Domestic market overview
What is the extent of oil and gas production in your jurisdiction?
Oman is the largest oil and gas producer in the Middle East that is not a member of the Organisation of Petroleum Exporting Countries (OPEC). While there is activity in offshore oil and gas blocks in Oman, oil is largely an onshore activity. The production and export of crude oil and natural gas is the biggest contributor to the Omani economy. In total, these activities contributed 29% of the nominal gross domestic product (GDP) in 2017 and 26.4% of the nominal GDP in 2016. In addition, petroleum activities are the main source of government revenues; they accounted for approximately 75.4% of total government revenues in the financial year ending December 2017.
According to latest estimates, Oman has an estimated 4.740 billion barrels of proven crude oil and condensate reserves and 24.96 trillion cubic feet of proven natural gas reserves. The average daily crude oil and condensate production for the six months preceding 30 June 2018 was 968,600 barrels per day (bbl/d), which is down from the 2017 average of 970,400 bbl/d per day. The average daily natural gas production for the six months preceding 30 June 2018 was 117,800 cubic metres per day. This was an increase from the average daily production (106,800 cubic metres per day) in 2017. The reduction in the average daily production of crude oil and condensate since 2017 is primarily due to the commitments that the government made at the December 2016 OPEC meeting in Vienna. This reduction is still ongoing, following Oman’s further commitments at the November 2017 OPEC meeting to extend the production cuts until 2018. In addition, following discussions at the 2018 OPEC meeting, all members have agreed a further combined cut of 1.2 million bbl/d. This will result in further cuts in production.
Exports of crude oil from Oman increased in 2017 despite the increased use of domestic refineries; similarly, crude oil exports increased in 2018. The majority of Oman’s exports are destined for the East Asia market, with China being the largest importer in 2017, accounting for almost 75% of Oman’s crude oil exports.
Government-owned companies produce a majority of the oil in Oman, including:
- the Petroleum Development Oman – the main operator of oil assets and producer of oil in Oman;
- Oman Oil Refineries and Petroleum Industries Company – responsible for operating oil refineries;
- Oman Gas Company SAOC – responsible for the transmission and distribution of gas;
- Oman LNG; and
- the Oman Oil Company – the government’s investment arm in the oil and gas sector.
The government encourages private companies to undertake oil and gas activities in Oman and, as a result of the government’s efforts, blue-chip companies such as British Petroleum (BP), Occidental, Shell, Total and Partex are undertaking oil and gas activities in Oman.
How does domestic energy consumption break down with respect to oil and gas, as well as imports and exports?
The domestic oil and gas sector meets all of Oman’s domestic energy consumption requirements. According to government statistics, almost 90% of oil and gas produced in Oman is exported to other economies, with China being the main importer of Omani oil. As the government’s projects in the energy sector start to come online, it is anticipated that domestic demand for oil and gas will increase and that this may be met by new discoveries, such as the Khazzan gas field. Oman does not import crude oil, although it does import certain refined petroleum products for use in the domestic market.
Natural gas consumption in Oman is also on the rise. In the first six months of 2018, total natural gas production in Oman reached 21,320 million cubic metres. This represents an increase of 117.8 million cubic metres per day in the first six months of 2018, up from 106.8 million cubic metres per day in 2017. The increase in production is principally attributable to BP Oman’s Khazzan field, which went on-stream at the end of 2017.
What are the current trends and future prospects for oil and gas supply and demand in your jurisdiction, and what policies has the government adopted to address these?
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 compared with other Gulf Corporate Council countries.
Oman is not a member of the OPEC. However, Oman has official observer status and has cooperated with OPEC guidelines on occasion. In an effort to ease its dependence on oil, Oman has sought to diversify its economy into light and heavy industries as well as tourism. The Council for Financial Affairs and Energy Resources regulates all aspects of the petroleum industry, including:
- concessions granted to companies;
- the transport of oil and gas; or
- investments in the oil and gas sector; and
- the grounds for fixing oil sale costs.
Although oil production constitutes less of Oman’s GDP than in the 1980s, oil is still a major source of revenue for the Omani government and the mainspring of the country’s economy, accounting for around 87% of budget revenues, 45% of the GDP and 60% of total export revenue according to 2012 figures reported by the National Centre for Statistics and Information. Manufacturing still accounts for only a small percentage of the GDP.
The Ministry of Oil and Gas is focusing on increasing the use of enhanced oil recovery techniques, which are targeted to account for 22% of oil output by 2021.
