GRM 2010 GRM 2011

Abstract Details

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Energy Challenges in the Sultanate of Oman
Paper Proposal Text :
Like other GCC countries, Oman has articulated a need to diversify its economy. A non-OPEC state, its oil reserves, both modest and geologically challenging are costly to extract and necessitate high global prices to balance government budgets. This research uses Oman as a case study to explore two main energy challenges, energy-driven diversification and demand side management. Despite much touted infrastructure and tourism projects, the most lucrative diversification efforts are petrochemicals, which depends on cheap access to energy and increases domestic consumption which limits oil available for export. This ties in with the second energy challenge which is demand side management. Politically expedient subsidies encourage waste and inefficiency, whilst consuming upwards of $850 million each year (Oil of Ministry and Gas, 2011). These subsidies are notoriously impervious to revision, especially in light of recent unrest in the country. Indeed, this Arab Spring has introduced additional urgencies and complexities to Oman's diversification efforts. This paper investigates some of the Oman's energy challenges in light of changing economic and social imperatives, using the theoretical lens of Matthew Gray's Late Rentier State Theory (2011).

As a small producer, recently hitting only 900,000 barrels per day, Oman relies on oil for 60% of government revenue (Ministry of Finance 2010). Average predictions suggest two decades of reserves remaining, though IMF estimates closer to six decades if using an ambitious 45% recovery rate (2011). However, these reserves are challenging. One expert at an advanced recovery hydrocarbons firm, Oxy, confirms "the easy oil is gone" (Author interviews 2011). Increasing complex methods such as fracking are extremely resource and technology intensive so while Oman may indeed hit its target of 1 million barrels per day, it will come at higher expense and marginal returns, as its already aging oil wells and deep reserves are coaxed more persistently.

Oman has sought to increase oil revenues by opening its doors to international companies that specialise in advanced recovery, expanding the field from a handful of operators to over 45 (Ministry of Oil and Gas 2011). More importantly, Muscat has sought to address its overall economic reliance on oil supply through diversification, and was the first to articulate this goal in its Fourth 5-Year Plan (1994). According to Oman Vision 2020 the most heavily referenced strategies are tourism and import/export transportation infrastructure (dry docks, ports, airports, etc), and petrochemical industries. Despite high level attention on new shipping infrastructure and tourism, these sectors are not a viable substitute for current levels of oil revenue, and will not be for the foreseeable future. Petrochemicals are the most promising, but still rely on cheap access to energy. Matthew Gray, identifies this as the next progression in the rentier state story whereby "Energy-driven policies (v. Energy Centric) encourage sectors that feed into or relate to the oil or gas sector" (Gray 2011, 30). Indeed, for all practical purposes, Oman's current diversification strategy is not diversification away from hydrocarbons, but diversification within hydrocarbons. Natural gas is a foremost prong of Oman's diversification strategy, with a stated goal of 10% of GDP by 2020 (Ministry of Finance 2010) and joined the Gas Exporting Countries Forum commonly known as the ‘Gas OPEC’ in Doha 2011 in anticipation of non-associated discoveries. In publicly available government budgets, natural gas revenues are calculated in non-oil income, but not named, inadvertently feeding a false perception that Oman is moving away from its oil dependence. To date, Oman's diversification strategy depends almost exclusively on hydrocarbons to fuel the national economic engine, which is highly dependent on high oil prices.

The second energy challenge facing the Sultanate is demand-side management (DSM). Petrol is sold for 30 US cents a litre (120 Omani Biases), and car ownership is nearly universal in Muscat. While official numbers are rarely published, one senior member of the Ministry of Finance confirmed that in 2010, Oman spent $850 million on fuel subsidies (diesel, petrol and cooking) and costs are rising. Once introduced, energy subsidies are notoriously difficult to modify or eliminate, especially in the Gulf countries where cheap petrol is considered a birthright (El Katiri et al 2011).

These two energy challenges are exacerbated by recent events in the region. Though financial benefits were used to stem the unrest, including raising the unemployment benefits 40%, and giving cash payment of 1000 OR ($2500 USD) the budget is vulnerable to rising costs in subsidies and energy price fluctuations for its revenue and diversification programs. Any curtailment in social subsidies and entitlements would not be well-received in the current climate, particularly as wealthy neighbors in the UAE continue to increase benefits for their own populations. This paper, drawing on extensive field research in Muscat, explores these energy challenges in light of changing economic and political imperatives.

Selected Bibliography

El-Katiri, L. 2011. Anatomy of an oil-based welfare state: Rent distribution in Kuwait. Oxford Institute for Energy

Gray, M. 2011’A Theory of Late Renterism in the Arab States of the Gulf’ Centre for International and Regional Studies, Georgetown University School of Foreign Service in Qatar, Occasional Paper No 7.

IMF 2011, ‘Economic Trends in the Sultanate’ Presentation to the Central Bank of Oman, Muscat, 14 December.

Ministry of Finance 2011 ‘Annual Budget 2010’ Available online at, Accessed 1 October 2011.