Oman LNG: tremendous potential
Oman will be looking mainly at gas-based industries to draw in foreign investments in the sixth five-year plan period from 2001 through 2005 with a number of projects already planned for implementation, Director-General of Industry at the Omani Ministry of Commerce and Industry Dr Hamed Al Dhahab has said.
The projects, to be implemented by the private and government sectors, will cost RO3 billion ($7.8 billion) and include the third Oman LNG train, two fertiliser projects, gas pipelines to Sohar and Salalah, the Sohar refinery and the aluminium smelter, Al Dhahab said.
Steps towards building the infrastructure for those projects have already been taken, he added. They cover the industrial port of Sohar and the associated industrial zone, the rehabilitation of Raysut Port and the promulgation of the Salalah Free Trade Zone.
Foreign direct investment (FDI) into Oman was said to have increased from $538 million in 1980 to $2.58 billion in 1999, but the foreign investment share represented only 4 per cent of equity capital according to the year 2000 industrial survey conducted by the Ministry of Commerce and Industry. Al Dhahab said the modest share of manufacturing was due to a number of reasons, the important one being that gas resources and the heavy industries basic infrastructure like ports and gas trunk lines were not ready for use by the large joint ventures under planning.
The official said several major projects had been included for privatisation including power generation, transmission and distribution power activities. He spoke of plans to privatise Seeb International Airport and to have private sector power plants at Al Sharqiyah, Barka and Salalah on the heels of the successful private Manah Power Plant.
In addition to oil- and gas-based industries, the government was focusing on the exploitation of fishery resources and on the food industry, Al Dhahab said. He noted that the food sector had done well and was considered one of the important sub-sectors of manufacturing.
Al Dhahab sent the following replies to Gulf Industry queries:
Q: What were the goals the ministry had set for foreign investments in Omani industry and to what extent have they been realised? Provide a breakdown for foreign investments in different sectors. If investments were less than expected in certain areas what do you think were the reasons?
A : After two decades of intensive development and by the beginning of the Fifth Five Year Plan (1995-2000), Oman is facing the challenge of the need for a major diversification of the economy that relies mainly on oil. The Vision 2020 was promulgated in 1995 with this objective as its main focus. Following the promulgation of Vision 2020, the First Five Year Plan in the framework of the Vision has initiated structural adjustments aimed at laying dawn a solid foundation for a diversified economic base led by the private sector. The Foreign Investment Law and other related laws, namely Commercial Law, Agency Law, Copyright Law and the Corporate Income Tax Law underwent revamping to adjust to the new era. The revised Foreign Investment Law allows up to 100 per cent foreign capital for projects that contribute to the development of the national economy, and generous taxation and other benefits have been made available for foreign investments.
The Law gives priority to the following sectors for attracting foreign investments:
(a) Industries using local inputs.
(b) High value-added industries.
(c) Export-oriented industries.
(d) Industries introducing new products or using modern technology.
(e) Industries that attract and localise internationally reputed industries.
(f) In the field of tourism preference is given to products involving the construction of integrated tourist villages and zones.
According to the World Investment Report 2000, the FDI (foreign direct investment) inward stock in Oman increased from $538 million in 1980 to $2587 million in 1999, However, in the manufacturing sector, the foreign investment share represented only 4 per cent of equity capital according to the year 2000 industrial survey conducted by the Ministry of Commerce and Industry .The modest share in manufacturing was due to a number of reasons. The important one is that gas resources and the heavy industries basic infrastructure like ports and gas trunk lines were not ready for use by the large joint ventures under planning.
Q: What steps is the ministry taking to step up the pace of foreign investments in local industries? Which new areas is it looking at to draw in overseas funds? What additional foreign investments is the ministry targeting for the period until 2005?
