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Navigating a new normal in Oman’s energy sector

We have been focused on mitigating the effects of the oil price downturn and coronavirus pandemic, which have impacted our business big time, says HE Dr Mohammed bin Hamad Al Rumhy, Minister of Energy and Minerals, in a candid interview with Energy Oman

There’s no spinning the brutal impacts of the global oil price collapse and the pandemic on Oman’s Oil & Gas sector, as indeed that of other producing countries in the region and the wider world.  Combined with demand destruction on an unprecedented scale amid saturated inventories and a supply glut, it represented a perfect storm for the pivotal energy industry of Oman, as it did for other crude export-dependent economies of the world. 

But on the flipside, this double-whammy of a crisis produced the historic OPEC+ accord to help buttress oil prices, with non-OPEC Oman playing a frontline role in the crafting of the landmark pact.  More importantly, perhaps, it has given strong new impetus to innovation, energy transition, decarbonisation and, on a more profound level, behavioural change. Oman’s energy industry is indeed on the cusp of a ‘new normal’.  

Insights into this new normal were shared by HE Dr Mohammed bin Hamad Al Rumhy, Minister of Energy and Minerals, in an exclusive interview. At the outset, he acknowledged that the crisis dealt a hammer blow impacting virtually every aspect of the Sultanate’s Oil & Gas business. “The sudden decline in demand was a shock – and we all know what has happened since then!” he lamented. 

The impacts were varied and across the board. Early on, a sharp slump in demand for refined petroleum products forced the brief closure of Mina Al Fahal (MAF) refinery – the country’s first refinery located in Muscat Governorate – as vehicle owners grounded their vehicles in response to lockdown measures and other pandemic related concerns.

“As people stopped going out, they no longer filled their cars with gasoline, while jet fuel demand fell as airlines stopped flying,” said HE Dr Al Rumhy. “Even diesel, used by commercial vehicles, declined a bit, prompting the shutdown of our Mina Al Fahal refinery during this period.  The only commodity that enjoyed good demand was cooking fuel (LPG), indicating that people were cooking more as they remained at home.”

Supply chain disruptions

Fortunately, concerns that a snowballing global lockdown would impede the flow of critically required equipment and spares for the domestic Oil & Gas industry did not materialise as feared, the Minister said.

“There were initially fears that the flow of bits and pieces of equipment coming from almost all over the world – hardware necessary to sustain our business – would be impacted due to supply chain disruptions.  We thought if China, for example, was unable to export certain equipment that we need for drilling, production and processing of oil and gas, then we would have problems.  These include everything from pipes and joints to electronics and spare parts. Thankfully, those fears did not materialise.” 

The Sultanate’s industry, the Minister explained, sources its hardware needs not just from China but from a range of countries across the world, including Japan, Korea, India, Italy, Spain, UK and the United States. With the improvement in the overall supply chain situation, these concerns have since fully abated, he said.

Dual shock

Faced with a pandemic-induced crisis on top of headwinds from collapsing oil prices, the Ministry has found itself fighting a rear-guard action to stave off the worst impacts of the dual crisis on the domestic Oil & Gas sector. “Our business has been impacted big time and we have been working to mitigate these difficulties,” he said. 

The chief priority for the Ministry was to dissuade oilfield service providers from taking any actions that would cost Omani workers their jobs and livelihoods. The results, however, were mixed primarily because of downturn’s almost tsunami-like impact that hurt the economy across-the board.

Redeployment – a strategy that was put to great effect as a safety-net in the wake of the previous oil price shock in 2014/2015 – could not be replicated this time around, primarily because the latest crisis impacted virtually every economic sector, and not Oil & Gas alone. Consequently, oilfield contractors could not easily turn to their non-oilfield businesses – as they did in 2014/2015 – for the redeployment of their staff from oilfield businesses upended by the crisis.    

Further, with oil and gas operators cutting their outlays on, among other things, the drilling of new exploration wells, the Ministry moved to help quell potential impacts to drilling crews who are predominantly Omani workers. With each rig employing around 100 people, any decision to idle rigs on account of the cost-cutting measures would potentially result in job losses running in the hundreds. 

“We tried to convince the drilling companies not to lay off their workers,” said HE Dr Al Rumhy. “We asked them to keep the rigs in warm-stacking mode – which means that the rigs are maintained in readiness for drilling, but they actually do not drill. It is similar to pilots and crew being on standby in the airline industry. These were the kinds of initiatives that we employed to help avert layoffs.” 

At the same time, the Oil & Gas operators were encouraged to maintain activity levels to the extent possible and within the budgetary constraints imposed on them by the dual crisis. Through a system of cost-optimisation, the hope was that the companies got more ‘bang for the buck’.  

“Here, the challenge for companies was to get more work achieved for their spend. Our message to the producing companies such as PDO, Daleel Petroleum, Occidental, CCED and others was to try to achieve more for the same spend. Thus, if a company was planning to drill two exploration wells, our message to them was to drill 3 or 4 wells for the same amount. This approach would enable the industry to maintain activity levels.”

But he acknowledged that companies operating on the basis of Exploration and Production Sharing Agreements (EPSA) would inevitably find the going tough to come up with the required funding for their operations amid the current downturn. Many of the EPSA players typically operate in multiple parts of the world, which necessitates the distribution of their limited resources across their operations.  “I realise it’s a difficult time for many of them, but our goal is to try to encourage them to maintain activity levels,” he commented.  

Prudent localisation

The Minister cautioned against any tendency by the industry to reduce its commitments to In-Country Value (ICV) development in light of the constrained fiscal and economic situation.  “On the contrary, I think we should have more ICV because it helps create jobs. By extending ICV, we will have more goods and service providers getting involved in the business.”

He also warned of the peril of pushing local companies to keep cutting costs to the point that they lose their competitive edge. “Our locally produced goods and services may not be cheapest in the market, so if we corner them into cutting costs, it will come at the expense of certain standards. We will then be shooting ourselves in the foot.  This is where the ICV philosophy comes into play: we want more ICV in order to safeguard locally produced goods and services.”

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