PETROLEUM ABUNDANCE IN OMAN:

RESOURCE CURSE OR BLESSING?

Adil Al Abduwani
Student ID 120012030

A Dissertation submitted in fulfilment of the

requirement for the award of Master in Laws
(LLM) degree in Petroleum Law & Policy

Center of Energy Petroleum Law & Policy (CEPMLP)

University of Dundee
June 2013

TABLE OF CONTENTS
LIST OF TABLES ............................................................................................................................ 2
LIST OF FIGURES........................................................................................................................... 3
LIST OF ABBREVIATIONS............................................................................................................... 4
ACKNOWLEDGEMENTS ................................................................................................................ 5
MAP OF SULTANATE OF OMAN .................................................................................................... 6
DECLARATION .............................................................................................................................. 7
ABSTRACT.................................................................................................................................... 8
CHAPTER 1: INTRODUCTION ......................................................................................................... 9
1.1 Background to the Study............................................................................................................... 9
1.2 Statement of the problem .......................................................................................................... 10
1.3 Aims and Objectives .................................................................................................................... 12
1.4 Research Questions .................................................................................................................... 12
1.5 Research Methodology ............................................................................................................... 12
1.6 Scope and Limitations ................................................................................................................. 13
1.7 Structure of Study ....................................................................................................................... 13
CHAPTER 2: EXPLAINING THE CURSE ........................................................................................... 14
2.1 Problems with Resource Endowment......................................................................................... 14
2.2 Dutch Disease.............................................................................................................................. 15
2.3 Revenue Volatility ....................................................................................................................... 17
2.4 Structural Problems .................................................................................................................... 20
2.5 Countries Experience with Resource Curse ................................................................................ 24
2.6 Is Resource Curse inevitable? ..................................................................................................... 27
2.7 What Has Been Said About Oman in Literature? ........................................................................ 29
CHAPTER 3: THE ROLE OF PETROLEUM IN DEVELOPING OMAN ................................................... 32
3.1 General Brief on Oman ............................................................................................................... 32
3.2 Omans Petroleum History .......................................................................................................... 35
3.3 Laws & Regulations ..................................................................................................................... 37
3.4 Development Planning ................................................................................................................ 40
3.5 Socio-Economic Impact of Petroleum Dependence ................................................................... 43
3.6 Comparison with GCC Countries for Selected Indicators ........................................................... 55
CHAPTER 4: PETROLEUM ABUNDANCE AS A SOLUTION ............................................................... 59
CHAPTER 5: CONCLUSION........................................................................................................... 64
BIBILOGRAPHY........................................................................................................................... 67

LIST OF TABLES
Table 1 Commodities Export Earnings by Country (Average Export 1992-97) ..................................... 19
Table 2 Corruption Perception Index vs. 2011 Proven Reserves .......................................................... 22
Table 3 Oman Population Spread by Region 2010 Census ................................................................ 34
Table 4 Vision 2020 Comparative Structure of GDP in percentage terms............................................ 42
Table 5 Omans Macroeconomic Indicators (1980-2010)..................................................................... 43
Table 6 Economic Activities Percentage Contribution to GDP ............................................................. 44
Table 7 Omans Foreign Trade indicators (1998-2009) ........................................................................ 50
Table 8 Selected Main Achievements in 1970 and 2012. ..................................................................... 51
Table 9 Employment Statistics (2002 2011)....................................................................................... 54
Table 10 GCC Economic Indicators 2011 .............................................................................................. 56
Table 11 GCC Countries Growth in Real GDP & GDP per Capita (PPP) ................................................. 57

LIST OF FIGURES
Figure 1 Oil Price Volatility (1960 2011)............................................................................................. 17
Figure 2 The Fraud Triangle. ................................................................................................................. 23
Figure 3 Economic and Institutional Development of Fuel Dependent Countries ............................... 25
Figure 4 Omans production and reserves from 1956 to 2011 ............................................................. 36
Figure 5 Omans GDP at Current Prices vs. Oil Price (1980 2011) ..................................................... 45
Figure 6 Regression Results on Oil price vs. GDP .................................................................................. 45
Figure 7 Omans Daily Oil Production vs. Oil Price................................................................................ 46
Figure 8 Omans Yearly Budget Deficit / Surplus (1980-2011) ............................................................. 47
Figure 9 Omans Petroleum Revenue Vs. Total Expenditure (1980-2011) ........................................... 48
Figure 10 Oman's Oil Export vs. Total Export Revenue (1980-2011) .................................................. 49
Figure 11 Impact of Oil Revenues on GDP per Capita at Current and Real Prices ............................... 52
Figure 12 Human Development Index : Trends 2008 Present ........................................................... 55
Figure 13 Omans Ranking Global Competitiveness Index ................................................................... 63

LIST OF ABBREVIATIONS
BBL/D

Barrels of Oil per Day

BCF/D

Billion Cubic Feet Per Day

CPI

Corruption Perception Index

EITT

Extractive Industries Transparency Initiative

EOR

Enhanced Oil Recovery

FYP

Five Year Plan

GCC

Gulf Cooperation Council

GDP

Gross Domestic Product

GNP

Gross National Product

ICV

In-Country Value

IMF

International Monetary Fund

IOC

International Oil Company

LNG

Liquefied Natural Gas

MOG

Ministry of Oil and Gas

NCSI

National Center for Statistics & Information

OECD

Organization for Economic Cooperation and Development

OPEC

Organization of Petroleum Exporting Countries

PDO

Petroleum Development Oman

PPP

Purchasing Power Parity

SCP

Supreme Council of Planning

SWF

Sovereign Wealth Funds

TCF

Trillion Cubic Feet

WGI

Worldwide Governance Indicators

ACKNOWLEDGEMENTS
With Allahs (Almighty God) blessing, this work represents the final requirement to earn my
LLM in Petroleum Law & Policy from Center of Energy, Petroleum and Mineral Law &
Policy (CEPMLP) at University of Dundee. CEPMLP is one great part of the knowledge
industry and has delivered valuable amount of education in petroleum and energy studies
through its expert lecturers.

This dissertation has been fascinating and intellectually

stimulating to discover Omans achievements in utilizing petroleum revenues to enhance

economic and social welfare. Thanks to the devotion of his Majesty Sultan Qaboos.
To my father, Mohamed Jawad, who left the world during my first year of undergraduate
studies in 1997. I wish he was here to see his youngest sons work towards earning a second
masters degree.
To my mother who has always prayed for my success and encouraged me to study. To my
wife who sacrificed one year of her career to come along and support me in Dundee. To my
two sons; Mohamed and Mazin who have always been a source of love and inspiration. To
my seven brothers and sisters whom I capitalized upon their experience.
I wish to thank my sponsor, Oman Oil Company Exploration & Production (OOCEP) and its
CEO Mr. Salim Al Sibani who always encourages investing in education. Your support has
taken me to a higher stage now.
I wish to thank Dr. Stephen Dow for supervising this dissertation.

His constructive

arguments and challenging conversations always stimulated me in this dissertation and other
research papers. I wish to thank all lecturers at CEPMLP, namely Prof. Peter Cameron, Dr.
Xiaoyi Mu, Dr. Ariel Bergmann and Dr. Ayodele Asekomah. I would also acknowledge the
assistance received from Audrey McLaughlin, Hugh Gunn, Kathleen Short throughout my
LLM program.
In Dundee, I have made many friends from different parts of the world. One great friend is
Terhemen Jude Biem from Nigeria. The list can take many pages, but I have to mention
meeting Daoud El-Tayyeb from Sudan, Namer Saleh from Lebanon, Hossam Al-Qudah and
Kamil from Jordan, Renzo from Peru, the two Livias from Brazil, Ivy and Anand from India,
Ahsan from Pakistan and Korshie from Ghana.
stimulated arguments in completing this dissertation.

Last but not least, to everyone who

MAP OF SULTANATE OF OMAN

Source: (www.mapsofworld.com/oman/)

DECLARATION
I hereby declare that I am the author of this dissertation. I also declare that all references
cited herein have been personally consulted by me and duly acknowledged with their sources
cited. This dissertation has not been previously accepted in this or any other university for a
higher degree.

