General

Oman is the Middle East’s largest non-OPEC crude oil exporter. Oil is largely an onshore activity. The first concession was granted to the Iraq Petroleum Company (IPC) for 75 years and had five shareholders. The government of Oman acquired a 60 per cent shareholding in IPC and renamed it Petroleum Development Oman (PDO). PDO is the national oil exploration and production company of Oman. It accounts for nearly 85 per cent of the country’s crude oil production and nearly all of its natural gas supply. Apart from the government, Royal Dutch Shell has a 34 per cent share, Total has a 4 per cent share and Partex has a 2 per cent share in PDO. Oman’s oil reserves are estimated to be around 5.5 billion barrels and its daily oil production is around 743,000 barrels per day.

More than 90 per cent of oil production is exported. The majority of Oman’s exports are destined for the Far East market. Japan, South Korea, Singapore, China, Taiwan, Thailand and the Philippines accounted for 85 per cent of total crude oil exports in 1990. Japan accounted for 40 per cent of total exports, South Korea for 26 per cent, and Singapore for 7 per cent. Less than 7 per cent of crude exports were for the United States market.

Following the merger in October 2007 of Sohar Refinery Company LLC with Oman Oil Refinery Company LLC pursuant to Royal Decree No. 99 of 2007, the country’s primary refinery and terminal is the Oman Refineries and Petrochemicals Company LLC (ORPC). The Ministry of Finance owns 75 per cent of the share capital and Oman Oil Company SAOC holds the remaining share capital. ORPC’s refineries at Muscat and Sohar produce liquefied petroleum gas (LPG), butane, jet fuel and two grades of petrol. The refinery was designed to meet domestic demand for petroleum products. ORPC meets domestic needs for refined oil products, which Oman previously had to import. ORPC sells refined petroleum products to Oman companies engaged in the distribution of the products within the country.

Petrol, kerosene and diesel are transported via pipelines to local marketing companies’ terminals for eventual distribution within Oman. Surplus kerosene and diesel are exported via the Shell Oman Marketing terminal. Bunker fuel oil is transferred via pipeline to ORPC storage tanks at PDO for export. Butane is taken out of the refinery by road tanker. Local gas companies carry out the transportation, bottling and eventually distributing it for domestic use.

Oman’s energy needs are basically met by oil and gas. Oman’s gas reserves are estimated to be around 30 trillion cubic feet and PDO is processing part of it to meet local demand. An increasing proportion of industrial feedstock is composed of gas, all of which is produced domestically. As such, no alternative sources of energy other than oil and gas are presently in use. To the best of our knowledge, no development of wind power has taken place.

ORPC meets the nation’s total demand for LPG, motor petrol, aviation fuel, diesel and fuel oil and is the single supply source of petroleum products in the Sultanate of Oman. The products created from Omani crude oil are received from PDO and supplied after refining to the marketing companies. Typical product volumes produced from Oman Export Blend (OEB) Crude are: long residue and bunker fuel oil (52 per cent); diesel (22.5 per cent); petrol (17 per cent); kerosene and jet A-1 (6.7 per cent); fuel gas; and LPG.

A 162-mile pipeline between ORPC and the new refinery in Sohar began operation in 2006 to facilitate the transport of mixed feedstock of crude from PDO and long residue from ORPC to Sohar for processing. The refinery has a crude unit with a capacity of 116,400 bbl/d (barrels per day) with a facility for extracting sulphur from petrol and a catalytic cracker with a capacity of 75,260 bbl/d that will produce gas and petrol from the leftover elements of the normal refining process. The major products of the new refinery include propylene, LPG, gasoline, diesel, fuel oil and sulphur.

In the early 1990s, Oman was faced with a diminishing reserve base. Proven reserves were estimated at 4.6 billion barrels in 1992, which is small in comparison with other Gulf states. Oman is not a member of the Organisation of Petroleum Exporting Countries (OPEC); but, Oman has cooperated with OPEC guidelines on occasions. In an effort to ease its dependence on oil, Oman has sought to diversify its economy into light, and recently heavy, industries as well as tourism. The Council for Financial Affairs and Energy Resources regulates all the different aspects of the petroleum industry, be they the concessions granted to companies, transportation of oil and gas, or investments in this sector, and the grounds of fixing the cost of the sale of oil, etc. Although oil production constitutes less of Oman’s GDP than was the case during the 1980s, oil is still the major source of revenue for Oman’s government and the mainspring of the country’s economy. Manufacturing still accounts for only a small percentage of GDP.