A: In the Sixth Five Year Plan 2001-2005, the main focus will be on gas-based industries and a host of projects have been (planned) for implementation during the plan period These include the third train for LNG, two fertiliser projects, gas pipelines (for facilitating ferrochrome-ferrosilicon-methanol units) to Sohar and Salalah, the Sohar Refinery and the aluminium smelter. These projects will be implemented by the private and public sectors and will include a significant share of foreign capital particularly from technology providers. The total cost of these projects amounts to about RO3 billion. The Government has already taken important strides to create the necessary infrastructure including the industrial port of Sohar and the associated industrial zone, the rehabilitation of Raysut Port and the promulgation of the Salalah Free Trade Zone. Gas drilling investments and gas transport lines are also underway for industries to avail themselves of the natural gas on time.
Q: What success has the government achieved in its privatisation programme? What is the scope for privatisation and which areas is the government looking at for replacing its own shares with private shares?
A: The Government has adopted a privatisation strategy with two objectives: to enhance the role of the private sector in economic development and to attract foreign capital. Also the strategy focuses on two distinct areas of privatisation, divesting government shares in existing projects and promoting and encouraging 100 per cent private sector investments in new projects in which the Government so far was the only investor.
In the first category the Government has already sold some of its shares to private shareholding in the following companies.
The second category is considered more significant as a potential for expanding privatisation. Success has been achieved in the education and health sectors. Many private colleges and hospitals have been established in recent years. The first phase Muscat Waste Water Treatment project has been awarded to a consortium of private companies.
The power sector is a significant area of planned privatisation. Following the success of the Manah Power Plant, which has been implemented by the private sector, there is a plan to set up a 240 MW power plant in Al Sharqiya, a 400 MW plant at Barka, and a 20OMW plant at Salalah by the private sector on a build-own-operate-transfer (BOOT) basis. Also under consideration is (a plan) to privatise existing generation, transmission and distribution power activities. These activities will initially be run by Government companies, which will eventually privatise. On the legal infrastructure a new law will be drafted to set up a body to monitor the privatised power companies,
The physical infrastructure is a prominent new area for privatisation. A classic example, which has already geared up momentum, is the establishment of a Free Trade Zone company in which the private sector will hold 60 per cent (local and foreign) of the shares and the government will hold 40 per cent. The company will have the exclusive right to own, manage, develop and provide services and utilities to the free zone. The Free Zone is set up with the objective of optimising the economic benefits from the container terminal and the transshipment hub at Salalah Port. There are plans to privatise Seeb International Airport. Already important steps have been taken in this direction by appointing advisors and financial consultants for conducting a feasibility study for the project. The whole process is expected to be completed by the year 2001.
The GTO (General Telecommunications Organisation) has been transformed into an Omani closed joint stock company. The new company, Oman Telecom-munications, is planned so as to find strategic investment for the purchase of a part of its share and a part could also be offered to the public.
The new Industrial Port at Sohar is also going to be privatised.
On the tourism side, the Government has successfully sold government-owned guesthouses to the private sector. The Al Sawadi Integrated Development Project will be developed by the private sector. The integrated tourism village will cover 34 sq km of land, which will be developed in three phases. The first phase will be developed over 9 sq km, with an investment of about $350 million. The project is expected to attract foreign and domestic joint ventures.
Q: What is the status of the Sohar Port Free Trade Zone and the Salalah Port Free Trade Zone (with details of zones management, development capital and companies involved in development)? What is the development schedule for the infrastructure in both areas and which industries/projects are likely to come up in those two areas? Describe important projects in the Sohar and Salalah areas, giving details of the promoters, the product base, raw materials, sourcing of raw materials and investments that will go in.