Due to ever-increasing domestic needs, the government is set to invest in more oil reserves.
The government is keen to secure additional gas reserves to meet rising domestic consumption. Fuel consumption in Oman is expected to rise by 10% to 15% per year, driven by higher demand from the industrial sector and power producers. In 2016 total gas consumption rose by 2.6% from the previous year, most of which was driven by industrial projects, which recorded a growth of 4.6%.
Therefore, the government is seeking to develop major gas projects. The biggest of these is BP's Khazzan development in Block 61 onshore Oman. The field is a tight gas formation with large recoverable resources. The total initial investment target is $16 billion. Phase I successfully began in September 2017 with Phase II anticipated to come on-stream in 2021. Phase II involves:
- the expansion of the Block 61 contract area;
- the addition of a third gas processing train; and
- the introduction of further gathering systems to support a significant increase in the volume of natural gas to be produced.
What are the primary laws and regulations governing the oil and gas industry in your jurisdiction?
The Oil and Gas Law (Royal Decree 8/2011) is the key piece of legislation in the oil and gas sector. The law sets out broad and general obligations for parties that are granted interest in hydrocarbon assets in Oman. To date, the executive regulation of the Oil and Gas Law has not been issued. Rights to explore and exploit oil and gas assets of the sultanate of Oman are granted pursuant to exploration and production sharing agreements (EPSAs), which set out the detailed rights and obligations of parties that have been granted the rights to explore or exploit hydrocarbons in Oman.
What government bodies are charged with regulating the oil and gas industry and what are the extent of their powers?
The Council for Financial Affairs and Energy Resources, acting in conjunction with the Ministry of Oil and Gas (pursuant to Royal Decree 60/1996) and its various departments, directs activities relating to the exploration and extraction of oil. The Directorate General of Petroleum and Mineral Resources at the Ministry of Oil and Gas can grant permits for these activities.
As per Royal Decree 37/97, the Council of Financial Affairs and Energy Resources:
- considers state investments in oil and natural gas;
- formulates the general policy regulating the production and transport of oil and natural gas;
- decides the grounds on which oil sale costs are determined;
- fixes gas sale prices for the purposes of local consumption; and
- supervises the Oil Reserve Fund.
As per Royal Decree 2/2008, the Ministry of Oil and Gas:
- prepares and carries out studies, plans and policies to ensure the optimum use of oil and gas wealth;
- manages and supervises the necessary surveys of oil and gas wealth sources and the necessary economic studies for any projects relating to their exploitation in coordination with the concerned government entities;
- supervises all activities relating to researching and drilling for oil and gas and any production therein by companies awarded concessions;
- conducts studies on international oil and gas market conditions, which are used when formulating crude oil and natural gas production marketing policies;
- concludes agreements with specialised companies and supervises their implementation of the terms and conditions therein;
- protects the sultanate’s interests with specialised companies operating in the oil and gas industry and ensures that these companies abide by all applicable laws;
- manages and supervises government investments in Omani oil and gas sector in coordination with the concerned government entities;
- prepares draft laws and regulations to govern the functioning of the oil and gas sector;
- represents the sultanate at international platforms relating to the oil and gas sector; and
- coaches and trains individuals to undertake various ministry work.
Exploration and production
Who holds the rights to oil and gas reserves in your jurisdiction?
The Oil and Gas Law (Royal Decree 8/2011) provides that, irrespective of their location in Oman, petroleum substances in their natural form are the sultanate’s property.
Is there a distinction between surface and subsurface rights?
The Oil and Gas Law provides that oil and gas substances, irrespective of their location in Oman, are the sultanate’s property. As such, the rights to oil and gas substances may be transferred only pursuant to the Oil and Gas Law. The government may grant surface and sub-surface rights to oil and gas resources to third parties by way of an exploration and production sharing agreement (EPSA) which must be ratified by royal decree and issued by the sultan.
What rules and procedures govern the grant of rights for exploration and production purposes (eg, through licences, leases, concessions, service contracts, production sharing agreements)?
The Directorate General of Management of Petroleum Investments under the Ministry of Oil and Gas governs the concession regime. The Council for Financial Affairs and Energy Resources sets out the broad policy guidelines to achieve various government objectives. These activities are generally carried out by virtue of agreements entered into with the government (ie, the EPSAs ratified by royal decree or by direct royal decree). Those granted concession rights may enter into service agreements with third parties in order to meet their functions and responsibilities under the EPSA.