Adil Al Abduwani

Dr. Stephan Dow

Date: ________________

Date: ________________

ABSTRACT

Countries with rich petroleum endowment are accused of ineffectively managing their
resource revenue in way that stagnates their economic growth. Resource curse or paradox of
plenty is a phenomenon where natural resources dominate economic base over other sectors
and promotes social and institutional problems. Several countries were studied and believed
to have been cursed with petroleum endowment where resource revenues did not contribute
to economic growth but in fact promoted corrupted behaviour. Resource abundance is not
necessarily a curse as some other countries managed to turn it into a blessing. This study
examines resource curse symptoms in Oman by analyzing socio-economic data of Oman
from 1980 to 2011 along with other tools necessary to avoid resource curse such as
diversification, sovereign wealth funds and stable political and legal regime. A high level
comparison with Gulf Council Countries is made, and the potential role of petroleum in
sustainable development is also explored. This study reveals that Oman has been blessed
with petroleum endowment but Dutch disease syndrome is present and can result in a serious
curse if not treated immediately given declining Omans declining oil fields. Data analysis
also suggests that oil revenue is indispensible until economic diversification is fully achieved.
Natural gas can take the lead to support industrial growth while higher portion of oil money
be directed towards an education reform.

CHAPTER 1: INTRODUCTION
1.1 Background to the Study
Petroleum resource endowment is said to enrich its countries and support economic growth.1
Revenues earned create wealth that is expected to lead sustainable economic development.
Oil and gas resources are non-renewable and possess high opportunity cost. Governments
therefore wish to impose high taxation tools to capture the maximum economic rents.2
Resource ownership is acknowledged by international law to be with sovereign states,3 and
this is another reason why petroleum development should be taxed. Governments utilize
these proceeds to develop the nation and improve social welfare.
Governments endowed with petroleum resources expectedly utilized petroleum revenue to
develop countrys economy, infrastructure and contribute towards social welfare. Resourcerich countries have also been an attraction to various foreign investors seeking a portion of
the wealth. The common stereo-type is that resource rich countries can easily be developed
and no poverty can be found. The truth can easily be revealed when a comparison of wealth
and development measures are performed among resource-rich and resource-poor countries.
Some resource rich countries have prospered more than others. The relationship between
economic growth and petroleum dependence has attracted great attention of scholars.
Sachs, J. and Warner, A. (1995) performed cross country analysis to conclude negative
relationship between natural resource exports and GDP growth. 4 Research performed by
Auti, R. (2001) revealed that income per capita of resource-poor countries grew two or three
times faster than that of resource-rich countries. Empirical analysis of data between 19601990 also showed that this gap expanded following 1970s.5 Wood and Berge (1997)
explained that manufactured goods exporting countries grow faster than primary good
exporting countries since the former depends on skilled labor and promotes investment in
human capital.6 Wealth creation also depends on several parameters including timing of
payments received by the government, size of the economic rent and the depletion policy set
by the government.
1

The term petroleum refers to oil and gas in this study.

Economic rent is defined as difference between the value of the resource and the cost of extracting it.
3
USA and some parts of Australia grant the ownership to landowners.
4
Sachs, J., and Warner, A., Natural Resource Abundance and Economic Growth Working Paper 5398
(Cambridge, UK: National Bureau of Economic Research, 1995).
5
Auty, R., Resource Abundance and Economic Development. (ed.), (Oxford, UK: Oxford University Press,
2001) at 3-6
6
Ibid, at 20.
2

10

Why do some countries face more success with petroleum revenues than others? What
causes slower economic growth to some resource abundant countries while others possessing
less resource grow faster? Why a resource-rich country like Norway did become an open
democratic society with transparent government and often cited as successful country in
managing petroleum wealth? Why did Sheikh Ahmed Yamani, the oil minister of Saudi
Arabia (1962-1986) say I wish we had discovered oil?7 The fact about oil and gas industry
is that it is more capital intensive than labor. The moment development and infrastructure
stages are done, it doesnt require much human interference to keep the petroleum flowing.
Petroleum upstream activities therefore, bring major contributions to gross domestic product
(GDP), but do not equally contribute towards creation of jobs. Sachs J. (2007) attributes
economic stagnation to spending of oil earnings rather than usage in public investment.8
A phenomenon called petroleum curse has become a focus of study in many nations in the
past and is being revisited with the recent discoveries of petroleum resources in some frontier
African countries. There is wide literature on why some countries are cursed with petroleum
endowment. Firstly, the high dependence on oil export revenue can be dangerous due to
volatile oil prices, thus affecting revenue streams resulting in fiscal spending unfavourable
trend.

Governments spend can be distorted during low oil price periods.

The second

symptom is called Dutch disease which is explained by the over valuation of a currency as
a result of booming oil prices which also results in crowd out effect. The third cause and
symptom of curse is the bad institution especially in developing countries lacking
transparency and scrutiny in government spend. There is also a controversial argument that
imports of capital goods will shrink over time due to revenue volatility. While some resource
rich countries have been cursed, countries like Australia, Canada, Norway and Malaysia are
said to be blessed.9

1.2 Statement of the problem

Sultanate of Oman is located in the Middle East and is a member of the 6 Gulf Cooperation
Council (GCC) countries. Omans land is covered in 309,500 square kilometres and it enjoys

Homans, C., Bottom of the barrel: why the Saudis wish they'd discovered water instead, The Free Library,
2009. http://www.thefreelibrary.com/Bottom of the barrel: why the Saudis wish they'd discovered water...a0211174263 (last accessed May 7th, 2013).
8
Sachs. J, How to Handle The Macroeconomics of Oil Wealth? In Escaping The Resource Curse, (Humphreys,
J., (ed), New York, Columbian University Press, 2007), at 173.
9
Gylfason, T., Natural Resource Endowment: A Mixed Blessing? in Beyond the Curse: Policies to Harness the
Power of Natural Resources, , (Rabah., A.,et al., (ed.), Washington, USA: International Monetary Fund, 2011).
at 10.

11

1,700 kilometres of coastline facing the Gulf of Oman and Arabian Sea.10 Oman is relatively
a small producer of oil and gas compared to its neighbours in GCC area. Oman has been
relatively poor country until the commercialization of oil discovery in 1962.11 Following the
throne takeover from his father, Sultan Qaboos has revised the countrys strategy and
achieved noticeable growth milestones since 1970. Oil export revenues have been the major
driver in development programs. Government realizing potential problems arising from oil
dependent economy has been planning for diversification year over year since 1976. While
oil revenues have assisted achieving fiscal objectives, it has split the economy to petroleum
and non-petroleum segments. Oil and gas revenues were estimated to form 81% of 2012
general budget.12 Unemployment rate was estimated at 15% by end of year 2011 and job
creation has been the hot issue on governments agenda. Oil production is also experiencing
a decline achieving its peak in years 2000 / 2001 at an average of 960,000 barrels per day13.
With remaining reserves indicating a reserve to production ratio (R/P) of 17 years,
government has progressed with its Enhanced Oil Recovery (EOR) programs and the search
for new discoveries continues.
Governments 25 year plan (vision 2020) set in 1995 is certainly not achieving it economic
diversification objective. Oil revenues still lead the fiscal budget and hence economy may
suffer from potential adverse price volatility following the recovery from 2009 world
financial crisis.
A sovereign country with a visionary leader, who promised his citizens a better life in 1970,
has fulfilled his promise. However, will the promise sustain going forward with two strong
forces being social pressure and oil dependent economy. Omans population was reported at
3.3 million in 2011 and touched 3.8 million in February 201314 The growing population
demands jobs and yet more expatriate labor is imported. Oman has seen a number of oil
shocks which demonstrated the level of fragility of the economy. Omans conventional oil
has also peaked as expected, so will Oman continue to extend its reliance on non-renewable
10

Ministry of Information, http://www.omanet.om/english/home.asp, (last accessed April 11th, 2013).

Petroleum Development Oman (PDO), http://pdointernet.pdo.co.om/Pages/AboutUs.aspx, (last accessed April
11th , 2013)
12
Ministry of Finance, Oman General budget 2012, http://www.mof.gov.om/p_balance.aspx , (last accessed
April 13th, 2013)
13
BP Statistical Review of World Energy June 2012, http://www.bp.com/statisticalreview (last accessed April
11th, 2013)
14
Zafar, M., Oman Population Hits 3.8 MN Mark, Muscat Daily, April 23rd , 2013,
http://www.muscatdaily.com/Archive/Oman/Oman-population-hits-3.83mn-mark-27eq (last accessed June 17th,
2013).
11

12

energy. Studying resource abundance in Oman and whether it has been a curse or blessing
will assist formulation of future strategy, hence this study.

1.3 Aims and Objectives

Analysing the impact of resource abundance on Omans development requires access to wide
information and larger space to present arguments than this study. The aims of this paper are
limited to resource curse literature review and diagnosis of its symptoms in Oman over the
period 1980 to 2011. Several parameters are used to analyse these symptoms including
examination of Omans oil and gas law, constitution and other legislations which are relevant
to this study. Another important objective is to analyse Omans development strategy and
review achievements in economic and social aspects. Comparisons with neighbouring GCC
countries and how others evaluate Oman are also examined in order to achieve broader view.
Finally, understanding the potential role of petroleum abundance in Omans development and
the diversification options available to avoid resource curse.

1.4 Research Questions

The main theme of this research is around three main questions. The paper tries to study
natural resource curse and its symptoms. Understanding resource curse leads to possible
precautionary measures to avoid it unless is inevitable. The second research question is to
study the impact of resource abundance in Oman and whether it is a blessing or curse. This
paper then seeks to address the potential path for sustainable development and whether oil
revenue is indispensable.

1.5 Research Methodology

Research methodology used in this dissertation is a combination of comparative and
analytical approaches. Discussion is based on relevant literature in secondary sources drawn
from books, journal articles, and online sources. Primary sources represented by relevant
Omani laws are also consulted in this study. Analysis is performed on Omans macroeconomic indicators.

Comparison is made to indicators of neighbouring countries and

reference is also made to key countries experience with resource management. The study
contains graphical and tabular illustrations as an aid to demonstrate key facts and trends. All
original data used in this dissertation is available with the author.

13

1.6 Scope and Limitations

The word resource refers to petroleum in this study, and minerals are not included. Data has
been obtained from Omans Supreme Council for Planning (SCP)15. Official publications of
the former Ministry of National Economy and Omans development planning publications
have also been consulted. References are made to original sources wherever applicable and
some facts reflect authors experience being an Omani citizen working in oil and gas sector in
Oman. Oman started exporting its first oil in 1967, but data analysed in this study pertain to
period 1980 to 2011 (31 years). Wherever original sources cite figures in Omani currency
(Omani Rial/OMR), an exchange rate of (OMR 1/- = USD 2.6) has been used to present
numbers in this study.
Resource curse is often assessed by analysis of macro-economic indicators, level of social
welfare and corruption level. This study however, will not assess corruption level in Oman,
but will shade light on literature related to best practices in corporate governance and revenue
management.
Arguments in this research aim to focus on studying the adverse effect of petroleum
abundance on Oman if any. Efforts have been made to reflect neutral opinion by the author
and review of all available literature relevant to the subject. Analysing Omans economy
would take larger space than this dissertation, but best efforts have been spent to cover
relevant parts to arrive at answers to research questions.

1.7 Structure of Study

Chapter 2 presents literature review on resource curse and the solutions proposed to avoid
resource curse. The chapter also presents a short section on what has been said about Oman
by others. Chapter 3 briefs on Oman, its petroleum industry development and proceeds
through review of relevant regulations and the development plans to the core analysis of
socio-economic indicators in Oman from 1980 to 2011. Comparison also made to GCC
countries to show impact of petroleum abundance on economic growth. Chapter 4 presents
the potential role of petroleum to achieve governments plans. Conclusion is presented in
chapter 5 to reflect proposed framework going forward in line with what has been discussed
in study.

15

This was previously called Ministry of National Economy which replaced the earlier Development Council.
Reference is made to three successive government bodies responsible in different years.

14

CHAPTER 2: EXPLAINING THE CURSE

2.1 Problems with Resource Endowment
Cash maybe considered the single most cause of problems worldwide were not only
individuals, but nations also fighting for. Power is also an equivalent cause, and the question
remains, which one brings the other. Does cash bring power, or is it that power brings cash.
Countries that possess strong economies and government policies are said to be powerful
nations. Wealth of a nation can be measured by its GDP and the welfare of its society.
Petroleum resources have become tempting for some countries to invade others. The Middle
East has experienced invasion of Kuwait by Iraq in 1990. The fundamental reason was Iraqs
debts and Kuwaits continuous attempts to sell its oil below OPEC prices. United States
invasion on Iraq was announced to clear weapons of mass destruction, but every knows that it
was about oil. Iraq has nationalized its domestic oil industry prior to invasion in year 2003,
and closed its gates to IOCs. Ten years following the war, the industry is privatized and
IOCs such as ExxonMobil, Chevron, BP, Shell including Americas famous Halliburton
dominate major contracts.16

Petroleum resources can generate power and cash

simultaneously.
Countries endowed with petroleum resources become an attraction of foreign oil companies
which foresee contractual arrangements to explore and exploit such resources in order to
share wealth.

The first problem arises during the negotiations with International Oil

Companies (IOC) that possess technology, expertise and funds to invest in resource
extraction. Bargaining power resides with the IOC and the challenge faced by government is
to achieve a contractual arrangement with the best IOC to maximize government objectives.
Petroleum exploration and exploitation also faces problems throughout the operational
process before it reaches the surface. Such problems are technical and can lead to severe
consequences if not mitigated in the right way.
Resource endowment problems related to post-extraction is the main scope of this study in
that the consequences are economic, social and political. To assess resource curse, some
scholars focus on empirical analysis of economic performance of a nation.

Others

concentrate on government policies, transparency issues and human development indicators.

While the process of evaluation is subject to availability of relevant data, interpretation of
16

Jahasz, A., Why the War in Iraq was Fought for Big Oil, CNN, April 15th, 2013,
http://edition.cnn.com/2013/03/19/opinion/iraq-war-oil-juhasz, (last accessed May 9th, 2013).

15

results is often possible due to its subjectivity. Norway is cited as a good example a country
blessed with resource, but the truth is that petroleum was found in Norway in 1970s when the
country was already developed. Discovery of petroleum by poor countries would certainly
show its prints in development programs and become the major driver if aggressive
development plans are set.

2.2 Dutch Disease

The 20th century has been an industrial age for many developing countries such as China,
India, Korea, and Indonesia. Prior to 1960, 80% of those countries exports revenues were
primary commodities while today, commodities have changed to be industrial ones.17 Dutch
disease-also called Paradox of Plenty - is named after serious of events in Netherlands in
1950s ranging from stagnation in industrial production, drop in corporate investment and
higher level of unemployment. Both balance of payment and currency were still in good
shape but the cause was identified to be the large volume of natural gas export. Gas industry
boosted wages and its export pushed the exchange rate upward and ultimately became the
sole source for government spend.18

The increase in natural resource exports triggers

appreciation of exchange rate and makes it difficult for other non-natural resource
commodities to compete (spending effect). Sachs, J., and Warner, A. (1995) argued that
resource abundant economies are divided to tradable resource sector, tradable non-resource
sector such as manufacturing and finally non-tradable sector (service industry).

The

argument is based on the fact that greater resource endowment increases demand for nontradable goods, thus ignores manufacturing (non-resource sector) and reduces its allocation of
labor and capital.19 Auty, R. and Mikesell, R., (1998) explained that windfall petroleum
export revenues spending raises the demand for other tradable goods and services. However,
an open international market is the one to determine prices of tradable goods and services,
hence spending oil money on tradable commodities fail to raise their domestic price which
ultimately results in increasing imports of those tradable goods and services to meet domestic
demand.20

17

Stevens, P. (2004) additionally explains the spending effect as the shift of

Gelb, A., Economic Diversification in Resource-Rich Countries in Beyond the Curse: Policies to Harness the
Power of Natural Resources, , (Rabah., A., et al., (ed.), Washington, USA: International Monetary Fund, 2011),
at 55
18
Hannesson, R., Petroleum Economics: Issues and Strategies of Oil and Natural Gas Production, (London, UK:
Quorum Books, 1988), at 142.
19
Sachs, J., and Warner, A., Supra Note 4, at 6
20
Auty, R., and Mikesell, R., Sustainable Development in Mineral Economies, (Oxford, UK: Clarendon Press.,
1998), at 22.

16

resources from tradable to non-tradable as a result of price increases of non-tradable goods

relative to tradable goods.21
Income earned in foreign currency is used to pay for internationally traded goods at the
expense of locally manufactured goods. This promotes movements of domestic resources
such as labor and materials to the petroleum sector (resource pull effect).22 Petroleum
industry attracts the majority of talents and generally pays high. The industry attracts all type
of other related industries who all seek to retain and develop the best talents. This causes a
crowd out in many professions seeking to move to petroleum industries through its sectors.
Dutch disease has become a common syndrome in resource-rich countries failing to strike the
balance in optimizing petroleum revenue management. Their economies therefore are split
into petroleum and non-petroleum sectors. Other than the Netherlands, Dutch disease was
seen in Australias gold market in the nineteenth century, Colombian coffee in 1970s or
generally the agricultural sectors in developing countries prior to petroleum discovery.23
Dutch disease often triggers government attempts to subsidize non-resource industries to
maintain economic diversification. Government subsidy potentially leads to higher demands
and eventually becomes a burden on fiscal budget. Subsidy is not favoured in literature
supporting competitive and liberalized markets, but governments continue to pursue to meet
their other national objectives. Another aspect of Dutch disease is the leapfrog effect
where labor intensive phase of the industrialization is forgone by governments in favour of
heavy and capital-intensive phase, which adversely affects the tradable sector. Stevens, P.
(2004), explains this as limited natural resources promote early industrialization forcing
earlier urbanization24 The immediate response of governments following discovery of
petroleum resources is to structure development plans and incorporate changes in fiscal
budgets. The human aspect tend to be forgotten and even where education is promoted,
quality is not a concern. Governments tend to abandon the fact that petroleum resources are
non-renewable and the economy is at a risk of losing the biggest contributor.

21

Stevens, P., Resource Curse and Investment in Energy Industries, Encyclopaedia of Energy, Vol.5 (2004),
at 451-459.
22
Humphreys, J., What is the Problem with Natural Resource Wealth? In Escaping The Resource Curse,
(Humphreys, J., (ed), New York, Columbian University Press, 2007), at 5-6.
23
Ibid, at 5.
24
Stevens, P., Supra note 21.

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2.3 Revenue Volatility

Petroleum exporting revenues are volatile and resource abundant countries which depend
highly on such revenue face price volatility problems often. Oil like any other commodity
has its market where its price is determined according to supply and demand function. Oil
supply is also subject to geological structure and very often, prediction of supply is merely
accurate.

Governments income timing from sale of petroleum is also dependant on

contractual agreement with its licensed oil producers where revenues can be front end loaded
as well as back end loaded. Oil price volatility is driven by political decisions of key
producers or adjustments between supply and demand. Figure 1 demonstrates price volatility
since 1960 until 2011 in nominal prices and adjusted to 2011. If a countrys fiscal revenue is
heavily based on oil export revenues, then its yearly revenue would fluctuate similar to the
pattern in Figure 1 unless an oil stabilization fund is established which will be discussed later.
The period between 1973 to 1983 was a golden period for net oil exporters at the expense of
net oil importers who paid the high price of oil. However, price subsequently fell bringing
volatility to petroleum export revenues. Price volatility leads to economies going through
boost-bust cycles in which governments level of expenditure varies in line with oil prices.
Uncertainty of the quantum of future revenues renders difficulties in long term planning.25

Oil Price Movement (1960-2011)

USD $
120
100
80
60
40
20
0
1960

1965

1970

1975

1980

1985

$ money of the day

1990

1995

2000

2005

$ 2011

Figure 1 Oil Price Volatility (1960 2011)

(Source: BP 2012)26
25
26

Humphreys, J., Supra note 22, at 6-8.

(1960-1983) represent Arabian Light posted at Ras Tanura, (1984-onward) represents Brent price.

2010

18

Although oil has been traded much earlier than 1960, major events resulting in unstable oil
behaviour are discussed with reference to trends presented in Figure 1. Following Second
World War, USA has been the biggest oil producer and consumer, but sooner was overtaken
by the former Soviet Union. Posted prices were agreed by major oil producers, who also
owned refineries and retail businesses and the process was driven by Texas Railroad
Commission. The commission was reacting more to demand in deciding for production
quotas which ultimately resulted in declining US oil flow rates.27 OPEC was formed in 1960
initially by 5 member countries which have increased to show 12 members now. The
fundamental purpose was to align members petroleum policies and optimize on supply
function in order to stabilize oil prices. Between 1973 1974, the world experienced sharp
increase in oil prices due to OPEC embargo. Syria and Egypt attacked Israel in1973 where
OPEC decided to cut its oil supply to countries supporting Israel. The Iranian Revolution
further took place between 1978 to 1979 where protests against new regime resulted in oil
supply disruption. Middle East witnessed the Iran Iraq war in 1980, and the first invasion
of Iraq to Kuwait in 1990. Both years show spikes in oil prices. The decline in oil prices
between 1997-1998 was driven by the East Asian Crisis where demand for oil dropped.
Prices were normalized and continued to rise immediately after the short term deterioration in
consumption until US attack on Iraq in 2003. Finally, oil prices dropped in 2009 as a result
of global financial crisis. The Oil shocks of 1973-1974 and 1979-1980 had significant impact
on the world, but it was difficult to measure the impact due to oil price versus other changes
in world economy.28 Oil prices transfer wealth from net importing countries to net exporting
countries, and according to the level of wealth transfer, subsequent changes occur in
economies. High oil prices also encourage development of new petroleum fields. Oil prices
are driven by supply and demand law, but another fundamental variable is the behaviour of
governments.
The common assumption that developing countries export primary commodities and
industrialized countries specialize in manufacturing is not so true, as each country exports
both depending on its trade strategy. The share of primary commodity export to total
countrys export is the one that can determine the degree at which a country is exposed to
price volatility risk. Countrys export revenue may fall when commodity price declines even
27

Hamilton, J., Historical Oil Shocks, (San Diego, USA: University of California, 2010)
Pereira, A., et al., Socio-Economic and Policy Implication of Energy Price Increases, (Aldershot, UK:
International Labour Organization, 1987), at 50-51.
28

19

if volume exported remain the same. Table 1 adopted from Cashin, Liang and McDermott
(2000), cited in Cuddington, J. et al. (2007), shows that more than 50% of countries drive
their export earnings from a single commodity which is oil are located in Middle East and
Africa. Venezuela is the only country in Eastern Hemisphere that depends on oil exports
more than 50% in its portfolio, and similarly Turkmenistans dependence on natural gas (in
Central Asia).

Table 1 Commodities Export Earnings by Country (Average Export 1992-97)

(Source: Cashin, Liang, and McDermott 2000)29

Report published by Oxford Policy Management in 2011 also indicated that economy of oil
dependant countries is more vulnerable to changes in prices, and these countries included
Angola, Cameron, Chad, Iran, Iraq, Nigeria, Sudan, Timor-Lieste and Yemen.30

29

Cuddington, J., et al., Prebisch-Singer Redux, in Natural Resources: Neither Curse nor Destiny, (Lederman,
D., and Maloney, W., (ed), Washington, USA: Stanford University Press, 2007), at 107-110.
30
Haglund, D., Blessing or Curse? The Rise of Mineral Dependence among Low and Middle-Income Countries,
Oxford Policy Management (2011), http://www.opml.co.uk/paper/blessing-or-curse-rise-mineral-dependenceamong-low-and-middle-income-countries .(last accessed May 1st, 2013).

20

2.4 Structural Problems

Weak Institutions
An institution in its broad definition means an organization or establishment that is created to
serve a defined purpose which for example can be religious, educational, political,
commercial, or social. North, D. (1991), defines it as humanly devised constraints that
structure political, economic and social interactions consisting of informal constraints like
customs, traditions and code of conduct, and also formal rules such as constitutions, laws and
rights.31 Cabrales, A. and Hauk, E. (2011), link institutions to the behavior of politicians and
the amount of discretion in setting up policies32. In other words, it is the behavior of
individuals that promote good or bad institutions.
Petroleum extraction is capital intensive and generates huge cash the moment operations
come into stream. Easy cash to the government doesnt encourage effective and efficient
practices, but rather adds more bureaucratic behaviour in resource-rich countries. History
shows that sudden flow of enormous revenues did not help governments to create competent
institutions, but rather deliver poor quality services to its citizens and thus slow economic
development. Certainly bad governance existed before discovery of petroleum so sudden
wealth wouldnt have fixed it either. Growth is also affected by powerful groups formed in
developing countries. Tornell, A., and Lane, P., (1999), empirical analysis revealed that
resource endowment promotes attempts by groups to appropriate rents and that economies
with powerful groups grow slower than economies having powerless groups.33
An independent study by Oxford Policy Management (2011) supported that significant
inverse correlation exists between institutional development measured by the World Banks
Worldwide Governance Indicators (WGI) and countries that are dependent on minerals. This
indicates that mineral dependence promotes poor institutional governance.34
The impact of weak institutions results in deviations from rule of law. Laws are established
to protect the society and often top level decision makers do not adhere to those laws.
Bureaucratic procedures set by government institutions are also not adhered to by its own

31

North, D., Institutions, The Journal of Economic Perspectives, Vol. 5, No. 1, (1991), at 97-112.
Cabrales, A. and Hauk, E., The Quality of Political Institutions and the Curse of Natural Resources. The
Economic Journal, Vol. 121, No.551, (2011), at 5888.
33
Tornell, A., and Lane, P., The Voracity Effect, The American Economic Review, Vol. 89, No. 1, (1999),
at.22-46.
34
Haglund, D., Supra note 30.
32

21

leaders who treat their discretionary power in their own favour. Indiscipline, breach of code
of conduct and lack of accountability are often cited in weak institutions.
Corruption
Oil revenues are temptations to rent seeking aiming to improve working environment and
lifestyles. Rent seeking is viewed as legal behaviour and not the same as corruption. Wealth
generated by petroleum industry attracts various corrupted behaviour and escape from
governance. Oil transactions are of high value; hence missing negligible fraction equates to
high dollar value. Average cost of extracting conventional oil ranges between $3-$5/barrel in
the Middle East, hence there are extremely high economic rents expected which capture
attention.
Table 2 shows selective extract from Transparency Internationals 2012 survey.

The

selection displays ranking and corruption perception index (CPI) of countries and oil proven
reserves figures have been tabulated for illustration purposes.35 Ranking of countries is based
on global scale and corruption score is inverse (lower score indicates higher CPI score).
There is a positive correlation between the volume of natural resource endowment and CPI.
Norway is the extreme exception of having good amount of remaining reserves and be less
corrupted (indexed at 85).36

35
36

Published report shows 174 countries CPI, while only 60 countries are presented in this study.
Norways was developed prior to discovery of petroleum.

22

Table 2 Corruption Perception Index vs. 2011 Proven Reserves

37

Corruption in oil and gas industry would be observed at very early stages when some IOCs
attempt to bribe government officials to facilitate licensing or loosen license conditions.
Profit manipulation techniques are also used to maximize returns. Corruption can take the
form of excessive value gifts, travel and accommodation arrangements for personal reasons.
Many resource rich countries in the Middle East do not tax their citizens; therefore
disseminate less information on government practices which jeopardizes prudent behaviour.
The equation becomes trading of financial support with lack of transparency, therefore
civilians dont choose to argue against governments. When corruption becomes too obvious
and extends to capture more of civilian rights, protests begin and the 2011 demonstrations in
Arab countries are best example. Civilians in countries like Tunisia, Egypt and Yemen
decided to change their political regimes to the best interest of the nation.
37

Transparency International, http://cpi.transparency.org/cpi2012/results/#myAnchor1 , (last accessed April

12th, 2013). Proven reserves figures from BP Statistical Review 2012, Supra note 13. N/F denotes not found in
BP report.

23

Ross, M. (2012) argued that oil and gas development can induce corruption and fraud in
relatively poor countries where criminal gangs exist or where governments can sell future
exploitation rights to creep potential profits away from citizens.38 Fraud is one aspect of
corrupted behaviour and internal control literature always cite the fraud triangle model
introduced by a criminologist called Donald R. Cressey which is demonstrated in Figure 2.

Figure 2 The Fraud Triangle.

(Source: http://controls.ucmerced.edu/fraud-triangle.aspx)

Pressure or motive is what drives fraud at the first place. Individuals face several problems
which are often financial.

The fact that these financial needs cannot be resolved via

legitimate ways motivates the individual to search for an alternative. Rationalization is

convincing oneself that breaching the ethical code of conduct is acceptable in certain
situations. Offenders often treat themselves as honest people in bad circumstances and that
stealing part of money would compensate their hard work and will not drive the organization
bankrupt. The last leg of the triangle is opportunity which represents a weakness or a gap in
the system that allows the offender to access and conduct crime.
The Fraud Triangle model can be applied to analyse corrupted behaviour caused as a result of
resource endowment. Public sector wages are often low in developing countries as the
38

Ross, M., The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, (New Jersey, USA:
Princeton University Press, 2012) at 230.

24

majority of the petroleum revenue is directed to development plans, Sovereign Wealth Funds
(SWF), or repayment of fiscal debts. Some portion of the money perhaps is outright stolen
and several creative accounting practices are used to hide the truth. Poor wages paid to
public sector represent a motive for fraud. Another motive is the management reward system
which is based on seniority and not performance of individuals. Annual increments often fall
below level of inflation which government reports but citizens dont believe.

Poor

accountability, low corporate governance and lack of segregation of duties create the
weakness and opportunity to corrupted behaviour. Rationalization remains a psychological
justification that cannot be controlled or measured accurately.

2.5 Countries Experience with Resource Curse

Empirical analysis performed by Lederman, D., and Maloney, W. (2007) that negative
correlation with growth was very clear in resource abundant countries such as Republic of
Congo and Papua New Guinea, while countries like Finland, Norway and Canada did not
show up in regression analysis as relevant.39 Strong reliance on petroleum revenues has
resulted in Dutch disease in countries cursed with petroleum endowment. Too much sudden
wealth demoted good governance and resulted in corrupted behaviour seeking more wealth
illegally.
Figure 3 illustrates relation between petroleum dependent countries and the economic &
institutional development index. Countries at the right side show higher levels of economic
and institutional developments. More government resources with effective bureaucracy will
assist these countries to avoid resource curse. Countries on the left side lack the resources to
link their petroleum sector to the rest of the economy and face high pressure to direct their
petroleum earnings towards recurring expenditures. Countries at the top left quadrant are
highly dependent on petroleum export revenues with lower economic and institutional
development index, therefore run the risk of resource risk. These countries are not well
diversified in their economies and their non-mineral industries are small.

