Shah of Iran; constructing modern infrastructure; acquiring weaponry; and building a system of welfare and state employment. But the history of Oman’s energy industry also is an outline of its Achilles’ heel.
Oman’s fields are relatively small and scattered, and present technical problems such as tight (low-permeability) reservoirs, heavy oil, high water production and complex geology. After 2001, the country’s mature oil output went into sharp decline. In 2004, Shell revealed heavy downgrades to its reserves, a large portion in Oman. From 2006, gas production plateaued, leading to shortages of feedstock for the liquefied natural gas plant, a key part of planned diversification.
But Oman turned this around. It has become the Middle East center for enhanced recovery technologies, reviving oil output to around 1 million barrels per day. BP’s development of the giant Khazzan tight gas field has ended shortages and even led to a temporary surplus of gas. Innovation in oil trading wrings the most value from every barrel, while gas-using industrial centers have been established at Sohar and Salalah.
But the fall in oil prices from 2014 has left the country’s economy precarious again. Protests in 2011 against corruption and unemployment led to a surge in state hiring and a slowdown in executing new projects. Economic diversification has been sought, as elsewhere in the Gulf, via government-backed megaprojects such as a new port and industrial hub at Duqm on the southeast coast, instead of empowering smaller private enterprises. Privatization has been slow, and December’s $1 billion sale of 49 percent of the electricity transmission firm to China’s State Grid was the first major deal outside the petroleum sector.
Oman’s participation in the OPEC+ deal has helped raise oil prices, but its output is not likely to gain much more. In the longer term looms the collision of a large carbon footprint, high production costs and likely stagnant prices and demand. National debt rose from just $4 billion in 2014 to an estimated $50 billion in 2019, and S&P forecasts the budget deficit to 2022 at 8.7 percent of GDP.
Oman’s economic future is crucial for its neighbors and for regional politics. The sultanate’s business model resembles many of its Gulf peers’, but starting from a weaker position. If budget reform, limited privatization, diversification into areas such as tourism, logistics and mining, and business-friendliness are not enough to keep it out of crisis, that would be a bad omen for other Gulf states.
Politically, Oman’s relatively free hand has depended on its economic independence, a contrast to similarly fiscally-strapped Bahrain. Sultan Qaboos has steered a careful political course, pro-Western but retaining links to Iran that helped in 2013 to broker the beginnings of the nuclear deal with the US and other countries. Part of the Gulf Cooperation Council, Muscat did not take sides in the boycott of Qatar that has divided the organization, while benefitting from the diversion of trade and flights.
But the sultan has suffered from colon cancer since at least 2014, and the royal court announced on December 31 somewhat ominously that he was in “stable condition.” He has no children or named heir, and if the royal family cannot choose a successor, Sultan Qaboos has identified his preferred candidate in sealed letters held in Muscat and Salalah. Whoever follows will not have Sultan Qaboos’ experience, authority and accumulated loyalty, at least not at first. Aid from neighbors will come with strings attached, at a time that Oman has been worrying about Saudi and Emirati influence in areas such as the strategic Musandam peninsula overlooking the Strait of Hormuz, or the Yemeni province of Al Mahra, adjacent to Dhofar.
Now, more than ever, some economic adjustments are necessary – even if they might offend parties with vested interest. Today’s Oman blends its ancient history with an economy still dependent on hydrocarbons, however innovatively used. But it does not have enough energy revenue to sustainably support its ambitions into the future. In many ways, the sultanate sits at a crossroads.
Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis