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Overview

Oman is the largest oil and natural gas producer in the Middle East that is not a member of the Organization of the Petroleum Exporting Countries.

Located on the Arabian Peninsula, Oman’s proximity to the Arabian Sea, Gulf of Oman, and Persian Gulf grant it access to some of the most important energy corridors in the world, enhancing Oman’s position in the global energy supply chain (Figure 1). Oman plans to capitalize on this strategic location by constructing a world-class oil refining and storage complex near Ad Duqm, Oman, which lies outside the Strait of Hormuz (an important oil transit chokepoint).

Like many countries in the Middle East, Oman is highly dependent on its hydrocarbons sector. The Oman Ministry of Finance stated that finances have been severely affected by the decline in oil prices since mid-2014. In 2016, Oman lost more than 67% of its oil and natural gas revenues compared with oil revenue the country earned in 2014, despite achieving record production.1 Oil revenue accounted for 27% of Oman’s gross domestic product (GDP) in 2016, a decrease from 34% of GDP in 2015 and 46% in 2014, according to the Central Bank of Oman.2

The ninth iteration of the Oman 5-Year Plan (2016-2020) released in 2016, created in the context of sustained low oil prices, aims to enhance the country’s economic diversification by adopting a set of sectoral objectives, policies, and mechanisms that will increase non-oil revenue. Oman’s diversification program is largely aimed at expanding industries such as fertilizer, petrochemicals, aluminum, power generation, and water desalination. Concerted efforts to develop these sectors would also accelerate non-oil job growth in coming years.3However, with rising production levels and a growing petrochemical sector–which relies on liquefied petroleum gases (LPG) and natural gas liquids (NGL)–the country is unlikely to significantly alter its dependence on hydrocarbons as a major revenue stream in the short term.

Figure 1. Map of Oman

Map of Oman

Source: Central Intelligence Agency World Factbook

Petroleum and other liquid fuels

Oman’s petroleum and other liquids production averaged more than 1 million barrels per day in 2016, its highest production level ever. Oman was on track to maintain this production level in 2017, but it reduced production to approximately 970,000 barrels per day in early 2017 to meet the production cut it agreed to, along with members of the Organization of the Petroleum Exporting Countries (OPEC).

Sector organization

The Ministry of Oil and Gas coordinates the government’s role in Oman’s hydrocarbon sectors. Final approval on policy and investment, however, rests with the Sultan of Oman. The majority state-owned Petroleum Development Oman (PDO) holds most of Oman’s oil reserves and operates the Sultanate’s largest block, Block 6. PDO is responsible for more than 70% of the country’s crude oil production.4 In addition to the government’s 60% ownership stake in PDO, Shell (34%), Total (4%), and Portugal’s Partex (2%) also own stakes.5 In addition to the PDO, the Oman Oil Company (OOC) is responsible for energy investments both inside and outside of Oman. The OOC is fully owned by the government. The Oman Oil Refineries and Petroleum Industries Company (ORPIC) is owned by the Government of the Sultanate of Oman and by the OOC. It controls the country’s refining sector and owns both of Oman’s operating refineries, Sohar and Mina al-Fahal.6

The U.S. firm, Occidental Petroleum (Oxy), is the second-largest operator after PDO and has the largest presence of any foreign firm in Oman. Oxy operates mainly in northern Oman at Block 62 and Block 9, along with the Mukhaizna field in the south. Lebanese independent, Consolidated Contractors Energy Development (CCED), operates Blocks 3 and 4 with a 50% stake alongside Sweden’s Tethys Oil (30%) and Japan’s Mitsui (20%). Daleel Petroleum is a 50:50 joint venture between Omani private firm Petrogas and Chinese state firm China National Petroleum Corporation (CNPC) and operates Block 5.

Upstream

According to the Oil & Gas Journal, Oman had 5.4 billion barrels of estimated proved oil reserves as of January 2017, ranking Oman as the 7th largest proved oil reserve holder in the Middle East and the 22nd largest in the world.7 The majority of the fields are located within PDO’s concession area.

Figure 2. Oman major oil and natural gas infrastructure

Map of Oman major oil and natural gas infrastructure

Source: U.S. Energy Information Administration, IHS EDIN

Exploration and production

Enhanced oil recovery techniques helped Oman’s oil production rebound from a multi–year decline in the early 2000s.

