DUBAI (Reuters) - When Oman unveiled a plan this year to build a large petrochemical complex alongside a $6 billion refinery in the southern coastal town of Duqm, officials hailed the project as a step towards diversifying income and creating jobs.
Promoting new industries and expanding downstream oil operations such as petrochemicals have been a cornerstone of the Gulf Arab state's aim to cut its $73 billion economy's reliance on crude oil exports and create jobs to combat unemployment, which the IMF puts at over 24 percent.
The government of Sultan Qaboos bin Said, Oman's ruler for 42 years, earmarked Duqm as the next industrial growth city with investments of up to $15 billion planned in new petrochemical and infrastructure projects at the port over the next 10 years.
Among other projects, Oman hopes to boost growth and employment with a 1,000 km (625 mile), $13 billion railway. It is also investing heavily in airport and port operations in the southern city of Salalah near the border with Yemen.
It is all part of a plan to give the private sector a bigger role in the economy as oil production, which accounts for 77 percent of government revenues and half of economic output in non-OPEC Oman, looks to be nearing a peak.
Oman has faced sporadic street protests over a lack of work and perceived corruption since early 2011 and faces political uncertainty as Sultan Qaboos, 72, has not revealed his successor, a cause for concern when much of the Arab world is in turmoil.
Adding pressure on the economy, and employment, is a drop in natural gas production after a decade-long boom. That has created a shortage of gas supply in the country that Oman quickly needs to correct, with much depending on whether British oil company BP will go ahead with a costly gas project in the country.
"Gas and energy remain significant constraints on growth going forward, although there are promising signs that new fields may be coming on line in the near future," said Farouk Soussa, Citigroup's chief economist for the region.
He estimated that energy shortages could reduce economic growth by 2-3 percent a year over the next decade based on a similar experience in other countries.
After nearly doubling in 2001-2010 and feeding economic expansion, gas output in Oman fell 2.2 percent to 26.5 billion cubic meters (bcm) in 2011, the first annual drop in a decade, BP's world energy review from June shows.
Gas consumption in Oman meanwhile soared by 180 percent to 619 billion cubic feet (17.5 bcm) in the decade to 2010, according to the U.S. Energy Information Administration (EIA), due to fast economic growth which averaged 5.8 percent annually in 2001-2011.
As a result, Oman has insufficient fuel to meet power demand in summer when air conditioning use soars as temperatures frequently top 40 degrees Celsius.
The government is pinning its hopes on a $15 billion tight gas project being developed by BP, which could unlock some 100 trillion cubic feet (2.8 trillion cubic meters) of reserves. The project will be costly however as tight gas is more difficult to extract than gas from conventional fields because it is trapped in rocks and tightly compacted sand and requires new technologies to flush it out.
The government has demanded that if the project goes ahead the gas produced should be sold in Oman. It is in protracted talks with BP over how much it would pay the UK company for the gas.
"The gas situation ... is really critically dependent on the BP project over the next few years," said Robin Mills, head of Manaar Energy Consulting in Dubai.
"It will at least meet the country's needs and the gas situation will improve a bit, but still the gas situation will be quite tight," he said.
BP hopes to make a final investment decision on whether the project is commercially viable towards the end of 2013, its Chief Executive, Bob Dudley, said last month. Analysts say the project is the key question mark over Oman's development over the next decade.
"Without the (BP) gas, Oman is likely to need further imports," said Hakim Darbouche, research fellow for a natural gas program at the Oxford Institute for Energy Studies.
The fall in gas production is hurting government revenues as liquefied natural gas plants are now running at roughly three quarters capacity.
The government depends on gas for 10 percent of budget receipts and the International Monetary Fund forecast in October that Oman's finances could slip into the red as soon as 2015, posting a budget deficit of 1.1 percent of gross domestic product with the gap deepening to 6.3 percent of GDP in 2017. The government has posted surpluses every year since 1998 with the exception of a deficit in 2009.
A BP report estimates that Oman's oil reserves will run out in 17 years' time if it does not step up production from current levels, which would be costly. The country's challenging geology means gas is partly locked in rocks. It is used along with other methods to extract more oil from old fields - a process known as enhanced recovery.
"We don't feel that Oman is likely to increase its current (oil) production," said a regional energy expert, who declined to be named.
"Presently crude production has plateaued and we see gradual declines from 2014 onwards. They've already come close to maximizing what they are doing with enhanced oil recovery."
The rising cost of oil production is affecting crude output, Oil and Gas Minister Mohammad bin Hamad al-Rumhy said in April.
"Oil is not a lake that we can tap when we wish. On the contrary, there are a number of technical challenges that deter many international companies from investing," he said.
That pressures Oman, whose non-oil GDP surged 7.9 percent a year on average in 2001-2011, to diversify further into less energy and more labor intensive sectors such as tourism, and promote private sector jobs among its 2 million nationals.
"The citizens have to understand that the private sector is the real source of employment in the long run," Sultan Qaboos said in an annual speech to his advisory councils last month.
"Hence they should not hesitate to join the private sector and must not desert their jobs therein," he said.
To appease protesters as the Arab Spring uprisings took hold in other parts of the Middle East, the government created 44,000 new public sector jobs in 2011.
But Omanis like other Gulf nationals have not been keen to join the private sector, accounting for just 12 percent of 1.4 million private sector employees in September, government data shows, because the pay is lower and working hours are much longer than in government jobs.
Nearly 157,000 new private sector jobs were filled by foreigners in January-September, a 14 percent jump from end-2011, while 1,500 Omanis left private sector jobs over the same period.
Oman has been pushing hard to promote tourism, counting on its diverse landscape and rich traditions, but analysts say that may not be enough as the focus is on five-star resorts that generate far less jobs and economic benefits than mass tourism.
The number of guests at four and five-star hotels jumped 21 percent in January-August from a year earlier to 400,200, according to government data. A Reuters poll forecasts Oman's economy will grow 4.7 percent this year, down from an IMF estimate of 5.4 percent in 2011.
"Diversification is ongoing, but has not really addressed the labor market issues that exist in Oman," said Soussa at Citigroup.
"Reducing unemployment is crucial to safeguarding political stability going forward in Oman, particularly as uncertainty over the succession process is probably greater than in any other GCC (Gulf Cooperation Council) country," he said.
- For graphics on Oman GDP performance click on: link.reuters.com/kyx54t
- For graphics on Oman crude oil and gas production, click on: link.reuters.com/gyx54t
($1 = 0.3850 Omani rials)
Editing by Daniel Fineren and Susan Fenton