Compared with its GCC neighbours, Oman has the second most diversified economy after Bahrain, with the oil and gas sector contributing less than 50 per cent of gross domestic product (GDP).

Gas demand from the utility sector in Oman is predicted to exceed its allocation within the next five years

Muscat has taken great strides to develop other sectors of its economy during the past 20 years or so, but the need for diversification became more urgent at the turn of the century, as its oil output entered decline.

Production peaked in 2001 at 960,000 barrels a day (b/d) before falling to a low of 742,000 b/d in 2006. Output has since been lifted to above 800,000 b/d, thanks to a $10bn enhanced oil recovery programme, but it is unlikely to return to the levels seen at the height of production.

Oman gas shortage

In the past, heavy investment has been made by the state to develop other industries such as aluminium and steel production, but now, with the sultanate facing a gas shortage, efforts are being focused on developing the non-energy-intensive sectors of its economy.

Muscat’s economic development strategy – Vision 2020 – sets the tourism sector the target of contributing 3 per cent of the country’s national income by 2020.

Although the number of visitors to the sultanate fell 20 per cent to 934,019 last year, from 1.2 million in 2008, officials at the state-run Oman Tourism Development Company say the 3 per cent GDP contribution target has been achieved, more than 10 years early.

The Vision 2020 plan also calls for a more than doubling of the contribution made to the economy by the agricultural sector to 5 per cent, and for manufacturing, including food processing, to contribute 29 per cent of GDP. At present, agriculture accounts for 1.5 per cent of GDP, while manufacturing contributes some 9 per cent.

Nonetheless, oil and gas exports revenues still dominate accounting for more than 75 per cent of government revenues. Like other producers in the Middle East and North Africa region, Oman felt the impact of the collapse in oil prices in 2009.

Income derived from the hydrocarbons sector dropped 41 per cent last year, contributing to an 11 per cent fall in nominal GDP to $53.4bn in 2009, down from $59.9bn in 2008.

In 2009, the oil and gas sector accounted for just 38.8 per cent of GDP, compared with 45 per cent in 2007 and 50.9 per cent in 2008.

But with the recovery in oil prices, the International Monetary Fund is forecasting Oman’s economy to rebound, with growth of 6.1 per cent in 2010 and 2011. And so the sultanate is expected to emerge from the global financial crisis in good shape.

Total state debt in Oman, at 4.9 per cent of GDP, is the lowest among the six GCC member states. The government estimates revenues this year will amount to OR6.38bn ($16.59bn), based on a conservative average oil price forecast of $50 a barrel.

The budget for 2010 has been set at OR7.18bn and it puts job creation as a priority, along with spending on education and healthcare. At around 15 per cent, the country has a high rate of unemployment. But, although the great majority of Omanis are employed in the public sector, the participation of the local population in the private sector is growing.

Employment in Oman

Omanisation rates of 95 per cent have been achieved in banking sector employment. This compares favourably with the UAE, which set its banks the target of 50 per cent Emiratisation in 2009, a level that few have so far managed to achieve. The biggest challenge that the Omani government has to tackle in the short term is its gas shortage. Gas demand from the utility sector is predicted to exceed its allocation within the next five years.

The Oil & Gas Ministry has allocated 19.5 million cubic metres a day (cm/d) of gas for electricity and water production. But the sector’s gas requirements are forecast to reach 20.2 million cm/d or more by 2015, on the back of rising demand. Alternative fuels, such as coal, are being explored to feed power and desalination plants, and the development of renewable energy projects is also being considered, although their potential contribution to the power supply is small.

In June, Muscat’s hopes to develop its tight gas reserves experienced a major setback, when the UK’s BG Group decided to abandon work on its Block 60 concession in the west of the country. The gas reserves in the area are geologically complex and production was likely to prove both difficult and expensive to execute.

But, unless additional gas supplies are secured, either through new domestic production or through regional import agreements, the potential for further growth in Oman’s economy will be severely limited.