A: The Salalah Free Trade Zone establishment has been announced with a view to optimising economic benefits from the container terminal and the transshipment hub at Salalah Port. The Salalah Free Trade Zone Company, which will have an equity capital of R0.10 million, will be owned by the Government (40 per cent), Hillwood (40 per cent) and Salalah Port Services (20 per cent). It will have the exclusive right to manage, develop and provide services and utilities to the Free Zone. The total area proposed to be developed is around 6000 acres. It is hoped that the concessional agreement will be signed by the end of September and development work will begin in the fourth quarter of this year. According to this plan, the first phase of the Free Zone should be operational by the first quarter of next year. The capital expenditure for developing the basic infrastructure and buildings in the first phase will be around $80 million, which will be invested over five to 10 years. The Free Trade Zone will attract companies engaged in distribution, warehousing and manufacturing activities. The target industries are pharmaceutical, plastics, engineering, electronics, bulk breaking and strategic food that will import raw material from cheap sources and export finished products to high-demand markets. About 1.8 million sq m will be allocated for distribution companies and 1.1 million sq m for light manufacturing.
Sohar Industrial Estate: In the Sohar Industrial Estate Master Plan that has already been completed with an area earmarked for a future Free Trade Zone, the major area is allocated for heavy industries, mainly gas-based ones. The projects intended to be implemented on the Estate include a long-residue refinery, a polypropylene plant, an aluminium smelter (capacity 477,000 tonnes per year), a urea fertiliser plant (urea 865,800 tonnes per year, liquid ammonia 166,500 tonnes per year), a ferrochrome and ferrosilicon plant (ferrochrome 52,600 tonnes per year and ferrosilicon 20,500 tonnes per year) and a methanol plant (1.75 million tonnes per year). Work on the industrial port, which will be an important impetus to the development of the Estate, is under way, Breakwater construction has been nearly completed. The consultancy tender for the Estate infrastructure is being formulated. The cost of the proposed infrastructure is estimated at RO 5 million.
Q: What is the significance of Oman LNG to the national economy?
A: A significant quantity of the proven reserves of natural gas has been allocated for LNG (two trains already underway and the third train planned). LNG ranks high compared to other projects utilising gas when one takes into account economic and socio-economic factors. The LNG project shows attractive opportunities in terms of the market, takes advantage of the infrastructure, generates higher revenue for the Government (about 10 per cent of government revenues) and is easier to monitor as a single project. The value-added segment of the first train of LNG amounted to RO130.7 million in the year 2000 Ñ 33 per cent of value added in the manufacturing sector and 1.7 per cent of the country's GDP.
Q: What prospects does the ministry see in industrialisation based on the country's oil and gas reserves? In the next few years, what energy-based projects do you expect to see?
A: Natural Gas is an important natural resource second to oil with a potential reserve of about 40 tcf. Natural gas is viewed as an important impetus for industrialisation, both as feedstock and a source of energy, A number of projects in this context are under consideration; some of them are in an advanced stage. These are: two urea fertiliser projects in Sohar and Sur, a methanol project, an aluminium smelter, a ferrochrome-ferrosilicon project, a domestic gas distribution network and a polypropylene plant. These projects have the advantage of increasing export and foreign-exchange earnings and the spinning of downstream manufacturing and services industries, hence expanding the industrial base and augmenting the value added.
Q: Other than industries based on oil and gas reserves, which industries have been identified as having potential and to what extent has the potential been exploited?
A: In addition to oil- and gas-based industries, which are mainly in the development stage, the government focus has been on the exploitation of fishery resources and on the food industry, based on local or imported inputs. The food sector has fared well and is considered one of the important sub-sectors of manufacturing. According to 1998 industrial-survey figures, this sector contributed 16 per cent of the value added in the manufacturing sector, 20 per cent of sales revenue and 19 per cent of the number of employees, Compared with 1997, the value added grew by 8 per cent and sales revenue by about 14 per cent. Important food industries established recently include baby food (Sohar Industrial Estate), tuna canning (Raysut Industrial Estate) and health foods (Raysut Industrial Estate).
Q: What was the national GDP for each of the years 2000 and 1999 and the manufacturing sector's share? What are your expectations for 2001?