Royal Decree No. 42 of 1974 issues the law dealing with petroleum and minerals. Royal Decree No. 2/99 defines the restricted areas for oil and gas pipelines, ministerial decisions by the Ministry of Oil and Gas, decisions by the Committee for Petroleum Concessions, and the regulations of the Council for Financial Affairs and Energy Resources, regulate activities in this sphere. Exploration of oil and gas is undertaken on the basis of concession agreements granted by the government of Oman pursuant to a specific royal decree.

The Council for Financial Affairs and Energy Resources, acting in conjunction with the Ministry of Oil and Gas (pursuant to Royal Decree No. 60 of 1996) with its various departments, directs activities relating to the exploration and extraction of oil. The Directorate General of Petroleum and Mineral Resources is authorised to grant permits for this activity. No activity may take place in the petroleum sector without the consent of the relevant governmental authorities. These authorities are as set out in question 4. Oil and gas are considered to be natural resources and as such belong to the government.

As per Royal Decree No. 37/97 the ‘Council of Financial Affairs and Energy Resources’ considers investments of the state in the sphere of oil and natural gas; formulates the general policy regulating the production and transportation of oil and natural gas; the grounds on which the cost of oil sale is to be determined; fixing the prices for the sale of gas for the purpose of local consumption and supervise the Oil Reserve Fund.

Government decisions in the petroleum sector are normally contractual actions under the relevant concessions as opposed to regulatory measures. As such, disputes are normally handled by negotiations or alternatively by arbitration in accordance with the relevant concession agreements. Disputes over oil sector activities that might arise between, for example, an operating company and an EPC contractor, would be settled by the Omani courts. The courts comprise a well-structured tier system up to the Supreme Court.

American Petroleum Institute (API) standards are used throughout Oman.

8 What government body maintains oil production, export and import statistics?

Statistics are maintained by the PDO and the Ministry of Oil and Gas. At the same time, the individual operating companies maintain statistics on their annual production figures.

Royal Decree 42/74, which issues the Petroleum and Minerals Law, provides that: ‘all rights, title and interest in and to petroleum and mineral resources prior to extraction which are under the sovereignty and jurisdiction of the Sultanate of Oman, whether found on the surface, underground, in the air or in territorial waters or seas, are within the exclusive domain of His Majesty the Sultan and are the property of the Government of the Sultanate.’ If an oil reservoir or a mineral deposit is located under private property, ownership of the oil or minerals, as the case may be, would lie with the government and the authorities have the right to expropriate the land, on payment of due compensation as per the rule of law.

Oman’s northern oilfields produce lighter grades of crude oil, whereas a group of southern fields produce heavier crudes. Development of the southern fields was contingent on the suppression of the Dhofar rebellion and the re-establishment of political stability in the sultanate. Gradual increments made to Oman’s reserve base since 1980 are attributable to the discovery of new, smaller oil fields. More than one-half of Oman’s total reserves are concentrated in the northern region, where six fields are part of a single geological structure containing recoverable reserves of more than 2 billion barrels. Similarly, in the south, eight principal producing fields also come from a single geological structure. Hardly any areas of Oman are off-limits to exploration and production activities. As stated earlier, however, all exploration and production activities take place pursuant to concession agreements that define the area of activity of the concession holder.

The concession regime is administered by the Ministry of Oil and Gas. The Directorate General of Petroleum and Mineral Resources under this ministry is the particular body concerned with this aspect. The Council for Financial Affairs and Energy Resources lays down the broad policy guidelines to achieve the various objectives of the government. This activity is generally carried out by virtue of agreements entered into with the government called ESPA agreements (Exploration Production Sharing Agreements). It could be either granted as a concession or it could also be by means of direct Sultani Decree.

Since most production is based on ESPA agreements, dues payable to the government are based on the terms of the particular agreement entered into. These agreements provide that the revenue from the oil production is to be shared between the government and the concession holder or company in an agreed ratio, for example 20:80, or 30:70 as the case may be, after meeting the costs involved. At present, royalty rates are not available. A new law regulating the petroleum industry is being considered and may be released shortly.

Although the original term of the first concession agreement was 75 years, more recently oil concession agreements are for much shorter periods. Generally a three-year exploration licence is granted, subject to a further extension of another three years. If oil is discovered and found to be commercially viable, then agreements and contracts are entered into with the government for a 10-year period or a 20-year period as the case may be.

The regulatory regime extends up to the international offshore border of the Oman. The borders of Oman have been demarcated by peaceful negotiation under the reign of the present ruler, Sultan Qaboos Bin Said with all the neighbouring countries, principally UAE, the Republic of Yemen and Saudi Arabia.

Exploration and production activities may be conducted only by holders of exploration and production permits or concessions from the Directorate General of Petroleum and Mineral Resources, as per the terms of the agreement that has been entered into, provided that such permit shall not be required if it is obtained directly by a Sultani Decree. PDO, being the national oil exploration and production company of Oman, accounts for more than 90 per cent of the country’s crude oil production and nearly all of its natural gas supply. The original concession holders at the PDO are made up of the government of Oman, Shell Group, Total and Partex. New concessions, when granted, can result from direct negotiations with the government or the Sultan. BP Amoco, for example, signed a major production-sharing agreement with the government in January 2007.

Despite PDO’s dominance, as part of its concession agreement, it is obliged to divest itself of acreage where it is inactive and several other companies are now involved in Oman’s oil sector. These include Elf Aquitaine Oman LLC, China's CNPC and Sinopec and Occidental Oman LLC, which holds the largest market share after PDO having been awarded the Mukhaizna cluster in 2005 after it was relinquished by PDO and two blocks close to the border with the United Arab Emirates in 2006. Other, relatively new entrants include the Petroleum Authority of Thailand, the Abu Dhabi National Energy Company (both awarded blocks in Dhofar); Australia's Oilex and Emerson of the United States (awarded blocks In the Al Wusta region); and the Hungarian Oil and Gas Company and Dubai-based Indago Petroleum, which were bothe awarded blocks in the Buraimi region. Meanwhile, India's Reliance Industries, Maersk Oil Oman, Mitsui & Co, Hunt Oil and Circle Oil of Ireland are among those International companies who operate offshore concessions.

PDO’s main hopes of stemming its decrease in production involve increasing recovery rates, and discovering and exploiting new fields, particularly in the south. Building on its success in contracting out the development of a cluster of small oil fields in the Nimr-Karim area to a specialised service provider PDO announced the award of its first Small-Fields Service Contract to a consortium led by MedcoEnergi, Indonesia’s largest publicly quoted oil and gas company. The award marked a new strategy adopted by the company in the development and management of fields that are too small and too remote to merit PDO’s undivided attention These service contracts are aimed at raising the production levels of PDO’s small fields in a cost-effective way, by granting the service provider a high degree of freedom in its operations and offering it strong financial incentives to increase the production of oil. In the meantime, The agreements are set up in such a way that the contractor does not have any rights to the produced oil or reserves. The fields, together with their associated physical assets and reserves, remain the property of PDO’s shareholders. It is expected that companies with a successful track record in the development and operations of small and marginally economic oilfields will be awarded contracts.

A joint venture can either be a contractual joint venture or a corporate joint venture. PDO in Oman is a corporate joint ventures between the government and the relevant international concession holders. There are also corporate ventures as detailed above.

The concerned governments would agree upon the limits of production in case of cross-border reservoirs, if any.

All crude oil from the northern and southern fields is collected and blended into Omani export blend. The transportation of crude oil and crude oil products is regulated as per the regulations laid down by the Council for Financial Affairs and Energy Resources. Royal decrees have been passed setting up the prohibited zones, issuing concessions and setting up bodies to issue regulations relating to oil and gas. Generally it is PDO that finds oil fields and develops them. The crude oil that is produced from the fields is not sold by the company but rather delivered to a storage facility, where it is loaded onto sea-going tankers at the discretion of the company’s shareholders. As such, the company does not ‘earn’ any money from the sale of oil – its shareholders do. The shareholders in turn cover all budgeted operating and capital expenditure.

As per the general policy formulated by the Council of Financial Affairs and Energy Resources, permits are required from the relevant authorities for the conduct of any activities relating to the transport of crude oil and crude oil products.

Health, safety and environment

Health, safety and environmental issues are addressed by a set of fairly complex regulations promulgated by multiple authorities. To a significant extent, petroleum sector operating companies impose health, safety and environmental requirements on their contractors, who are in contractual conformity with the labour laws, social insurance laws and environmental laws. In addition, the municipalities have long taken a leading role in promulgating and enforcing health, safety and environmental regulations. As a result, a significant body of regulation exists that suitably takes care of this aspect. Rules governing drilling rigs, production platforms, refineries, pipelines and service stations are largely the responsibility of the Council for Financial Affairs and Energy Resources. Violations can result in denials of permits to operate.

