The Omani government is in a race to prepare for a post-oil future. Since the discovery of oil in the 1960s, the sultanate’s economy has relied heavily on revenue from oil exports. This high dependence has continued, and oil and gas earnings still make up 65% of export revenue, 78.2% of total government revenue, and 23.5% of gross domestic product, as of 2021. But Oman has the second-smallest oil and gas reserves and the second-smallest economy of the Gulf Arab states. Estimates indicate that Oman is set to run out of its current oil and gas reserves in less than two decades. Such a timeline – compounded with predictions of looming peak oil demand resulting from advanced climate mitigation measures – reinforced by its vulnerability to oil prices fluctuations limits Oman’s bandwidth for economic diversification. For Oman, the transition to cleaner energy sources is both an imperative and a practical economic path to a more sustainable future.

In November 2022, Oman announced its commitment to reach carbon neutrality by 2050, defining a new direction for the country’s energy policy and economic growth. “The Sultanate of Oman’s National Strategy for an Orderly Transition to Net Zero,” sets a pathway for unlocking investments in alternative energy sources, including renewable energy and hydrogen, along with measures to decarbonize traditional hydrocarbon sources through the use of carbon capture and storage technologies and negative emission solutions that remove emissions from the atmosphere, such as direct air capture and bioenergy with carbon capture and storage. The adoption of this new energy policy signals a gradual shift from a hydrocarbon-based, rentier economy to one that limits government control, spending, and public ownership.

Oman Vision 2040, announced in 2019, had set out an economic diversification strategy, following an earlier iteration covering 1996-2000, Vision 2020. The main priority of Vision 2040 is to establish an economic model in which dependence on hydrocarbons is reduced.

While the Omani government’s interest in protecting its natural environment and wildlife goes back to 1974, Vision 2040 is the first economic development plan that places the protection of the natural environment and sustainable use of natural resources at the heart of national priorities. Sultan Haitham bin Tariq al-Said said in his February 23, 2020 “Vision 2040 Address”:

While identifying the national priorities, the vision focuses on reshaping the roles of and relation between the public, private and civil sectors to ensure effective economic management; achieve a developed, diversified and sustainable national economy; ensure fair distribution of development gains among governorates; and protect the nation’s natural resources and unique environment.

Vision 2040 also addresses renewable energy, setting a goal to increase renewable energy consumption to 20% of total energy use by 2030 and to between 35% and 39% by 2040. It aims to put Oman in the top 20 countries globally in the “Environmental Performance Index,” linking its national priorities with the United Nations’ “17 Sustainable Development Goals.”

In 2019, Oman ratified the Paris Climate Agreement and released a national strategy for climate change mitigation and adaptation. In July 2021, Oman submitted its second nationally determined contribution on climate change, pledging to reduce its greenhouse gas emissions by 7% relative to a business-as-usual scenario by 2030. Oman’s NDC makes an explicit link to Vision 2040 and Oman’s National Energy Strategy.

Vision 2040 includes benchmarks and key performance indicators to reduce oil’s contribution to Oman’s GDP to 16% in 2030 and 8.4% by 2040. Furthermore, Vision 2040 sets a target to raise energy productivity (GDP per unit of energy) from 6.92 in 2014 to 14.57 in 2030 and 17.3 in 2040.

Oman’s Low-Carbon Economic Transition

Since 2020, the Omani government has announced several initiatives to support its low-carbon economic transition. The Oman Center for Governance and Sustainability was established to oversee the development and implementation of the carbon neutrality strategy. To better coordinate alternative energy investments in Oman, Energy Development Oman was established in December 2020 by royal decree to untether the economy from reliance on hydrocarbon revenue. This shift contrasts with the business model of Petroleum Development Oman, the state-owned company that for a long time was a significant revenue generator for the state. Energy Development Oman’s mandate is to develop alternative finance mechanisms that support the expansion of renewables through foreign direct investment and small and medium-sized enterprises. In 2022, the Omani government established the hydrogen-centric energy company Hydrom, fully owned by Energy Development Oman and regulated by the Ministry of Energy and Minerals, with a mandate to facilitate and coordinate the development of hydrogen projects.