Concession agreements require ratification by royal decree. The Oil and Gas Law prescribes no specific procedure to be followed while applying to the government for a concession, with the exception that the applicant must be technically and financially qualified to carry out the investment project as assessed by the Ministry of Oil and Gas in accordance with Article 10 of the Oil and Gas Law.
Tender documents floated by the Ministry of Oil and Gas in relation to a new block will contain the necessary details for preparing and submitting the bids to the ministry, as well as the financial and technical qualifications expected from an applicant. Alongside their bids, bidders must usually submit to the ministry (among other things):
- a letter of intent;
- a signed confidentiality agreement; and
- a non-refundable deposit.
The Oil and Gas Law contains no specific procedures regarding application costs or timeframes.
What criteria are considered in awarding exploration and production rights (eg, are there any restrictions on the participation of foreign investors/companies)?
In accordance with the Oil and Gas Law, concessions may be granted only to technically and financially qualified applicants. While the Oil and Gas Law does not require specific types of company to apply for a concession, concession holders will either be required to incorporate a subsidiary under the Commercial Companies Law (Royal Decree 18/2019) or to register a branch office in Oman. Article 24 of the Commercial Law (Royal Decree 55/90) states that non-Omanis may not engage in business in Oman unless permitted to do so by applicable Omani laws.
Thus, in order for a foreign company to undertake petroleum activities, it must establish a business presence in Oman after complying with the Foreign Capital Investment Law (Royal Decree 102/94), which provides that the capital of a commercial company established in Oman must be at least 30% owned by an Omani national. That said, the government may exempt an applicant from this requirement if the applicant can prove that its project will significantly contribute to the development of the national economy. Notably, a branch office can be established only if the foreign company already has a government contract to undertake a project for the benefit of the Omani government.
Are there any special legal provisions applicable to joint ventures?
Joint ventures under Omani law can take the form of either:
- unincorporated or contractual joint ventures which:
- have no separate legal personality;
- are not registered with the Ministry of Commerce and Industry; and
- are primarily governed by the contract entered into between its founders for its formation; or
- a commercial company registered by multiple shareholders subject to the national shareholding requirements under the Foreign Investment Law (Royal Decree 102/94).
Both types of joint venture are governed by the Commercial Companies Law (Royal Decree 18/2019); however, unincorporated joint ventures are regulated only by Articles 85, 86 and 87 of the this law.
Can exploration and production rights be transferred to third parties?
According to Article 19 of the Oil and Gas Law, the transfer or waiver of concession rights by a concession holder to a third party is prohibited without ministry approval and a subsequent ratification of such transfer or waiver by royal decree.
Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?
Yes – several large and state-owned oil and gas companies (eg, Petroleum Development Oman) employ fracking in their operations.
Transport and storage
What is the general legal framework governing the transportation and storage of oil and gas resources in your jurisdiction?
According to Royal Decree 37/97, the Council for Financial Affairs and Energy Resources regulates all aspects of the petroleum industry, including formulating the general policy regulating the production and transport of oil and natural gas. In accordance with Article 4 of the Oil and Gas Law (Royal Decree 8/2011), oil and gas cannot be transported or stored without a licence from the Ministry of Oil and Gas, and such transport and storage should be conducted in accordance with the requirements and standards issued by the ministry after coordination with the Council for Financial Affairs and Energy Resources.
The Civil Defence Branch of the Royal Oman Police issues permits for the transport and storage of all hazardous materials. Further, the Ministry of Environment and Climatic Affairs issued Regulation 25/2009 regarding the use of and trading in chemical substances, which applies to oil and gas substances. Further, Royal Decree 10/2016 sets out a general framework regulating the land transport of goods and individuals.
How is cross-border transportation of oil and gas resources regulated?
No specific legislation deals with cross-border transport of oil and gas resources. Any oil and gas transport activity must:
- be licensed by the Ministry of Oil and Gas and the Royal Oman Police; and
- satisfy the safety standards and requirements set out by both authorities and the Ministry of Environment and Climatic Affairs.
Are there specific provisions governing marine and ground transportation of oil and gas resources?
No specific legislation deals with maritime transport of oil and gas resources. Any oil and gas transport activity must:
- be licensed by the Ministry of Oil and Gas and the Royal Oman Police; and
- satisfy the safety standards and requirements set out by both authorities and the Ministry of Environment and Climatic Affairs.
As mentioned above, Royal Decree 10/2016 sets out a general framework regulating the land transport of goods and individuals.
Construction and infrastructure
How are the construction and operation of pipelines, storage facilities and related infrastructure regulated?