Oman’s petroleum and other liquids (total oil) production ranks 7th in the Middle East and ranks among the top 25 oil producers in the world. Oman is the largest oil producer in the Middle East that is not a member of the Organization of the Petroleum Exporting Countries (OPEC). Oman’s annual petroleum and other liquids production peaked at 972,000 barrels per day (b/d) in 2000, but dropped to 715,000 b/d by 2007. Oman successfully reversed that decline, and total oil production has risen, hitting a new peak of a little more than 1 million b/d in 2016 (Figure 3). Enhanced Oil Recovery (EOR) techniques helped drive this production turnaround, along with additional production gains as a result of previous discoveries.

Several recent developments could contribute to future oil production growth in Oman. The major oil discoveries of 2016 were in north Oman (Figure 2, Table 1).

Enhanced oil recovery

Oman’s ability to increase its oil and natural gas production relies heavily on innovative extraction technologies, such as EOR. Several EOR techniques are already used in Oman, including polymer, miscible, and steam injection techniques.8 Because of the relatively high cost of production in the country, Oman’s government offers incentives to international oil companies (IOCs) for exploration and development activities related to the country’s difficult-to-recover hydrocarbons. The government enlists foreign companies in new exploration and production projects, offering generous terms for developing fields that require the sophisticated technology and expertise of the private sector. Given the technical difficulties involved in oil production, the contract terms for IOCs have become more favorable in Oman than in other countries in the region, with some allowing significant equity stakes in certain projects.

Block 6, located in central and southern Oman and operated by PDO, is the center of current EOR operations, using all four of the EOR techniques with the Marmul field (polymer), Harweel field (miscible), Qarn Alam field (steam), and Amal-West field (solar). Solar EOR at Alam-West in southern Oman was the first solar EOR project in the Middle East, completed by GlassPoint Solar in 2012 and commissioned in early 2013. This project uses the production of emissions-free steam that feeds directly into current thermal EOR operations, reducing the need to use natural gas in EOR projects.9

In partnership with PDO, GlassPoint Solar is currently building the Miraah solar thermal plant to improve recovery of heavy and viscous crude oil from Amal oil field. The plant is expected to produce 1,021 megawatts (MW) of peak thermal energy in the form of 6,000 tons of solar steam each day (no electricity is produced). Construction on the project began in October 2015, with steam generation from the first glasshouse module expected in 2017.10

However, in 2016, because of relatively low crude oil prices and the resource-intensive nature of EOR, PDO announced it was placing more emphasis on accelerating conventional oil and gas opportunities instead of short-term expansion of EOR projects.11

Oman petroleum and other liquids production and consumption

Table 1: New oil discoveries, 2016ProjectFieldCompanyContingent Reserves, million barrels*ShammarLekhwairPDO40Qarn Alam-RabaQarn AlamPDO27Total  67The Society of Petroleum Engineers separates the term contingent from the term reserves. “Contingent resources are less certain than reserves. These resources are potentially recoverable but not yet considered mature enough for commercial development due to technological or business hurdles.” 
Source: Oman Ministry of Oil and GasConsumption and refining

Oman consumed 186,000 b/d of petroleum and other liquids in 2016 (Figure 4), most of which were petroleum products refined at Oman’s refineries and a small amount that was imported.

Oman is not a major refined petroleum product producer, although it has plans to expand the country’s refining and storage sectors. Oman aims to capitalize on its strategic location on the Arabian Peninsula by expanding its refining capabilities.

Oman has two refineries, Mina al Fahal and Sohar. As of early 2017, Minal al Fahal was operating at 106,000 b/d and Sohar at 116,000 b/d.12 Plans are underway to upgrade the facility at Sohar as part of the ORPIC-led Sohar Refinery Improvement Project (SRIP), scheduled for completion in 2017.13 Sohar’s capacity is expected to expand to 197,000 b/d from 116,000 b/d. In February 2017, ORPIC announced the mechanical completion of all Sohar units as part of the expansion project. A major bunkering and storage terminal near Sohar is scheduled to be completed in 2017, and the facility’s location outside the Strait of Hormuz could make it an attractive option for international crude oil shippers.14

