Sultan Qaboos bin Said al-Said has been around for long enough to be aware of false dawns and the danger of raised expectations when it comes to the sensitive issue of the Gulf’s relationship with Iran.

The Omani ruler has taken an active role in reaching out to the new Iranian president, Hassan Rouhani, while ensuring the sultanate stands to gain material rewards for its efforts.

When Sultan Qaboos visited Tehran in late August, becoming the first foreign head of state to meet Rouhani, he returned with significant booty in the form of a fresh memorandum of understanding (MoU) that would see Iran export natural gas from the South Pars field to Oman via a subsea pipeline.

The emergence of a reform-minded Iranian leadership seeking to reach out to both the West and the Gulf states has handed Muscat significant leverage as a potential conduit for these contacts, founded on its historically strong ties with Tehran.

Valued interlocutor

Oman has much to gain from its international standing as a valued interlocutor between Tehran and Washington – a role it has often played to significant effect in the past, for example in helping facilitate the return of Iranian nationals imprisoned by the US on spying charges in 2009. Muscat also acts as the diplomatic representative of the UK in Iran.

The gas agreement [with Iran] is particularly prized as the sultanate is in need of new sources of natural gas

Sultan Qaboos also wants to ensure Oman can obtain strategic benefits from its status as a go-between. Economic, security and military cooperation is firmly on the agenda. Joining the sultan on his Tehran visit, Oman’s long-serving oil minister, Mohammed al-Rumhy, was able to renew a relationship with his Iranian counterpart, Bijan Zanganeh, resulting in the re-signing of a gas MoU first inked in 2005.

The gas agreement is particularly prized as the sultanate is in need of new sources of natural gas to supply its growing array of downstream industries and to replenish the Qalhat liquefaction plant that is estimated to be running at only 80 per cent capacity. The promise of gas imports is not the only commercial fruit to be yielded from the reinvigoration of Tehran’s relationship with the outside world. The prospective diluting of the sanctions regime on its neighbour offers a clear advantage for Oman, which is a significant trading partner of the Islamic Republic and a noted retrading post between larger economies such as India, and Iran.

Most Indian-Iranian trade goes through Oman, which has good relations with both nations. The arrangements can be complicated, particularly in light of the circuitous routes countries looking to trade with Tehran have to use. Indian media recently reported that Iran has authorised Oman to collect and safeguard oil payments it is owed from buyers, including India. According to a report in the Indian Express newspaper, a confidential pact signed in July also allows Muscat to use the funds to finance Iran’s import of food, agricultural commodities, medicines and medical devices.

Iran has actively courted Oman and is eager to ensure it has the ear of at least one Gulf Arab monarchy

There is a reason why Omani officials are eager to rebuild trade links with Tehran. Sanctions have not just affected Iran’s economy, they have also damaged some of its major partners. Oman’s re-export volumes with the Islamic Republic have plummeted, according to the latest figures from the Central Bank of Oman. In 2010, it re-exported $182.4m of goods to Iran, 9.5 per cent of the total (second only to the UAE). By 2012, this had declined to just $114.1m, below 5 per cent of the total.

Given the improved political atmosphere of the past couple of months, Oman also sees a chance to revitalise its exports to its neighbour, which in 2012 reached $393m. Imports from Iran were just $210m, yielding a $173m trade surplus heavily in the sultanate’s favour.

The official figures do not reflect the full extent of trade links between Oman and Iran. The town of Khasab, positioned on the tip of Oman’s Musandam peninsula at the neck of the Gulf, has long conducted a black market trade, with the smuggling of large quantities of white goods and cigarettes to the Islamic Republic. Khasab’s traders have traditionally been able to circumvent the Iranian coastguard’s attempts to clamp down on their activities.

Reviving trade

Attempts to revive Omani-Iranian trade predate Rouhani’s presidency. In 2009, the Omani foreign investment promotion agency, Ociped – now known as Paiped (the Public Authority for Investment Promotion & Export Development) – announced the formation of a joint Omani-Iranian investment company capitalised with $50m, with a remit to enhance commercial and economic cooperation between the two countries. Ociped had previously established an economic cooperation office in the Iranian coastal town of Bandar Abbas to provide advisory services to investors and firms of both Iranian and Omani origin. 

For as long as the former president, Mahmoud Ahmadinejad, remained in power though, these efforts inevitably had limited impact. The renewal of high-level political contacts since August heralds a major potential change that could lay the foundation for a deeper commercial relationship between the two countries. But first, Muscat will need to show deep political resolve, and ensure it is not distracted by the still considerable antipathy shown by other Gulf states towards Iran.

