The Sultanate of Oman has managed to raise its oil production to record levels thanks to a stable political regime, its strategic location, and attractive commercial terms that have drawn foreign oil majors to the Gulf Arab state. New players have entered the Omani upstream sector in recent years and the country has become an incubator for advanced technologies that have set new industry standards for efficiency and innovation.

In many ways, Oman shares the characteristics of other Gulf Arab states. It is a significant oil and gas producer and exporter and relies heavily on revenue from hydrocarbon exports. It is not a member of OPEC, though it has joined other independent oil producers in the alliance with OPEC, known as OPEC+, in efforts to stabilize the oil market. It is a member of the Gulf Cooperation Council, though it tends to pursue an independent foreign policy. It has managed to maintain good relations with its Arab neighbors as well as Iran and the United States. Its policy of moderation and neutrality allows Oman to act as mediator during times of rising tensions in the region, most recently during the attacks on shipping in the Gulf of Oman.

Oman today produces close to 1 million barrels per day of crude oil and condensates – a very light type of crude oil that is derived from gas production. After steep production declines earlier in the decade, it was able to restore production to 1 mb/d by applying advanced techniques and offering increasingly attractive contracts to foreign oil companies, many of which have been loyal partners to the sultanate for decades. Oman’s oil fields are geologically challenging and require enhanced recovery techniques to lift heavy oil. This makes production costs higher in Oman than in other Gulf states. Some 20% of its total gas production is reinjected into oil fields to extract heavy oil, according to Oman’s National Centre for Statistics and Information. Oman’s Ministry of Oil and Gas is trying new techniques to use less gas for oil extraction and free up some of its gas for exportation. It is already an exporter of liquefied natural gas, but high domestic demand has meant that it has been unable to increase its exports. It is importing gas from Qatar via the United Arab Emirates, a situation that it hopes to rectify with more investment in upstream gas and expansion of its gas processing and exporting facilities.

Because of its high dependence on oil and gas revenue, which generates between 70% and 85% of government revenue depending on oil prices, the country is exposed to oil market volatility.

According to the Central Bank of Oman’s monthly statistical report for August, gross domestic product contracted by 1.6% in the first quarter of 2019 because of a 3% decline in oil prices compared with the same quarter in 2018, despite slightly higher oil production.

Like other oil producers in the Gulf Arab region, Oman’s budget deficit widened in 2016 following the oil price collapse of 2014-15, reporting a deficit of $13.8 billion in 2016. This led the government to reduce energy subsidies, though domestic energy prices remain low by international standards and further price reforms are in the cards. The economy is not yet out of the woods even as the deficit has shrunk. According to the National Centre for Statistics and Information, the deficit fell to $6.9 billion in 2018, down from $9.8 billion in 2017. But the fact that the government is running a deficit – despite oil prices in 2018 averaging above the $50 per barrel on which it calculated revenue for the year – shows that Oman remains heavily dependent on oil revenue. An economic diversification program has been slow to take off and the contribution of non-oil revenue remains small. New investments suggest this dependence on hydrocarbons will remain a cornerstone of Oman’s economy in the medium term with plans for new oil refineries and petrochemical plants as well as the expansion of gas infrastructure.

Oman is currently producing 970,000 b/d of crude oil, a remarkable achievement considering that its output had declined to just over 715,000 b/d in 2007. This makes Oman the largest producer of oil outside of OPEC in the Gulf region. Oman agreed to cut its oil production by 2% as part of the OPEC+ deal that aimed to remove 1.2 mb/d from the market, an agreement that has been extended to March 2020.

The Omani oil sector benefits from partnerships with major international oil producers such as Conoco, Shell, Total, BP, and, more recently, Eni. It has also benefited from the longevity of its minister of oil and gas, Mohammed bin Hamad al-Rumhy, who has held the job since December 1997 and is highly respected in the industry.

Rumhy is also chairman of the board of directors of Petroleum Development Oman, which is the country’s largest producer. PDO produced 610,170 b/d of crude oil and 65,300 b/d of condensates in 2018, according to company figures. PDO is a joint venture between the government of Oman (with a 60% interest), Royal Dutch Shell (34%), Total (4%), and Thailand’s PTTEP with 2%, a stake it acquired recently from Partex of Portugal.

PDO has been at the forefront of the technological enhancements that have allowed Oman to reverse production declines and raise production to current levels. By 2025, more than 23% of PDO’s production will come from enhanced oil recovery projects using a variety of techniques from polymer injection to using solar power to produce steam for reinjection. Oman is home to the world’s largest solar power project designed to extract oil from the Amal oil field.

Occidental Petroleum is the second largest oil producer in Oman and it too has contributed to the recovery in Oman’s oil production. At the Mukhaizna Oil Field, Occidental has implemented an aggressive drilling and development program, including a major pattern steam flood project for enhanced oil recovery that utilizes some of the largest mechanical vapor compressors ever built. In 2016, the average gross daily production was approximately 16 times higher than the production rate in September 2005 when Occidental began operations, according to the company.

