Petroleum industry lights up progressive path

The petroleum industry forms the backbone of Oman's economy. Over the past three decades, the oil reserves has helped the Sultanate move from strength to strength economically. But can Oman depend wholly on its natural resources or it needs to diversify into other areas to sustain and bolster its economy is an important question mark.
The oil price slump in 1998-99 forced Oman to take steps to diversify and put greater emphasis on other industries, such as tourism and liquid natural gas. Oman's Basic Statute of the State expresses in Article 11 that "The National Economy is based on justice and the principles of a free economy."

Recent official statistics reveal that the oil sector's share in the GDP has risen to 49 per cent in 2005 from 42.2 per cent in 2004. According to the 2006 annual report of the Central Bank of Oman (CBO), "The fiscal position remained strong in 2005, with the fiscal recording a surplus of about 2.6 per cent of GDP. As against a budgeted deficit of RO540 million in 2005, there was a net surplus of RO303 million." Revenues from the petroleum sector rose 44.3 per cent in 2005. Non-oil revenues rose 9.2 per cent, driven by a strong 17.8 per cent growth in non-oil industrial activities.

The average price of Omani crude was about US $50.26 per barrel in 2005, representing a 46 per cent rise over the average price of US $34.42 in 2004. As a result, the share of oil and gas sector in the GDP, exports and net government revenue rose to 49 per cent, 84.2 per cent and 79 per cent, respectively, in 2005.

After a period of subdued inflation, 2004 saw signs of minor rise in prices, which persisted in 2005. Consumer price inflation rose from 0.7 per cent in 2004 to 1.9 per cent in 2005. But the Sultanate's inflation at 2.3 per cent was still lower than the average inflation in advanced countries in 2005.

A close look at the June 1995 “Vision Conference: Oman 2020” reveals that a lot of strategic planning went into the formulation of initiatives aimed at securing Oman's future prosperity and growth. These include:

• To have economic and financial stability.
• To reshape the role of the government in the economy and to broaden private sector participation.
• To diversify the economic base and sources of national income.
• To globalise the Omani economy.
• To upgrade the skills of the Omani workforce and develop human resources.

It is expected that by 2020 the economy will not be reliant on oil, but rather diversified into non-oil sectors, raising higher levels of savings and investments. Studies reveal that the crude oil sector's share of GDP is estimated to drop to 9 per cent in 2020, compared with 41 per cent in 1996. Also, the gas sector is expected to contribute around 10 per cent to GDP, compared with less than 1 per cent in 1996, while the non-oil industrial sector's contribution is expected to increase from 7.5 per cent to 29 per cent.

Incentives for Foreign Investment

In a bid to reinforce the existing set-up as well as make room for further development in the petroleum sector, the government has undertaken a string of measures to provide incentives to foreign investors. These include:

• Tax exemption for five years (sometimes renewable for a further five years) for industrial enterprises which contribute to Oman's economy.
• Foreign investors allowed to hold 49 per cent of equity, which could be increased in mitigating circumstances.
• Concessional financing may be arranged through the Ministry of Commerce and Industry and Oman Development Bank.
• A clear and efficient legal network which offers advice on company law, copyright law, arbitration and agency law.
• A diverse economy which encourages privatisation of infrastructure and services.
• Price stability, with an inflation rate of not more than 1 per cent since 1992.
• Stable currency with full convertibility.
• No personal income tax and no foreign exchange controls.
• Tax and import duty exemptions.
• Interest-free long-term loans to partly foreign-owned industrial and tourism projects.

Foreign business participation in Oman is encouraged provided the company is established in accordance with the Foreign Business and Investment Law of 1974. Foreign companies are formed as an incorporation of a local company or other commercial entity. They may also exist as a branch office, a consultancy or by appointing a commercial agent, ensuring that the company only supplies services and/or goods to be imported into the Sultanate.

Airline and shipping offices as well as companies with occasional business are not governed by the Foreign Business and Investment Law. Potential businesses should supply the company's articles of incorporation and other pertinent information when applying for authorisation to the Foreign Capital Investment Committee at the Ministry of Commerce and Industry.

According to the CBO annual report, the improved macroeconomic environment has been reflected in the upgrading of the Sultanate's rating by Moody's from Baa2 to Baa1 in October 2005. In January 2006, Standard and Poor's also reaffirmed their local and foreign currency sovereign credit ratings for Oman at "A-/A-2" and "BBB+/A-2", respectively, with a "stable" outlook. It may be noted that the government debt as a percentage of GDP continued to decline and, by the end of 2005, fell to 8.6 per cent.

The easy liquidity condition was manifested in the form of strong growth in money supply. Narrow money (M1) and broad money (M2) registered high growth of 24 per cent and 21.4 per cent, respectively, as against 12.8 per cent and 4 per cent in 2004. The banking system witnessed a healthy improvement in all parameters of soundness in 2005. Capital levels of banks, which represent the capacity of the banks to deal with sources of instability, as percentage of risk-weighted assets increased from 17.6 per cent in 2004 to 18.5 per cent in 2005, which could be viewed as impressive in the context of the minimum regulatory capital adequacy requirement of 12 per cent (reduced recently to 10 per cent to become effective under Basel-II). The asset quality of banks also improved considerably, evident by the fact that gross non-performing loans (NPLs) as a percentage of gross loans declined to 7.3 per cent by the end of 2005, as against 11.1 per cent and 12.8 per cent in 2004 and 2003, respectively.

The most striking aspect of the developments in the banking system in 2005 relates to the surge in profits. Net profits of banks rose from RO79.4 million in 2004 to RO123.2 million in 2005 while net foreign assets of commercial banks rose by 127.9 per cent, from RO256.6 million in 2004 to RO584.9 million in 2005.
The current account (comprising trade, services, income and transfers) showed a surplus of RO1813 million in 2005 as against RO219 million in 2004. The trade account, reflecting the excess of export earnings over merchandise imports, showed a high surplus of RO4100 million in 2005 as against a surplus of RO2118 million in 2004.

The overall balance of payment position, which reflects the combined effect of net flows emerging out of current, capital and financial accounts taken together, showed a large surplus of RO1069 million, leading to corresponding increase in the foreign exchange reserves of the CBO and the SGRF assets.
The CBO's foreign exchange reserves of RO1675.9 million at the end of 2005 were equivalent of cover for about six months of merchandise imports. Macroeconomic prospect for the current year look extremely encouraging in the face of the continuing high oil prices as well as the sound domestic macroeconomic policy environment.

The nominal GDP, exports and government revenue are expected to benefit further from the favourable oil price scenario in 2006. This favourable phase provides an opportune time to use the surplus oil revenue in diversifying the economy. Greater openness to trade and foreign investment, phased implementation of the privatisation programme of the government, and reversing the declining trend in oil production will help strengthen the growth impulses in the economy.

In 2002, the petroleum ministry took big steps to encourage international companies to invest in abandoned concession onshore and offshore areas. Oil and Gas Minister Dr. Mohammed Bin Hamad al-Rumhi had then called on Petroleum Development Oman (PDO) and international companies operating in oil and gas exploration and production to continue their efforts to discover new fields and improve extracting methods and techniques.

The minister upheld his ministry's resolve to provide necessary infrastructure and the government constructed three pipelines to transport gas from the central region to Sur, Sohar and Salalah for existing industrial estates and power plants.
The transported gas was to be used to operate power plants in Salalah and Barka, and petrochemical, aluminum, cement factories, oil refinery and other industries in Sohar and Raysut industrial estates. With the new infrastructure in place, the scene has improved significantly. Foreign investors are now keen on joint ventures in these regions.