The right to use land for the operation of pipelines is usually granted by a way of usufruct agreement. According to Articles 28 and 29 of the Oil and Gas Law, existing oil and gas pipelines and those to be set up in future must have a 25 metre prohibited area on each side of the pipeline centre.
What rules govern third-party access to pipelines and related infrastructure?
No statutory regulations govern third-party access to pipelines and other infrastructure. Typically, the various oil and gas operators will have contractual arrangements in place which provide for third-party access and right of way, provided that this is allowed under the exploration and production sharing agreement where concession over the relevant land has been granted to an investor.
Trading and distribution
How are oil and gas resources traded in your jurisdiction and what (if any) regulations and procedures apply to oil and gas sales, distribution and marketing activities, both nationally and internationally?
Trading in petroleum substances, whether by way of sale, distribution or marketing, can be conducted under a licence from the Ministry of Oil and Gas only after coordination with the Council for Financial Affairs and Energy Resources in accordance with the Oil and Gas Law (Royal Decree 8/2011). Natural gas producers must generally allocate their gas production, excluding gas used for operations, to satisfy the local market demand, as dictated by the Ministry of Oil and Gas. This means that rights holders must sell their natural gas production as a priority to the local markets, as determined by the Ministry of Oil and Gas.
Is oil and gas pricing regulated in your jurisdiction?
The Ministry of Oil and Gas sets out pricing for oil and gas products after considering market conditions and the political environment. The Ministry of Oil and Gas follows no specific criteria when pricing oil and gas.
Occupational health and safety and labour issues
Health and safety
What health and safety regulations and procedures apply to oil and gas operations (upstream, midstream and downstream)?
According to Article 22 of the Oil and Gas Law (Royal Decree 8/2011), the concession holder must:
- develop a comprehensive security plan to meet all security and safety requirements in the concession area which satisfies the terms and conditions set out in applicable laws; and
- coordinate with the Royal Oman Police for its approval.
The plan must be renewed every two years. In addition, the Ministry of Manpower set out vocational health and safety requirements in Decision 286/2008 (as amended), with which all employers must comply. One of the chapters in the Labour Law (Royal Decree 35/2003) governs health and safety requirements in the workplace and reiterates the obligations of both employers and employees in this respect. The Ministry of Manpower has the authority to:
- inspect workplaces;
- identify health and safety violations;
- instruct employers to remedy such violations; and
- take action against the employer should they fail to abide by such instruction.
Are there any labour law provisions with specific relevance to the oil and gas industry (eg, with regard to use of native and foreign personnel)?
While the Labour Law does not specifically apply to the oil and gas industry, the Oil and Gas Law contains several requirements with regard to the training and use of native workforces. In this respect, Article 36 of the Oil and Gas Law provides that concession holders must employ a qualified national workforce and, in coordination with the Ministry of Oil and Gas, prepare annual training programmes designed to qualify Omanis for professional, technical and senior executive positions relating to operations in order to gradually replace expatriate labourers with local ones. In accordance with Article 36, the Ministry of Oil and Gas, in coordination with the Ministry of Manpower, can determine concessionaires’ rates, controls, areas of employment, training and obligations in line with the needs of the petroleum industry and expertise required.
What is the state of collective bargaining/organised labour in your jurisdiction’s oil and gas industry?
The Ministry of Manpower’s Collective Labour Decision (294/2006, as amended) governs collective bargaining. Article 2 of the Collective Labour Decision provides that collective negotiations should be conducted between the employer, a trade union representative within the enterprise (should the enterprise have a trade union pursuant to the Ministry of Manpower’s Labour Unions Decision (570/2012)) and the General Union of Workers of Oman. Where there is no labour syndicate, negotiations must be between the employer and five employees who have been selected by the employer, with the optional assistance of the General Union of Workers of Oman. Article 3 of the Collective Labour Decision states that throughout the course of the negotiations, the employer must refrain from taking measures or issuing decisions on the matters being negotiated. Such collective labour negotiation can be conducted in relation to the preparation of a collective labour agreement.
There is no unified trade union for all oil and gas industry workers; each large oil and gas company (eg, Petroleum Development Oman and Oman Oil Refineries and Petroleum Industries Company) has a trade union specific to its own personnel.
What preliminary environmental authorisations are required before commencing oil and gas-related activities?