Oman’s stance towards the new regime contrasts sharply with the vehement Saudi rejection of Rouhani’s diplomacy. The kingdom’s dismissal of the US-Iranian detente, as witnessed in the historic September telephone conversation between US President Barack Obama and Rouhani, was a contributor to Riyadh’s decision to reject a UN Security Council seat.

Ignoring Riyadh

Saudi-led opposition to making concessions to Tehran is unlikely to knock Sultan Qaboos off course, say experienced Western diplomats. “Historically, Oman has always held Saudi Arabia in suspicion and has never been deflected from marking out its own course,” Sir Richard Dalton, the former British ambassador to Iran, tells MEED. “At the same time, they have to maintain brotherly relations with the Saudis and after 2011, both the kingdom and the UAE pumped lots of money to Oman.”

In reality, Saudi policymakers are unlikely to be too perturbed by the Omani leader’s fashioning of new contacts in Tehran. There are defined limits to Muscat’s capacity to shape its own foreign policy agenda as an intermediary. There is little reason for Riyadh to fear that Oman will attempt to use its position as a confidante of Iran to make decisions that could challenge GCC unity towards the Islamic Republic and its alleged nuclear ambitions.  

For one thing, the US usually does not let other countries to do its diplomatic bidding. “I suspect messages may have been exchanged between Washington and Tehran, but I’d expect them to be more about process than substance,” says Dalton. “The US and Iran can talk to each other in a number of ways. I think Oman’s role is probably less significant than the use of the word mediator or intermediary implies.”

Nonetheless, the Iranian leadership has actively courted Muscat and is particularly eager to ensure it has the ear of at least one Gulf Arab monarchy. “It’s quite important for the Iranians to at least have one friend in the Gulf,” says Sara Bazoobandi, an Iran specialist at UK think-tank Chatham House. “Now that the situation is getting worse with the other GCC states, [Tehran is] more likely to put more effort into maintaining a better relationship with Oman. Specifically in bypassing the sanctions, Oman has been very helpful in that respect.”

Although Oman’s political intermediary role has been accorded the most attention in the wake of Sultan Qaboos’ August visit to the Islamic Republic, it is the strategic nature of proposed energy cooperation that is perhaps most significant for both sides.

The 2005 gas MoU appeared at the time to herald a potentially significant tightening of the two countries’ embrace, with an agreement to export some 8 billion cubic metres a year of gas to Oman, along with the joint development of Iran’s Kish gas field and the shared offshore Hengam oil field.

Such ambitions failed to materialise, however. Kish, estimated to contain 66 trillion cubic feet of gas, is no longer considered a joint project and the gas prodced is being piped into Iran for domestic use in the southeast of the country.

The agreement struck between Zanganeh and Al-Rumhy in late August represented an effort to revive the gas plans, but with subtle differences. Rather than export gas from Kish into the Omani gas system, Iran is understood to be prioritising the export of South Pars gas.

Expectations are already being played down that Iranian gas will soon find its way to Oman. Al-Rumhy acknowledged in mid-September that the two sides were unlikely to commence the laying of the subsea pipeline for at least another two years. By this time, Oman may have made more progress in developing plans to tap domestic tight gas reserves, which would be more reasonably priced than Iranian imports. The Khazzan tight gas scheme, which could supply about 1 billion cubic feet a day of gas, affords an alternative means of supplying gas to Oman’s liquefied natural gas (LNG) facilities.

Pricing dispute

Price remains the major sticking point between the two sides, says Siamak Adibi, a gas analyst at UK consultancy FG Energy. “Omani expectations on price are lower than the level at which the Iranians are looking to sell. That is a big obstacle,” he says.

Muscat is looking for a price of reportedly about $6-7 a million BTUs, which is regarded as well below Iranian expectations. “Iran is looking for netback prices reflecting LNG exports to Asia, suggesting an ideal rate of about $12-13 a million BTUs at least,” says Adibi.

With Oman currently negotiating terms with the UK’s BP on the development of the Khazzan tight gas concession at rates substantially below this – $4 a million BTUs is one current estimate – there seems little incentive for Muscat to agree to pay such a high premium for Iranian gas, particularly as US officials have in the past reminded the government that gas imports from Iranian waters could be subject to the Iran Sanctions Act.

Difficulties in cementing a gas cooperation deal are not going to stymie the flowering of bilateral relations under Sultan Qaboos and Rouhani, however. The Omani leader’s 43-year reign began with Iranian military assistance, which helped quell the Dhofar rebellion. Such memories figure strongly in shaping Muscat’s policy towards Tehran and they will continue to oil the wheels of commerce across the Strait of Hormuz.

Key fact

In 2012, Oman’s exports to Iran reached $393m; imports from Iran were just $210m

Source: MEED