39

Lederman, D., and Maloney, W., Trade Structure and Growth, in Natural Resources: Neither Curse nor
Destiny, (Lederman, D., and Maloney, W., (ed), Washington, USA: Stanford University Press, 2007), at 17

25

Figure 3 Economic and Institutional Development of Fuel Dependent Countries

(Source: Oxford Policy Management)

Natural resource curse was reported in Angola through International Monetary Fund (IMF)
fiscal audit that was unable to reconcile missing oil revenues.40 Angolas proven oil reserves
have been accounting for 10% of total Africa41, but it failed to improve the social welfare of
its society. Around 70% of population lives on less than $2 income per day and Dutch
Disease and corruption have been noticed in Angola. Palley, T. (2004) has cited several
examples such as Nigeria, Cameroon and Republic of the Congo where oil wealth developed
less growth and promoted corruption. It appears that IOCs exploited the benefit of weak
government policies in those countries to capture the majority of the wealth or where rent
was shared with government, the money has been captured by a specific group of the
community.
Iraqs proven reserves stood at 143 billion barrels to account for approximately 9% of
worlds reserves.42 However, its former political regime under Saddam Hussein spent oil
revenues in military operations, domestic political repression and wasteful spending on

40

Palley, T., Lifting the Natural Resource Curs, Oil, Gas and Energy Law Intelligence (OGEL), Vol. 2, No. 1
(2004).
41
BP Statistical Review 2012, Supra note 13.
42
BP Statistical Review 2012, Supra note 13.

26

presidential palaces.43 Poor management of oil revenues and the imposition of military
regime has led many Iraqis depart their country. The ultimate result of this leadership style
was serious of wars with Iran and then with Kuwait until Iraq was invaded by USA in 2003.
The political instability hasnt settled yet, even after the collapse of Saddam Hussein regime.
In 2012, major IOCs signed contracts with regions in Iraq without the approval of the federal
government which in the absence of federal legislation exposed these contractual
arrangements to potential legal risks.44 The long term repression strategy has ended and the
new government will take time to gain trust of civilians.
Nigerias oil revenue per capita increased from $33 in 1965 to $325 in 2000, but income per
capita was remained the same at $245 indicating that the resultant oil revenue of $350 billion
over 35 years did not contribute to social welfare. By year 2000, population that has to
survive on income less than $1 per day has increased to 70%.45 Nigerias proven reserves
were reported at 31.5 billion barrels (2.5% of world reserves) by end of 2001.46 Decades of
huge production volumes of oil and gas rendered billions of dollars, but neither improved
social welfare nor succeeded in developing non-petroleum sectors with the huge spend
directed to support military dictatorship. In fact, Nigeria scored 27 points on CPI, and ranked
139 out of 174 countries.47 Crime rates are high and petroleum assets were no exception.
Seven cases of pipeline vandalism were reported in 1993, increased to 33 in 1996, then to 57
in 1998, to 497 recorded cases in 1999 and finally 600 in year 2000.48 A rising practice
called illegal bunkering49 caused Nigerian oil companies to lose around 200,000 bbl/d in
2004.50 Today, with oil production volume exceeding 2.5 mmbbl/d, 3.9 bcf/d of gas,
population of 175 million, $2,700 GDP per capita,51 Nigeria is suffering a real resource curse.
Botswana on the other hand is said to have received a blessing where 40% of its GDP is
contributed by diamonds. It has second largest investment in education as a fraction of its
43

Palley, T., supra note 40, at 3.

Jiyad, A., Iraqi Oil: Resource Curse or Glorious Blessing?, Iraq Business News, August 31st, 2012,
http://www.iraq-businessnews.com/2012/08/31/iraqi-oil-resource-curse-or-glorious-blessing/ (last accessed June
16th, 2013).
45
Sala-i-Martin, X., and Subramanian, A., Addressing the natural resource curse - an illustration from Nigeria,
(Washington, USA: International Monetary Fund, 2003), at 4.
46
BP, Supra Note 13.
47
Refer Table 2.
48
Sala-i-Martin, X., and Subramanian, A., Supra note 45.
49
Illegal Bunkering refers to oil theft by loading a ship with oil, carried by jerry cans or by tapping on pipeline.
This oil is ultimately sold to refineries in neighbouring countries at considerable profit.
50
Ghazvinian, J., The Curse of Oil Niger Delta, Nigeria, The Virginia Quarterly Review, Vol.83 No.1
(2005), at 12.
51
Central Intelligence Agency (CIA), The World Factbook, https://www.cia.gov/library/publications/the-worldfactbook/index.html , (last accessed May 11th, 2013).
44

27

GNP, has experienced highest growth rates since 1965. Botswana experience in converting
natural resources into a blessing is similar to Indonesia, Malaysia and Thailand which all
followed diversification and industrialization path.52 Countries like Singapore, Hong Kong
and South Korea have achieved higher growth despite being poorly endowed with natural
resources. Norway is considered to be the third largest petroleum exporter after Saudi Arabia
and Russia, but perhaps its political and legal regimes drive its success. Norway is said to
have limited oil-related corruption because of its investment in transparency and bureaucracy.

2.6 Is Resource Curse inevitable?

Resource endowment does not result in a curse, but it is any negative outcome similar to
country experiences discussed earlier that leads to a curse. It is the political regime and
management of resource wealth that triggers a blessing or curse. The main foundation to
avoiding petroleum curse is to realize that petroleum is a finite resource. The easiest way to
manage the finite petroleum revenue is by converting it to renewable fund and by avoiding
reliance on petroleum as a backbone of the economy.
Controlled Revenue Streams and Revenue Sterilization
Controlling excessive flow of money is one option. Governments often establish their fiscal
budgets with very conservative oil price assumption. Oil price is frequently higher than
budget resulting in higher revenues. Historical price shocks have been a good lesson to
conservatively estimate oil prices, but the excess is usually unplanned upfront and dealt with
as it appears. Reduction of production flow is economically argued as higher production and
revenues upfront result in higher project net present values. However, modest and steady
revenue streams are easier to administer rather than a sudden surge.
Impact of large revenues needs to be controlled on economy. Increased revenues are usually
followed by increased expenditure and inflation, and a control mechanism needs to ensure
that government resist increasing expenditures and does not get tempted to increase
borrowing in anticipation of potential increase in petroleum revenues. Stevens. P. (2004)
suggests avoiding fixed exchange rate policies when domestic inflation exists and urges
central banks to purchase foreign currencies to control nominal rate. Higher than budgeted
petroleum revenues should not result in increased government expenditures throughout the

52

Ploeg, F., Natural Resource: Curse or Blessing? Oxford Center for the Analysis of Resource Rich
Economies, Research Paper 5, (Oxford, UK: University of Oxford, 2010), at 3.

28

year. The main variance explanatory note in government annual budget should not be around
oil price behaviour.
Diversification
Diversifying the economy and release dependency on petroleum revenue is one commonly
agreed solution. Dutch Disease is the obvious symptom that drives nations to redirect their
development strategies to non-petroleum sectors. Stevens. P. (2004) argues that maximizing
private sectors revenue flow compared to public sector is an ideal solution in line with
experience cited in Australia, Canada and the United States who avoided the curse.53
Oil Stabilization Funds
Stabilization fund has been widely recommended in literature.

Resource-rich countries

should invest part of their petroleum revenues in funds to grow and feed low oil price
periods. The growth and profits gained on these investments can also be beneficial for future
generations. Stabilization funds often take the shape of SWF, whose fundamental objective
is to protect the economy and fiscal budget from adverse oil price shocks and guarantee
wealth flow for future periods. These funds invest in financial assets, government bonds or
industries related to productive capital or knowledge.

Leaving contributions to SWF

untouched, all profits and capital gains can be utilized to cater for recessionary economic
times and used for future generations.
Good Governance
Good governance can be achieved by stable laws, rule of law, competent tax administration
capacity, budgetary controls and open dialogue between government and society. 54 These
tools articulated by good governance mitigate possible outcomes that may lead to resource
curse. Law enforcement is key to protecting public interest and countrys wealth. Most
countries state sovereignty of their natural resources in their petroleum, mineral laws or
constitution. Similarly, setting complex fiscal system is meaningless if tax administration
capacity is weak. Governments have to strike a balance between what they want to achieve
and how are they going to achieve it with its available resources. Transparency is key to

53

Stevens, P., Supra Note 21, at 457

McPherson, C., and MacSearriagh, S., Corruption in the Petroleum Sector in The Many Faces of CorruptionTracking Vulnerabilities at the Sector Level, (Campos, J. (ed), Washington, USA, The World Bank, 2007), at
194.
54

29

good governance as it will allow citizens to participate in policy making and ensure proper
flow of cash.
Many governments are accused of non-disclosure of petroleum contracts details.
Transparency is the responsibility of government and education is of individual citizen in this
context. During licensing rounds, governments strive to strike a balanced interest with
international oil companies.