A: The National GDP registered a value of RO6000.3 million and RO7602.9 million for 1999 and 2000 respectively i.e. 26.7 per cent of the annual growth. The manufacturing sector's contribution was RO253.9 and RO397.8 million for 1999 and 2000 respectively with a growth rate of 56.7 per cent. The contribution of the manufacturing sector in the national GDP was 4.2 and 5.2 per cent for the year 1999 and 2000 respectively. The large increase in the value added in the manufacturing sector in the period 1999-2000 was due to the commissioning of the LNG plant and the start of export of LNG. Thus in 2001, some further 'value added' is expected on account of a buildup of capacity at the LNG Plant. The contribution of the manufacturing sector may thus register 6 per cent of the national GDP.
Q: How have the Rusayl and other industrial estates fared over the past two or three years? Which important industries/projects have emerged over the past two years in the industrial estates?
A: There has been parallel development on a number of industrial estates by way of expansion of the service plots. In Buraimi 250,000 sq m, in Raysut 320,000 sq m, and in Rusayl 350,000 sq m are being developed as an Information Technology Area. Important projects implemented in the last two or three years are as follows:
Sohar - Carton paper, chlorine and caustic soda, baby food, carton boxes, sulphuric acid, metal furniture, marble granite agglomerate, GRP and GRV pipes and galvanised steel pipes,
Raysut - Leather tanning, organic fertilisers, mineral water, tuna canning, plastics, welding rods and health food.
Buraimi - Paint, decorative stones and plastic pipes
Rusayl - Animal feed concentrates, distribution transformers, metal cans, pharmaceutical products, steel bars, zinc coating and polypropylene and polyethylene pipes.
Nizwa - (under implementation) Pharmaceutical products and metal castings.
Q: How serious is the situation regarding sick manufacturing concerns? How many companies has the ministry identified as sick in different parts of the country and what steps are being taken to assist them in regaining their health? To what extent have the measures succeeded?
A: The Government recently conducted a diagnostic study aimed at analysing industries which had availed themselves of government soft loans and which were located on industrial estates. This was done in order to reassess policies pertaining to these industries. The sample of the units studied represented one-fifth by number and about half the value added of the Omani industrial sector. According to the study conclusions, about 48 per cent of the sample can be considered as healthy, 20 per cent are in various stages of incipient sickness that have the potential to become healthy in the short-term with minor intervention, and about 33 per cent are sick and have inherent weaknesses requiring a comprehensive programme for turnaround.
The diagnosed situation as outlined cannot be considered a serious situation for the manufacturing sector per se, for a number of reasons. First, the number of units studied represents only a small percentage of the manufacturing sector as mentioned. Secondly, about 35 per cent of the units under analysis are less than five years old and many are passing through a gestation period and some are recovering from management failures and correcting weak project plans. Thirdly during the period of the analysis there was a general worldwide recession in the economy, particularly in South-East Asia. Fourthly, the units classified as unhealthy have in fact contributed significantly to the development of the industrial sector, contributing 22 per cent of the total value added, 34 per cent of total employment and 24 per cent of exports of the manufacturing sector, though they constitute 52 per cent of the classified samples by number.
The study has also concluded that government soft loan schemes had a large reach embracing many small units and had galvanised the performance of sound units. Nevertheless the study is a useful milestone for monitoring industrial growth and facilitating early correction where necessary. It forms a basis for further milestone diagnostic studies, which in total can provide a useful input for sound long-term industrial strategy, As for the results of the present study they have been made use of in taking measures to correct unhealthy situations, For this purpose a committee has already been established to look into specific cases in more detail and discuss them with the owners and prepare an effective business plan for rehabilitation. A number of cases have already shown positive possibilities of rehabilitation.
Q: What were the main causes for the failure of the companies?
A: The study has identified 17 causes of sickness among the sample units. The major ones related to management inadequacies; market-related causes included a lack of promotional efforts, a weak marketing organisation and shortcomings in the basic assumptions of the project.