The OOC and Kuwait Petroleum International (KPI) have signed a partnership agreement for their Ad Duqm Refinery and Petrochemical Industries Company (DRPIC) joint venture to build a 230,000 b/d export refinery in a special economic zone under development at Ad Duqm on the Arabian Sea coast of central Oman and a 200 million barrel crude oil storage terminal at Ras Markaz.15 The storage terminal, with phase one estimated to be complete in 2019, will be one of the world’s largest crude oil storage facilities.16 The Ad Duqm refinery could be operational by 2022, with most of the plant’s output to be exported.17 According to the OOC, the cost of developing the refinery will be $6 billion–$7 billion. Both Oman and Kuwait will provide crude feedstock.

Oman does not have any international oil pipelines, although plans are in place to expand the country’s domestic pipeline infrastructure. The Muscat Sohar Pipeline Project (MSPP), built by ORPIC and scheduled to be completed in 2017, is a 180-mile refined product pipeline that will connect the Mina al-Fahal and Sohar refineries with a new storage terminal near Muscat airport and reduce tanker traffic between the two coastal facilities.18 

Oman petroleum petroleum and other liquids consumption, 2016

Exports

Oman is an important oil exporter, particularly to Asian markets. In 2016, virtually all of the country’s crude oil exports went to countries in Asia, with 78% going to China.

Oman’s only export crude oil stream is the Oman blend, with an API gravity of 32, medium-light and sour (high sulfur- 1.33%) crude. Oman is an important crude oil exporter, particularly to Asian markets (Figure 5). In 2016, Oman exported 912,500 b/d of crude oil and condensate, its highest level since 1999.19

China is Oman’s largest export market, and that country received 78% of Oman’s crude oil exports in 2016, while Taiwan received the second-highest volume, despite falling by almost one-third from 2015 levels. Thailand, which had previously been a consistent purchaser of 40,000 to 50,000 b/d of Omani exports, bought only two small cargoes in 2016.20

Oman crude oil exports by destination, 2016

Natural gas

The greatest growth potential for Oman’s natural gas production is in the Khazzan-Makarem field, Block 61. The planned start–up of that field in late 2017 could significantly ease pressure on Oman’s natural gas supplies.

Sector organization

PDO has an even greater presence in the natural gas sector than it does in the oil sector, accounting for nearly all of Oman’s natural gas supply, along with smaller contributions from Occidental Petroleum, Oman’s largest independent oil producer, and Thailand’s PTTEP. The Oman Gas Company (OGC) directs the country’s natural gas transmission and distribution systems. The OGC is a joint venture between the Omani Ministry of Oil and Gas (80%) and OOC (20%). Oman Liquefied Natural Gas (Oman LNG)–owned by a consortium including the government, Shell, and Total–operates all liquefied natural gas (LNG) activities in Oman through its three liquefaction trains in Qalhat near Sur.21

Exploration and production

Oman’s potential for natural gas production growth may be substantial, supported by promising developments in several new projects.

According to the Oil & Gas Journal, Oman held 23 trillion cubic feet (Tcf) of proved natural gas reserves in 2016.22 Oman’s natural gas production grew to 1.16 Tcf in 2016, turning around a recent decline and surpassing the previous high of 1.15 Tcf in 2013. Approximately 80% of production was from non-associated fields.23

Consumption more than doubled from 2006 to 2016, increasing from 380 billion cubic feet (Bcf) in 2006 to 820 Bcf in 2016 (Figure 6). Oman consumes slightly more than 70% of the natural gas it produces. Natural gas is becoming a key source of energy to the Omani economy with its increased focus on economic diversification away from oil.24 The Central Bank of Oman estimates that demand for natural gas will continue to rise going forward with the number of energy-intensive industries coming online combined with rising demand in the electric power sector.25 The concern over rising natural gas consumption prompted the Oman LNG company to announce in 2015 that it would divert all its exported volumes of natural gas away from foreign markets and toward domestic consumers by 2024.26

The greatest growth potential for Oman’s natural gas production is in the Khazzan-Makarem field in BP’s Block 61. The field is a tight gas formation, and BP proposed two phases to develop the 10.5 Tcf of recoverable gas resources. Combined plateau production from Phases 1 and 2 is expected to total approximately 1.5 billion cubic feet per day (Bcf/d), equivalent to about 40% of Oman’s current total domestic gas production.27 This project will involve construction of a three-train central processing facility with associated gathering and export systems and drilling about 325 wells over a 15-year period.28 BP estimates that Phase 1 of the project is more than 80% complete29 and will be online by the end of 2017.30 The start-up of the Khazzan tight gas field will significantly ease the pressure on Oman’s natural gas supplies.