Shell, which held a 17% stake in the Mukhaizna production-sharing agreement, in April 2018 sold its share to IOCL Singapore PTE Ltd., a subsidiary of Indian Oil Corporation. The transaction shows the changing geographic mix of foreign investors in Oman, and the recent Asian entrants into the Omani upstream oil sector reflect the increased trade ties between the sultanate and the region. Asia is the biggest market for Omani crude oil exports: China is the largest importer of Omani crude and India is the second largest.

Oman has an export advantage over its Gulf neighbors in that its export terminals lie outside the Strait of Hormuz, the congested oil waterway that Iran has threatened to shut down repeatedly in response to sanctions against its oil sector. The sultanate plans to take advantage of its strategic location by building a new oil refinery and storage facilities at its Arabian Sea port of Duqm.

The more recent entry of Italian oil major Eni into the Omani upstream oil and gas sector bolstered Oman’s reputation as an attractive investment prospect. Eni signed an exploration and production-sharing agreement for an offshore block in 2017. The company said the signing of the Block 52 agreement represented an “important milestone in Eni’s strategy to reinforce its presence in the Middle East region.” In 2018, Eni added another upstream asset when it signed up for an onshore oil block and is planning to add more in the future in partnership with BP.

Because it is a freely traded crude oil, unlike that of other Gulf producers, which specify destination clauses in their contracts, Omani oil serves as a benchmark for crude oil sales to Asia. Saudi Arabia, for example, uses Omani crude as listed on the Dubai Mercantile Exchange to price its crude oil sales to the Asian market. In order to retain that role, its production needs to be at levels that are liquid enough to allow for a proper assessment of its value as a crude marker. In the past month, the price of Omani crude soared, making it the most expensive crude oil ahead of lighter grades such as Brent and West Texas Intermediate of the United States. The latter two grades normally trade at a premium to Oman because they are lighter and produce more high value products when refined. In late September, Omani crude on the Dubai Mercantile Exchange surged by 11% over two days. This was attributed partly to the sanctions against Iran, which have removed crude similar in quality to Oman’s, and to higher purchases from China. This would make other crude oils that use Oman as a benchmark more expensive and harder to market.

But Oman is not just about oil. It is also a gas producer and exporter. PDO produces nearly all of Oman’s natural gas, some of which is exported as LNG mainly to Asia. Most of the gas is consumed domestically for oil production, electricity generation, and as feedstock for the petrochemical industry. This high utilization of gas has forced Oman to import some gas through the Dolphin Pipeline from Qatar via the UAE, but it is working to boost its gas production and use the excess to manufacture value-added products. Oman is investing heavily in value-added projects that will use surplus gas for expansion of the petrochemical business and to boost exports. PDO accounts for nearly all Oman’s current gas production, which stands at 110 million cubic meters per day.

The next big gas increment is due to come from the Khazzan–Makarem field in BP’s Block 61. The two-phased development, when completed in 2021, will add 42 million cubic meters per day to gas production.

Because of its high consumption of gas, Oman signed an agreement with Iran in 2014 to import gas through a new subsea pipeline across the Gulf of Oman. However, the project has been delayed due to sanctions against Iran. Oman plans to convert the gas to LNG for exportation. Rumhy said in an interview with the Middle East Economic Survey in September 2018 that Oman was proceeding with the project, but he admitted that the sanctions had slowed it down. “A few key players have dropped out – the likes of Shell … along with their partners the Koreans and Japanese [Kogas and Mitsui]. That has caused a slowdown, but there are others – the Russians for example and the Chinese who are still interested. So we will see if they can start soft work until the issue is resolved. But we haven’t actually closed everything down.”

Oman is also investing in a number of infrastructure projects to boost storage facilities while also preparing to meet demand for lower sulfur fuel oil once new strict bunker specifications come into effect in 2020. Oman Oil Company, which is responsible for oil and gas investments at home and abroad, plans to invest $15 billion in projects in Duqm.

In April 2017, Oman Oil Company and Kuwait Petroleum International signed a partnership agreement for the development of the Duqm Refinery and Petrochemical Complex that is due to be operational in 2021. In the industrial hub of Sohar an existing oil refinery is being expanded and new units are being installed to produce feedstock for production of petrochemicals.

Before it joined the OPEC+ production cut agreement, Oman was producing 1.015 mb/d. Any additions to capacity will come from PDO and the foreign oil companies, though Rumhy has acknowledged that, given Oman’s complex geology and decline rates, achieving 1.1 mb/d would be a stretch.

However, should oil prices rise beyond current levels, some Omani oil fields that are not deemed commercial could be developed. But with current oil and gas production running at close to capacity, Oman needs to grow its nonhydrocarbon sector. For now, the future is in gas, which provides opportunities for diversification. Rumhy told MEES that one option under consideration is to debottleneck its existing LNG facility and use some of the gas to develop an LNG bunkering facility either in Sohar or Duqm in partnership with Total. This would entail providing LNG to ships as a substitute for heavy fuel oil or marine diesel fuel or gas oil. With strict new sulfur limits for bunker fuel due to come into force in 2020, the project, if realized, is an example of Oman’s openness to new ideas and technologies. The sultanate may not have the vast oil resources of Saudi Arabia or any of its other Gulf neighbors, but that is precisely why it has embraced innovation and technology to ensure that it makes maximum use of a finite resource.