Poor geological prospectivity dictates that government

compromise on certain fiscal terms to attract investment. Quality of petroleum is of another

impact on project economics and investment attractiveness. Basic infrastructure and fiscal
stability plus others are also in the pool.

Therefore, if transparent reporting by the

government is required, legitimate argument should also be expected by citizens which

cannot be achieved if fundamental knowledge about resource sector is absent. An important
goal to achieve is countrys objectives without unproductive interference from public. Several
categories of petroleum licensing regimes exist such as petroleum sharing agreements,
concessionary systems and service contracts. Although contractual types and taxation tools
and regimes are not the subject of this study, it is the governments responsibility to choose
the best set of tools to capture the maximum rent of petroleum activities in a transparent and
prudent manner.
Extractive Industries Transparency Initiative (EITI) is a global standard that was set 2002 to
promote stronger governance in natural resource industries through transparent reporting by
governments and petroleum companies.

The mechanism adopted lay in that member

countries should report what they receive from IOCs, and the later should report what they
pay. This is to minimize the accusation of government in corrupted behaviour and eliminate
political public tension. These reports are then compared to ensure that no payment has been
unrecorded and sovereign wealth is protected by enhancing the level of information available
in public domain. Civil society then would be aware of those revenues that governments
manage on their behalf.55

2.7 What Has Been Said About Oman in Literature?

Before proceeding to discussions on Oman, it is necessary to review how other researchers
have assessed petroleum endowment in Oman. Data collection remained the challenge for
many researchers and wherever available, no explanations for extraordinary movements were

55

Refer to EITI website http://eiti.org/sydney2013 (last accessed May 23rd, 2013).

30

made available; therefore Oman has not been studied in depth with reference to resource
curse or blessing.
Ross, M. (2012), argued that different resource rich countries managed promote democracy,
create job opportunities for women and avoid civil wars. He acknowledged that Oman was
the most economically successful oil country in the last 50 years.56 In his cross country
evaluation, he examined oil endowment with women employment, level of democracy;
Omans powerful strategy lied in not joining OPEC thus being liberal on production volumes.
Sachs, J., and Warner A. (1995) performed cross country regression analysis for 97
developing countries. Oman was reported to have strong share of exports contribution to
GDP with lower growth rate at 0.691% Oman was therefore excluded from regression being
an outlier and would have increased the adverse effect of petroleum abundance on GDP
growth for countries under study.57 Their study simply supported that petroleum endowment
has been a curse in Oman.
Brunnschweiler, C. (2007) found positive relation between resource abundance and economic
growth, but not applicable to the Middle East were economies did not empirically perform
well. The argument concluded that resource abundance can be less of a curse than boost to
economic growth.58
Smith, B. (2004), included Oman among 107 countries in his study of oil influence on
durability of political regimes. He tested cross-sectional time-series data to examine the
effect of oil wealth on regime failure, political protests and civil wars. Among other
arguments, one main notable finding was that highly repressive regimes that confront
opposition during crisis are more likely to survive. In practical terms, if oil bolsters
authoritarian longevity by funding repression, then including a measure for repression ought
to reduce the effect of oil wealth in regression models. He concluded that oil dependence is
positively related to regime durability and negatively to democracy. 59 This is very true in
GCC countries where full democracy is missing, but the population growth will certainly
increase the risk of regime failure.

56

Ross, M., Supra note 38 at 230.

Sachs, J., and Warner, A., Supra Note 4, at 11
58
Brunnschweiler, C. Cursing or Blessing? Natural Resource Abundance, Institutions, and Economic
Growth, World Development, Vol. 36, No. 3, 2007, at 399-419.
59
Smith, B., Oil Wealth and Regime Survival in the Developing World, American Journal of Political
Science, Vol.48, No.2. (2004), at 232-246.
57

31

Haglund, D. (2011), studied evolution of fuel dependence by low and middle income
countries to assess their vulnerability to resource curse. His study positioned Oman in the
green quadrant of the matrix indicating high levels of economic and institutional
development. This quadrant has also hosted countries such as Norway, St. Luicia and UAE.60
It is worth noting that availability of data plays an important role in cross country regression
analysis and absence of certain variables or number of years should not be an excuse to
exclude such country from regression. Researchers can in fact estimate missing data, rather
than biased to achieve a global conclusion. Sachs, J. and Warner A. (1995) excluded Oman,
Saudi, UAE, Bahrain, Iraq, Kuwait and UAE for reasons such as high negative correlation
between GDP growth and oil exports, periods with negative GDP growth and periods with
missing data. These countries require full independent study to assess resource curse. When
analyzing country specific data, researchers should not only focus on economic indicators,
but also consider non-numeric data coupled with historic development of events.

60

Haglund, D., Supra note 30 and Figure 3.

32

CHAPTER 3: THE ROLE OF PETROLEUM IN DEVELOPING OMAN

3.1 General Brief on Oman
Prior to 1970, Oman was a poor country suffering from economic stagnation and political
isolation. Basic infrastructure and services were not in place such as utilities, health care,
education system, housing, employment opportunities, safe drinking water, and paved roads.
Oman has a prolonged history in sailing, trading, agriculture and animal breeding. The
discovery of oil perhaps changed the economy mix and helped bring Oman to the world map
as a fast developing country under the leadership of Sultan Qaboos. This section briefs on
main features of Oman relevant to this study.
Geography
Oman is located in the south east corner of the Arabian Peninsula occupying land area of
309,500 square kilometres and 1700 kilometres of long coastline facing the Arabian Sea,
Gulf of Oman and sharing the Strait of Hormuz. Saudi Arabia, United Arab Emirates (UAE)
and Yemen are adjacent neighbours to Oman.61 Oman is considered the third largest country
in the Arabian Peninsula after Saudi Arabia and Yemen and the second largest among GCC
after Saudi Arabia.62 This location gives it a strategic advantage in accessing the Indian
Ocean directly and not exports its oil through the controversial Strait of Hormuz.
Oman has divided into 11 administrative regions and 61 wilayats (towns).

Muscat

Governorate includes 6 towns including Muscat which is the capital of the country. Al
Batinah region (split into North and South governorates) consists of 12 towns which occupy
the coastal line from Muscat to UAE. Musandam Governorate covers 4 wilayats located in
the north of the country with high mountains facing the Strait of Hormuz. Adh Dhahirah
governorate consists of 3 towns and slopes from southern wings of Omani mountains to the
ArRub Al-Khali (Empty Quarter desert). Ad Dakhliyah governorate covers 8 towns in the
interior of Oman and hosts oil and gas pipeline route. Ash Sharqiyah region (split into North
and South governorates) covers 11 wilayats and its land is covered by desert, mountains and
faces the Arabian Sea.

61
62

Al Wusta covers 4 towns and is the richest with petroleum

See Map of Oman.

Yemen is not a member of GCC.

33

endowment. Al Buraymi governorate consists of 3 towns and adjacent to boarders with UAE.
Finally the Dhofar governorate which consists of 10 towns neighbouring Yemen.63
Omans topographical features 3% of the area overlooking sea, 15% occupied by mountains
and remaining 82% by desert and gravel sands.
Climate
Climate differs from one region to another where it is hot and humid in coastal areas in the
summer. Interior regions receive hot and dry climate with exception of mountains having
moderate climate throughout the year. Oman receives low quantities of rainfalls although
irregular heavy rains fall at times. The Dhofar region is situated at high altitude and enjoys
moderate climate most of the times. This region also benefits from monsoon coming from
the Indian Ocean between June and September which makes it a tourism attraction for GCC
citizens during hot summers. Temperature can go as low as 4C in some towns during winter
and as high as 50C in summer.
Political System
Oman established its modern government in 1970 and follows a monarchy system. The
executive head is the Sultan and the administrative system derives its power and authority
from the sultan. Article 10 of the basic statue of the state calls for aligning the foundation
with Islamic Sharia (law) while adopting useful contemporary methods and tools.
establishes an administrative system that ensures justice and equality for citizens.