The Rabab Harweel integrated project (RHIP), located in Block 6, is PDO’s largest capital project underway. The project integrates sour miscible gas injection (MGI) in multiple oil reservoirs with production and pressure maintenance of a government gas condensate field, and it will also contribute to easing Oman’s overall natural gas demand. The RHIP is slated for completion in 2019.31

Oman natural gas flows and net exports, 2000-2014

Exports

Oman is a member of the Gas Exporting Countries Forum (GECF) and exports natural gas as LNG through its Oman LNG facilities near Sur, in the Gulf of Oman. In 2016, Oman exported 358 Bcf of natural gas (Figure 7).32 Nearly all of Oman’s natural gas exports go to South Korea and Japan, accounting for 80% of exports in 2016.33

Oman’s natural gas sector grew in importance over the past two decades, largely the result of two LNG trains that opened in 2000 at the LNG complex at Qalhat, near Sur, operated by Oman LNG (a joint venture between PDO and other shareholders). The third LNG train, operated by Qalhat LNG SAOC and built alongside the two existing trains, entered into production in 2005. Qalhat merged into Oman LNG in 2013. Its main shareholders are the Omani state (51%) and Shell Gas B.V (30%).

South Korea is Oman LNG’s primary buyer. Oman’s LNG exports have increasingly been under pressure as rising domestic consumption has cut into volumes available for export. LNG supplies received a boost last year with lower consumption from power stations, and these supplies will see a further boost from new production when the Khazzan gas field comes online in 2017. Khazzan volumes are primarily designated for domestic consumption, with excess volumes exported from Oman’s LNG facilities.

The Sultanate has been focused on diversifying its LNG export destinations because regional demand for LNG is growing. Oman LNG’s 2016 Annual Report reported the first-ever sales of two spot cargoes to Kuwait and Jordan as representing “new departures for our company” by exporting to new geographic destinations.34

Oman LNG exports

Imports

Oman has one international natural gas pipeline–the Dolphin Pipeline–that runs from Qatar to Oman through the United Arab Emirates (UAE). Oman is not a major importer of natural gas, although the country imported approximately 74 Bcf of natural gas in 2016 from Qatar through the Dolphin Pipeline.35 According to the Omani government, the imports through the Dolphin Pipeline are necessary to meet the rising level of domestic natural gas consumption (including re–injection in oil wells).

In March 2014, Oman signed a memorandum of understanding with Iran on a natural gas import contract. The deal will deliver approximately 353 million cubic feet of natural gas per year through a new pipeline under the Gulf of Oman, much of which is slated to be re-exported as LNG. A new route was agreed upon in February 2017 to avoid UAE waters, and Iran is expecting natural gas to begin flowing in 2020.36

Electricity

Oman’s electricity sector relies heavily on domestic natural gas to fuel electricity generation.

The Authority for Electricity Regulation Oman (AER Oman) regulates the country’s electricity and associated water sectors. Its primary functions include implementing general policy from the state, licensing, compliance, and coordination between the various ministries, organizations, and stakeholders in the sector. The Oman Power and Water Procurement Company (OPWP) is the planning body for power supplies in Oman, and the Oman Electricity Transmission Company (OETC) is in charge of the country’s transmission networks.

Oman’s electricity sector has two major networks–the Main Interconnected System (MIS) and the Salalah system. The MIS, the larger of the two, covers most of the northern area of Oman. The Dhofar Power System (DPS) covers the city of Salalah and surrounding areas in the Governorate of Dhofar in the south. Areas outside both networks get electricity from the Rural Areas Electricity Company (RAECO), primarily from diesel generators.37 The Sultanate’s power plants are almost entirely natural gas-fired, and OPWP expects peak demand from power plants connected to each of Oman’s two main power grids to rise by 6% per year through 2023.38

Oman’s electric generation more than doubled between 2006 and 2016, from 13 billion kilowatthours (kWh) to 33 billion kWh. Electricity consumption over the same period also grew at a fast rate, tripling from 10 billion kWh to 30 billion kWh.39 Oman generates electricity primarily from natural gas, although it also has some generation from diesel/distillate.