PDO in May 2007 signed two major engineering, procurement and construction (EPC) contracts for its Qarm Alam steam injection project. The Qarn Alam steam injection project is the world’s first full-field steam injection project based on thermally assisted gas/oil gravity drainage (TAGOGD) in a fractured carbonate field making use of EOR recovery process, keeping development costs to a minimum. Most of the steam will be generated by waste heat recovery from the existing Qarn Alam power station, thereby significantly reducing the project’s carbon dioxide emissions and saving on gas consumption. Scheduled to reach full operation in 2010, the project is expected to increase recovery from Qarm Alam from 3% to 25%. This is part of PDO’s strategy to preserve the environment while benefiting from the waste heat. It represents the successful conclusion of an innovative contracting strategy in difficult market conditions.

It is unlawful for any operator to permit waste, and they are to conduct operations with due diligence to prevent serious and irreparable injury to the environment, and take all steps to minimise pollution of air and water. Following the establishment of The Ministry of Environment and Climatic Affairs (MOECA) pursuant to Royal Decree No. 90 of 2007, MOECA has the portfolio of regulating these requirements and promulgates environmental protection regulations that apply throughout Oman. In accordance with the Environmental Law and the Industry Law, before any activity which may be the direct or indirect source of environmental pollution is carried out, an environmental permit must be obtained from MOECA supported by technical documents. Legislation to prevent air, noise and soil pollution, and the conservation of water has been passed. This is apart from legislation relating to chemicals, onshore and offshore pollutants, discharge of wastewater and hazardous waste. Penalties for non-compliance with these laws range from stiff fines of three times the cost of restoration or three times the damage to the environment, whichever is greater, to imprisonment.

In addition to the Oman Labour Law (OLL), legislation applicable to labour and employment in Oman is contained in various ministerial decisions, such as MD 127/94 and MD 19/97 and the Social Insurance Law in Oman. Employees in the public sector are governed either by Civil Service Regulations or the special internal employment regulations followed by their public sector employers. OLL provides for the minimum benefits to be made available by an employer to an employee, and is applicable to both Omani and non-Omani employees unless expressly stated otherwise.

The majority of the labour force in Oman is foreign. Statutory compliance with the Omanisation policies is mandatory, and requires 35 per cent Omani participation in the private sector, and ranging anywhere from 90 per cent to 100 per cent Omanis in the ministries and government-run sector. All foreign employees must hold residence visas and have labour clearance, sponsored by their employers. Violation of labour regulations can result in fines and other administrative penalties, and may lead to criminal prosecution in extreme cases. Oman does not have any anti-discrimination rules as such. A company that hires female employees must give them statutory maternity leave and may not require them to work at night.

Tax is imposed by the director of taxation affairs pursuant to Royal Decrees No. 47/81, which lays down the general provisions relating to taxation on petroleum products. Further, the third schedule of this decree stipulates the special provisions relating to petroleum companies. This has been followed up by other legislation as well.

The price-setting mechanism is regulated by the Council for Financial Affairs and Energy Resources. But the shareholders of PDO, which controls 90 per cent of the oil production in Oman, have a say in this decision.

There are no competition regulations in Oman as such. All activities in the petroleum sector are subject to regulation at the ministry level by the Ministry of Oil and Gas.

See question 25.

Oman is not a member of OPEC and is not bound by the OPEC production and export guidelines. On occasions, however, it has complied with OPEC decisions to cut oil production to raise oil prices.

The acquisition of oil-related interests by any party, foreign or local, can only be acquired by means of a Royal Decree granted by the Sultan of Oman or by the Ministry of Oil and Gas.

No special rules apply to cross-border sales or deliveries of crude oil or crude oil products. In practice, all of these deliveries are of the nature of export transactions. Such transactions are closely controlled by the shareholders of the relevant
operating companies.

Update and Trends

(What are the current trends in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory frameworks?)

Oman has taken steps in recent years to diversify away from oil and one route has been through the exploitation of its large natural gas reserves. Oman now has three liquefied natural gas (LNG) trains with a total annual capacity of 485bn cu ft and, on January 8th 2009, the shipping of Oman’s 1000th consignment of LNG took place. November 2008 also saw the first piped gas from the Dolphin Gas Project reach Oman from Qatar (via the UAE) with Dolphin Energy initially undertaking to pump 200m cu ft of gas per day into Oman. The Dolphin gas is the fourth gas supplier into Oman Gas Company’s (the national gas company) after PDO, Occidental and PTTEP and represents the continued development of an integrated gas network across the GCC.