Under Article 39 of the Oil and Gas Law (Royal Decree 8/2011), right holders must carry out their operations with due care, in accordance with the technical standards provided for in their exploration and production sharing agreement and in a manner that guarantees environmental protection. Article 39 further provides that the concession holder must conduct operations with diligence and in accordance with the technical standards set out in the concession agreement and international conventions to which Oman is a party and must take all necessary measures to achieve this.
To obtain an environmental permit, an application, supported by an environmental study, should be made to the Ministry of Environment and Climatic Affairs before beginning the project.
What environmental protection requirements apply to the operation of oil and gas facilities?
The Ministry of Environment and the Ministry of Oil and Gas set out the specific requirements applicable to the operation of oil and gas facilities. Article 39 of the Oil and Gas Law outlines the general environmental protection requirements when conducting oil and gas projects.
What are the consequences of failure to adhere to the relevant environmental regulations and to what extent can operators be held liable for environmental damage?
The Environment Protection and Pollution Combating Law (Royal Decree 114/2001) is the main piece of legislation governing environmental violations. The penalties for environmental damage vary depending on the nature of the breach and its effect, but typically consist of fines and remedies at the violator’s expense. More serious penalties consist of closure of the violator’s establishment or imprisonment of personnel deemed responsible for the violation.
Taxes and royalties
What taxes (direct and indirect) and/or royalties apply to oil and gas activities in your jurisdiction (including upstream, midstream and downstream activities)?
Oil excavation companies pay 55% income tax on their taxable income resulting from oil sale proceeds in accordance with Royal Decree 28/2009, promulgating the Income Tax Law. This tax is deductible from the government's oil production share under the applicable exploration and production sharing agreement.
Royal Decree 9/2017 introduced significant amendments to the Income Tax Law (Royal Decree 28/2009). For example, it increased the standard corporation tax rate from 12% to 15% and the minimum tax-free threshold of OR30,000 has been removed. It also expanded the scope of the 10% withholding tax.
Finally, value added tax is expected to be implemented in Oman in 2019; this will likely have an impact on the oil and gas market.
Imports and exports
What taxes and duties apply to oil and gas imports and exports?
A 5% duty applies to the import of crude oil, gas and other petroleum products. There are no export taxes on the export of oil and gas or other petroleum products.
How is the decommissioning of oil and gas facilities regulated?
Article 16 of the Oil and Gas Law (Royal Decree 8/2011) provides that the decommissioning and restoration of the concession area to its original state will be performed at the expense of the concession holder within the timeline set out by the Ministry of Oil and Gas (usually within the exploration and production sharing agreement (EPSA)). In this regard, the EPSA usually provides that the rights holder must have a decommissioning plan and account for the plan annually in accordance with the International Financial Reporting Standards. The decommissioning plan must be updated every calendar year and actual costs relating to the decommissioning plan are treated as recoverable costs. In addition, EPSAs usually require the rights holder to open and maintain a decommissioning fund with an international bank of good standing and repute.
How are oil and gas disputes typically resolved in your jurisdiction?
Oil and gas rights granted to licensees are typically governed by Omani law and agreed to be resolved by arbitration. However, this is subject to negotiation between the parties and there are contracts which may also be made subject to a dispute resolution clause whereby the Omani courts have jurisdiction to resolve disputes between the parties.
What regulations and procedures are in place to combat bribery, fraud, collusion and other dishonest practices in the oil and gas sector in your jurisdiction?
No oil and gas sector-specific regulations and procedures deal with bribery, fraud, collusion and other dishonest practices.
However, the primary legislation governing bribery and corruption in Oman is the Criminal Law (Royal Decree 7/2018) and the Protection of Public Property and Avoidance of Conflict of Interest Law (Royal Decree 112/2011). Additionally, the Civil Services Law (Royal Decree 12/2004) and the Tender Law (Royal Decree 36/2008) contain several provisions that aim to combat bribery and corruption.
Further, Oman has ratified a number of international and regional conventions relating to anti-bribery and corruption, including:
- the United Nations Convention against Corruption (pursuant to Royal Decree 64/2013), which became effective in February 2014;
- the Arab Convention on Prevention of Corruption (pursuant to Royal Decree 28/2014), which became effective on 21 May 2014;
- the Arab Convention for Combating Organised Trans-border Offences (pursuant to Royal Decree 6/2015), which became effective on 8 March 2015 – this convention contains a section pertaining to corruption in the context of organised trans-border offences; and
- the Convention for Combating Bribery of Foreign Public Officials in International Business Transactions (pursuant to Royal Decree 41/2016), which became effective on 18 August 2016.