Oman is a part of the Gulf Cooperation Council’s (GCC) grid interconnection system, which allows for electricity transfers between the six connected countries (Kuwait, Saudi Arabia, Qatar, Bahrain, the United Arab Emirates, and Oman).

OPWP plans to raise electricity generating capacity by 51% from 7.77 gigawatts (GW) at the end of 2016 to 11.7GW in 2023 to meet rising demand. OPWP’s 2017 Seven-Year Plan sees peak power demand rising by 53%, from 6.52 GW in 2016 to 9.96 GW in 2023.40 Eleven firms have submitted applications to develop a 750–850 MW capacity power plant at Misfah for start-up in 2022. Misfah will be the first conventional large-scale power plant for which Oman’s Ministry of Oil and Gas will not guarantee a supply of natural gas fuel.41

Oman has a growing renewable energy sector, with several projects making progress. RAECO plans to install 90 MW of renewable capacity by 2020. UAE’s Masdar was awarded a contract to build the 50 MW wind farm at Harweel in the Dhofar region, estimated to start-up in 2017.42 In July 2015, Oman’s first commercial solar power project, with a 307 kilowatt-capacity, started generating electricity. RAECO will purchase electricity for 20 years from this plant operated by Bahwan Astonfield Solar Energy Company.43 Although Oman does not currently have a nuclear energy program, the country joined the International Atomic Energy Agency in 2009. Currently, the country has no plans to construct any nuclear generating facilities.

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[Media Partner Content] Recognising innovation in transforming the world’s oil and gas industry

The 9th edition of the Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC) Awards, hosted by the Abu Dhabi National Oil Company (ADNOC), is now open for submissions.

In this fourth industrial age it is technology, innovation, environmental leadership and talented workforces that are shaping the companies of the future.

Oil and gas is set to play a pivotal role in driving technology forward, and at this year’s ADIPEC Awards emphasis is placed on digitalisation, research, transformation, diversity, youth and social contribution, paving the way towards a brighter tomorrow for our industry.

Hosting the ADIPEC Awards is one of the world’s leading energy producers, ADNOC, a company exploring new, agile and flexible ways to build its people, technology, environmental leadership and partnerships, while enhancing the role of the United Arab Emirates as a global energy provider.

Factors which will have a prominent influence on the eventual decisions of the distinguished panel of jury members include industry impact, sustainability, innovation and value creation. Jury members have been carefully selected according to their expertise and knowledge, and include senior representatives from Baker Hughes, a GE Company, BP UAE, CEPSA Middle East, ENI Spa, Mubadala Petroleum, Shell, Total and Weatherford.

Chairperson of the awards is Fatema Al Nuaimi, Acting CEO of ADNOC LNG, who says: “At a time when the industry is looking towards an extremely exciting future and preparing for Oil &Gas 4.0, the awards will recognise excellence across all its sectors and reward those who are paving the way towards a successful and sustainable future.”

Ms Al Nuaimi, continues: “we call upon our partners across the globe to submit their achievements in projects and partnerships which are at the helm of technical and digital breakthroughs, as well as to nominate the next generation of oil and gas technical professionals, who will spearhead the ongoing transformation of the industry.

These awards are recognising the successes of those companies and individuals who are responding in the most innovative and creative manner to the global economic and technological trends. Their contribution is pivotal to the development of our industry and to addressing the continuous growth of the global energy demand. “

Christopher Hudson, President of the Energy Division, dmg events, organisers of ADIPEC, says: “With ADNOC as the host and ADIPEC as the platform for the programme, the awards are at the heart of the worldwide oil and gas community. With its audience of government ministers, international and national oil companies, CEOs and other top global industry influencers, the ADIPEC Awards provide the global oil and gas community the perfect opportunity to engage, inspire and influence the workforce of the future.”