Renewable Energy

Oman has made a rapid switch to renewable energy, with 1,005 megawatts of installed renewable energy capacity in 2022 compared with only 1 MW in 2014. Another 2,700 MW of capacity is in the pipeline. Oman introduced its first renewable energy target in 2017, aiming to ensure that renewables represent 10% of the energy mix. Prior to that, nearly 100% of Oman’s electricity was generated from hydrocarbons. In 2019, Oman raised its renewable energy target to 20% of the energy mix by 2030 and between 35% and 39% by 2040; this would mean adding up to 4,000 MW of renewables capacity by 2040.

Along with implementing large scale renewable energy projects, since 2017, the Omani government has implemented policies that enable homeowners as well as industrial and commercial entities to produce electricity from solar energy and sell the surplus to electricity distribution companies. In a scheme known locally as “Sahim,” distribution companies act as agents and buy solar-generated electricity from consumers via a net metering mechanism that allows for compensation for electricity generated by rooftop solar photovoltaic panels. Additionally, a utility scale, 50-MW wind farm project in south Oman became operational in 2019. In 2022, Oman inaugurated a 500-MW solar energy park in Ibri. The project is an independent power plant awarded to a consortium led by Saudi clean energy company ACWA Power following an international competitive tender.

Current and Planned Renewable Energy Projects in Oman

Hydrogen

Hydrogen production, specifically green hydrogen produced from renewable energy, has topped the government agenda in its effort to develop clean energy sources and generate an alternative source of income. Since 2020, several large-scale hydrogen-related projects and a national hydrogen economy strategy have been established, aiming to build a hydrogen-centric economy by 2040 with potential clean hydrogen production of around 1 gigawatt by 2025, 10 GW by 2030, and 30 GW by 2040, to capitalize on abundant solar and wind resources.

Planned Hydrogen Projects in Oman

To accelerate the advancement of the hydrogen industry in Oman and attract foreign direct investment, the government has identified locations for renewable hydrogen production at Duqm, Dhofar, and Al-Jazir along the southwestern coastline. Over 19,000 square miles of land have been designated for hydrogen development. This land area has the potential to produce 25 metric tons of hydrogen per year (powered by 500 GW of renewables). These locations are close to shared industrial hubs, namely ports, such as Duqm, Salalah, and Sohar, from which hydrogen can be exported.

In mid-March, the first public bids were held for the first land blocks, resulting in the award of six hydrogen projects valued at $20 billion. The International Energy Agency, in a special report, identified Oman as having the potential to be the sixth-largest exporter of hydrogen globally and the largest in the Middle East by 2030.

The Challenges Ahead

Unlocking Oman’s low-carbon economy requires overcoming institutional, financial, and human capacity challenges.

While economic decarbonization is central to realizing Oman’s Vision 2040 goals, it is an evolving process and remains fragmented. The Ministry of Energy and Minerals and the Authority for Public Services Regulation oversee the development of alternative energy sources, such as renewable energy and hydrogen, setting the regulations and policies to draw investments and uptake of clean energy resources. Yet the Ministry of Economy and other relevant ministries are not directly involved, which leads to delays in approvals for new projects.

Oman is highly dependent on technology imports rather than domestic talent in research and development. In 2020, research and development investment in Oman averaged 0.2% of GDP compared with 2% to 3% in industrialized countries. The 0.2% figure is far less than the minimum percentage (1%) needed for an effective science and technology base as specified by UNESCO. Indeed, Vision 2040 makes support of research and innovation central to Oman’s national priorities, aiming to improve Oman’s rankings in the Global Innovation Index.

The cost and scale needed to shift to a low-carbon economy will require financing independent from oil revenue and the state budget. This will require local and foreign direct investment, institutional and private, and a larger role for the private sector. Indeed, in 2019, Oman’s core financial services provider, Bank Muscat, issued the country’s first green finance scheme to support the installation of rooftop solar panels.

The government will also have to reform its social policies, which have allowed citizens to benefit from generous government spending, including in health care and education as well as generous fuel, energy, and food subsidies. The economic transformation will need to be managed in a way that does not cause social tensions. As fossil fuel assets become devalued, the government may no longer be able to maintain its social support program and might be forced to reduce or cut subsidies for all services and increase the cost of these services in a way that reflects real prices. It may also resort to privatizing state-owned companies and services and introduce a tax system that would generate a new source of non-oil income, especially from a growing private sector.

In March, OQ, the Omani integrated energy company, privatized its drilling unit, Abraj Energy Services, which raised $244 million. In September, OQ announced that it would offer a 49% stake in its gas pipeline business, which is expected to raise close to $800 million. The privatization of state energy assets and the transformation of a vital sector of the Omani economy are underway.