Gross domestic product (GDP) figures for Oman released on 21 April show a healthy overall economic performance that is likely to continue. Shrugging off the devastation wreaked by Cyclone Gonu in June 2007, which left a $4bn reconstruction bill, GDP grew by 12.9 per cent to RO15.5bn ($40.3bn) in 2007. A near 50 per cent liquefied natural gas (LNG) boost in exports helped, as the Qalhat liquefaction plant raised capacity to almost 10 million tonnes a year (t/y).

The biggest growth occurred in the non-oil sectors, with non-oil GDP rising by 18.3 per cent to RO8.7bn, dwarfing the 5.8 per cent growth produced by the hydrocarbons sector. For the first time, Oman’s non-oil exports crossed the RO1bn mark. The industrial sector expanded by 14.4 per cent, buttressed by a 17.8 per cent jump in private sector investment to RO570m.

High oil revenues, forecast to reach $14bn in 2008, will enable the authorities to plough more inv-estment into industrial schemes. Budgeted state expenditure is due to increase by 19 per cent to $15bn this year, while allocations for projects that form part of the latest five-year plan will rise by 45 per cent to $1.9bn in 2008.

But policymakers appear nervous about the medium-term impact of sliding oil output, and the scarcity of gas supplies.

The latter issue has risen to the top of the agenda. Ratings agency Moody’s Investors Service cautioned in February that Oman’s gas production was failing to keep pace with rampant local demand, constraining the growth prospects of the country’s energy-intensive industrial sector. The Oil & Gas Ministry forecasts gas demand will reach 3.8 billion cubic feet a day (cf/d) by 2010, outpacing supply of just 2.7 billion cf/d.

Oman Power & Water Procurement Company (OPWP) indicated in December 2007 that a proposed 700MW/26 million-gallon-a-day independent power and water project (IWPP) might have to be coal-fired, rather than gas-fired.

Increasing output

The short-term supply situation still looks manageable. The government intends to increase gas output by 11 per cent this year, targeting output of 70 million cubic metres a day (cm/d), up from 63 million cm/d in 2007.

UK energy giants BP and BG are investing up to $1bn into Oman over the next three to five years to develop gas fields. Oman is also due to receive its first supplies of gas via the Dolphin pipeline by June 2008, pumping at a rate of 200 million cf/d.

Another new source of supply is likely to emerge in late April after Oman Oil Company (OOC) signs an agreement to develop the Kish gas field in southern Iran. OOC will invest up to $7bn to develop the field, under a buyback deal that will secure at least 1 billion cf/d of Iranian gas.

Yet this is unlikely to be sufficient to supply all of Oman’s planned gas-based industries. The first metal from the 350,000-tonne-a-day (t/d) aluminium smelter at Sohar is due to roll out in June, but Sohar Aluminium wants to double that production capacity within a few years. A slew of petrochemicals plants are also bidding for limited gas supplies.

The tight supply position is exacerbated by Oman’s declining crude production. “Everybody is short of gas in the Gulf,” says Eckart Woertz, economics programme manager of the Gulf Research Centre. “But Oman is also past peak oil, which means less production of associated gas.”

This will stifle Oman’s medium-term economic outlook. Much of the country’s economic growth is linked to its vibrant industrial sector. Concerns over feedstock availability could also undermine long-term investor confidence in Muscat’s industrial expansion.

The government’s industrial drive is largely founded on the provision of cheap gas. The gas price offered to the industries at Sohar and Salalah ports was equivalent to a $5-a-barrel oil price. This made key schemes such as the aluminium smelter commercially viable, even though Oman lacked natural bauxite deposits. The possibility of a gas deficit by as early 2010 may prevent the government from extending such offers to prospective industrial investors.

Neither can Muscat rely on continued increases in oil export receipts to support its wider economy. National Economy Ministry figures reveal that Omani crude output fell by 6 per cent in 2007 to 710,000 b/d.

Oman’s finances are also susceptible to inflationary pressures. “Rising costs and demands for expenditure increases to offset the effects of inflation, coupled with an ambitious public investment plan, are contributing to a marked loosening of fiscal policy,” says Tristan Cooper, Gulf analyst at Moody’s.

The authorities will be able to contain the impact of rising prices through subsidies, but the bigger worry is Oman has no solution to its shortage of gas, on which its wider industrial ambitions rely.

Oman will lose the ability to expand its downstream sectors if its domestic gas exploration programme fails to reap dividends. If the anticipated sources of supply fail to materialise, the sultanate’s days of 18 per cent non-oil GDP growth may be over.