Entries can be submitted until Monday 29th July for the following categories:

Breakthrough Technological Project of the Year

Breakthrough Research of the Year

Digital Transformation Project of the Year

Social Contribution and Local Content Project of the Year

Oil and Gas Inclusion and Diversity Company of the Year

Young ADIPEC Technical Professional of the Year

A shortlist of entries will be announced in October and winners will be revealed on the first day of ADIPEC 2019, Monday 11th November, St. Regis Saadiyat Island, Abu Dhabi.


ABOUT ADIPEC

Held under the patronage of the President of the United Arab Emirates, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, and organised by the Global Energy Division of dmg events, the Abu Dhabi Petroleum International Petroleum Exhibition and Conference (ADIPEC) is the global meeting point for oil and gas professionals. Standing as one of the world’s leading oil and gas events.  ADIPEC is a knowledge-sharing platform that enables industry experts to exchange ideas and information that shape the future of the energy sector. The 22nd edition of ADIPEC will take place from 11th-14th November 2019, at the Abu Dhabi National Exhibition Centre (ADNEC). ADIPEC 2019 will be hosted by the Abu Dhabi National Oil Company (ADNOC) and supported by the UAE Ministry of Energy & Industry, Department of Transport in Abu Dhabi, the Abu Dhabi Chamber of Commerce and Industry, Masdar, the Abu Dhabi Future Energy Company, Department of Culture and Tourism - Abu Dhabi, the Abu Dhabi Department of Education and Knowledge (ADEK). dmg events is committed to helping the growing international energy community.

June, 24 2019
TODAY IN ENERGY: Energy products are key inputs to global chemicals industry

chemicals industry inputs

Source: U.S. Energy Information Administration, based on World Input-Output Database
Note: Dollar values are expressed in 2010 U.S. dollars, converted based on purchasing power parity.

The industrial sector of the worldwide economy consumed more than half (55%) of all delivered energy in 2018, according to the International Energy Agency. Within the industrial sector, the chemicals industry is one of the largest energy users, accounting for 12% of global industrial energy use. Energy—whether purchased or produced onsite at plants—is very important to the chemicals industry, and it links the chemical industry to many parts of the energy supply chain including utilities, mines, and other energy product manufacturers.

The chemicals industry is often divided into two major categories: basic chemicals and other chemicals. Basic chemicals are chemicals that are the essential building blocks for other products. These include raw material gases, pigments, fertilizers, plastics, and rubber. Basic chemicals are sometimes called bulk chemicals or commodity chemicals because they are produced in large amounts and have relatively low prices. Other chemicals—sometimes called fine or specialty chemicals—require less energy to produce and sell for much higher prices. The category of other chemicals includes medicines, soaps, and paints.

The chemicals industry uses energy products such as natural gas for both heat and feedstock. Basic chemicals are often made in large factories that use a variety of energy sources to produce heat, much of which is for steam, and for equipment, such as pumps. The largest feedstock use is for producing petrochemicals, which can use oil-based or natural-gas-based feedstocks.

In terms of value, households are the largest users of chemicals because they use higher value chemicals, which are often chemicals that help to improve standards of living, such as medicines or sanitation products. Chemicals are also often intermediate goods—materials used in the production of other products, such as rubber and plastic products manufacturing, agricultural production, construction, and textiles and apparel making.

basic chemicals industry energy intensity in select regions

Source: U.S. Energy Information Administration, WEPS+, August 2018
Note: Dollar values are expressed in 2010 U.S. dollars, converted based on purchasing power parity.

The energy intensity of the basic chemicals industry, or energy consumed per unit of output, is relatively high compared with other industries. However, the energy intensity of the basic chemicals industry varies widely by region, largely based on the chemicals a region produces. According to EIA’s International Energy Outlook 2018, Russia had the most energy-intensive basic chemicals industry in 2015, with an average energy intensity of approximately 98,000 British thermal units (Btu) per dollar, followed by Canada with an average intensity of 68,000 Btu/dollar.

The Russian and Canadian basic chemicals industries are led by fertilizers and petrochemicals. Petrochemicals and fertilizers are the most energy intensive basic chemicals, all of which rely on energy for breaking chemical bonds and affecting the recombination of molecules to create the intended chemical output. These countries produce these specific basic chemicals in part because they also produce the natural resources needed as inputs, such as potash, oil, and natural gas.

By comparison, the energy intensity of the U.S. basic chemical industry in 2015 was much lower, at 22,000 Btu/dollar, because the industry in the United States has a more diverse production mix of other basic chemicals, such as gases and synthetic fibers. However, EIA expects that increasing petrochemical development in the United States will increase the energy intensity of the U.S. basic chemicals industry.

The United States exports chemicals worldwide, with the largest flows to Mexico, Canada, and China. According to the World Input-Output Database, U.S. exports of all chemicals in 2014 were valued at $118 billion—about 6% of total U.S. exports—the highest level in decades.

June, 24 2019
The Winds of War and Oil Markets

The threat of military action in the Middle East has gotten more intense this week. After several attacks on tankers that could be plausibly denied, Iran has made its first direct attack on a US asset, shooting down an unmanned US drone. The Americans say the drone was in international waters, while Iran claims that it had entered Iranian air space. Reports emerging out of the White House state the US President Donald Trump had authorised a military strike in response, but pulled back at the last minute. The simmering tensions between the two countries are now reaching boiling point, with Iran declaring that it is ‘ready for war’.

Predictably, crude oil prices spiked on the news. Brent and WTI prices rose by almost US$4/b over worries that a full-blown war will threaten global supplies. That this is happening just ahead of the OPEC meeting in Vienna – which was delayed by a week over internal squabbling over dates – places a lot of volatile cards on the table. Far more than more than surging US production, this stand-off will colour the direction of the crude market for the rest of 2019.

It started with an economic war, as the Trump administration placed increasingly tight sanctions on Iran. Financial sanctions came first, then sanctions on crude oil exports from Iran. But the situation was diffused when the US introduced waivers for 8 major importers of Iranian crude in November 2018, calming the markets. Even when the waivers were not renewed in April, the oil markets were still relatively calm, banking on the fact that Iran’s fellow OPEC countries would step in to the fill the gap. Most of Iran’s main clients – like South Korea, Japan and China – had already begun winding down their purchases in March, reportedly causing Iran’s crude exports to fall from 2 mmb/d to 400 kb/d. And just recently, the US also begun targeting Iranian petrochemical exports. Between a rock and a hard place, Iran looks seems forced to make good on its threats to go to war in the strategic Straits of Hormuz.

As the waivers ended, four tankers were attacked off the coast of Fujairah in the UAE in May. The immediate assumption was that these attacks were backed by Iran. Then, just a week ago, another two tankers were attacked, with the Americans showing video evidence reportedly show Iranian agents removing mines. But still, there was no direct connection to Iran for the attacks, even as the US and Iran traded diplomatic barbs. But the downing of the drone is unequivocally the work of the Iranian military. With President Donald Trump reportedly ‘bored’ of attempting regime change in Venezuela and his ultra-hawkish staff Mike Pompeo and John Bolton in the driver’s seat, military confrontation now seems inevitable.

This, predictably, has the oil world very nervous. Not just because the extension of the current OPEC+ deal could be scuppered, but because war will impact more than just Iranian oil. The safety of the Straits of Hormuz is in jeopardy, a key node in global oil supply through which almost 20 mmb/d of oil from Iraq, Saudi Arabia, Kuwait and the UAE flows along with LNG exports from the current world’s largest producer, Qatar. At its narrowest, the chokepoint in the Straits is just 50km from Iranian land. Crude exports could be routed south to Red Sea and the Gulf of Aden, but there is risk there too; the mouth of the Red Sea is where Iranian-backed Yemeni rebels are active, who have already started attacking Saudi land facilities.

This will add a considerable war risk premium to global crude prices, just as it did during the 1990 Gulf War and the 2003 invasion of Iraq. But more than just prices, the destabilising effects of a war could consume more than just the price of a barrel. If things are heading the way the current war-like signs are heading, then the oil world is in for a very major change very soon.

Historical crude price responses to wars in the Middle East

  • 1973: Yim Kippur War – oil prices quadrupled from US$3/b to US$12/b
  • 1990: Iraq invasion of Kuwait/Gulf War – oil prices doubled from US$17/b to US$36/b
  • 2003: US invasion of Iraq – oil prices rose from US$30/b to US$40/b
June, 21 2019