It
The

council of ministers or the cabinet is responsible to implement general policies. 64 The

government is assisted by the Council of Oman headed by the Sultan taking all its decisions
on the basis of majority vote.65 This council is made up of state council (Majlis Al Dawla),
and consultation council (Majlis Al Shura).66

63

Development at Glance 2012 SCP Oman, http://www.ncsi.gov.om/viewPublication.aspx?id=1684 , (last

accessed May 19th, 2013).
64
Basic Statue of State, Article 44.
65
Ministry of Information, http://www.omanet.om/english/government/majlis.asp?cat=gov, (last accessed May
22nd, 2013).
66
Basic Statue of State, Article 58.

34

Population
According to published statistics, Omans population stood at 3.3 million formed of 2 million
Omanis and 1.3 expatriates (2011 estimate)67. This presents a 10.6 person per square
kilometre population density. Gender ratio is 174 males for every 100 females.68 Table 3
demonstrates population by region and is sorted by number of Omanis. The capital of the
country like everywhere in the world attracts the majority of population and loads the
infrastructure. Surprisingly, Al Dhakhliyah and Al Wusta regions which are endowed with
rich geological structures containing hydrocarbons are not highly populated.
Region
Area in KM Omani
Non Omani Total population person/km2
Al Batinah
12,500
638,648
282,133
920,781
73.7
Muscat
3,900
418,652
585,090
1,003,742
257.4
Ash Sharqiyah
36,400
301,737
113,919
415,656
11.4
Al Dakhliyah
31,900
276,721
65,296
342,017
10.7
Dhofar
99,300
168,764
146,560
315,324
3.2
Adh Dhahirah
44,000
122,262
34,744
157,006
3.6
Al Buraymi
44,261
34,274
78,535
Musandam
1,800
22,526
8,499
31,025
17.2
Al Wusta
79,700
19,587
11,037
30,624
0.4
Total
309,500 2,013,158 1,281,552
3,294,710
10.6
Table 3 Oman Population Spread by Region 2010 Census

(Source: SCP)69

67

SCP, Statistical Year Book 2012, Population, http://www.ncsi.gov.om/book/SYB2012/contents.htm, (last

accessed May 29th, 2013)
68
SCP, Supra note 63.
69
No Area size is reported for Al Buraymi region as it was separated from Al Dhahirah region in 2011.

35

3.2 Omans Petroleum History

The first exploration agreement in Oman was signed in 1925 with DArcy Exploration
Company on a 2 year term based on which the first expedition team began to survey Omani
areas. The company decided not to continue following several challenges faced among
which was resistance of indigenous people on the coastal lines.70
The second attempt was made in 1937 when a 75 year concession was awarded to Iraq
Petroleum Company, which drilled the first dry exploratory well in 1956. After a serious of
dry wells, oil was first discovered in1962, and the first cargo was exported in 1967.71 Few
partners withdrew from the company and the government decided to restructure ownership to
reflect government 60%, Shell 34%, Total 4% and Partex 2% where Petroleum Development
Oman (PDO) was born. The first part of infrastructure was a 20 inch main oil pipeline to
serve the existing 5 active fields which was triggered by increased oil prices in 1973. The
number of active fields has increased since 1967 to reach 100 fields operated by PDO by end
of 1999. The first gas pipeline was constructed in 1978 from the Yibal field to Muscat in
order to fuel the power and desalination plant. Subsequent major explorations were made in
1991 exceeding the domestic requirements where the government decided to build its
Liquefied Natural Gas (LNG) plant for export purposes in 1994.72
PDO has been the largest oil and gas producer in Oman and has established the required
infrastructure. Apart from developing the petroleum sector in Oman, PDO since inception,
has been a great source of talented Omanis who moved to different sectors of government
and private sectors.73
Following contractual relinquishments of areas by PDO, the government restructured those
areas into blocks and invited international oil companies to participate in petroleum
development programs. By end of 2011, 8 companies were contributing to the oil and gas
production volumes, with remaining 14 in exploration stage.74 PDOs concession license was
renewed for another 40 years in 2012 and remains one of the oldest active licenses in the

70

Clark, T., Underground to Overseas The Story of Petroleum Development Oman, (London, UK: Stacey
International, 2007), at 10.
71
PDO, See Supra Note 11.
72
Oman LNG, http://www.omanlng.com , (last accessed April 6th, 2013).
73
Clark, T., Supra note 70, at 61.
74
Ministry of Oil and Gas, Exploration Companies,
http://www.mog.gov.om/LinkClick.aspx?fileticket=V3tqKMhEheM%3d&tabid=314 , (last accessed April 14th,
2013).

36

world.

All other blocks are licensed using exploration and production sharing agreements

and the Ministry of Oil and Gas (MOG) has been running licensing rounds from time to time.
Omans oil production profile is depicted in Figure 4 showing a rapid growth in crude
production, with stable proven reserves level in recent years.

'000 bbl/d

Oman Oil Production vs Reserves (1965-2011)

billion bbl
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

1050
900
750
600

Reserves Billion Bbbls - right scale

Production Mbbl/D Left scale

450
300
150
0

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

Figure 4 Omans production and reserves from 1956 to 2011

(Source: BP Statistical Report)

Production has grown to its peak at 960,000 bbl/d and started to decline. Being a major
source of income for the country, the government through its MOG, started to pursue
Enhanced Oil Recovery (EOR) techniques to maintain high production volume in addition to
accelerating exploration efforts for new fields. Hydraulic fracturing techniques are also used
to unlock tight gas which has been added to fuel mix. By 2012, more than 90% of oil and gas
was produced by PDO and Occidental, while remaining 6 producers contribute the balance.75
BP has commercialized a major tight gas field which is expected to produce in 2016 and
provide 1/3 of Omans current gas production.

75

Ministry of Oil and Gas, Daily Average Production,

http://www.mog.gov.om/english/MediaCentre/StatisticalInformation/tabid/90/Default.aspx (last accessed May
23rd, 2013).

37

3.3 Laws & Regulations

Escaping resource curse starts with effective laws and regulations. All laws in Oman are
initiated, studied, reviewed, updated by Ministry of Legal Affairs in coordination with
concerned parties then reviewed by the parliament and the ministers cabinet. These laws are
then escalated to the Sultan who issues them. This section highlights regulations relevant to
this study and reflects legislative support to petroleum revenue management.76
Oil and Mineral Law was first issued in 1974 stating full sovereignty of all petroleum and
mineral resources within Omani jurisdictions and that underground ownership is not
transferrable.77 Chapter 2 of the law referred to licensing conditions and gave discretionary
rights to the ministry. In addition to other chapters, article 6.11 prohibited disclosure of any
financial or technical data related to operations by any government officials throughout the
license term without IOCs consent. It is may be that absence of information transparency at
early stages of development was due to the government wanting to quietly develop its
infrastructure without much foreign intervention.
Omans sovereign wealth fund was created in 1980 via royal decree to establish State General
Reserves Fund (SGRF). The creation coincided with high oil prices which were required to
be re-invested via an independent entity. Article 8 stipulated that 15% of each sum received
from oil revenues to be invested to the fund in addition to re-investment of all income
received from SGRF investments. Article 6 stipulated that no withdrawal is made from SGRF
except for the purpose of financing budget deficit in years which require financing.78
The Basic Law of the State was promulgated in 1996 which is viewed as the constitution.
This highlights sovereignty of state (article 1), supremacy of law and calls equal opportunities
for all citizens (article 9).79 Article 11 on economic principles acknowledges the sovereign
rights over natural resources stating that:
All natural resources and revenues therefrom shall be the property of the state which will preserve
and utilize them in the best manner taking into consideration the requirements of the states security
and the interest of national economy. No concession or investment in any of the public resources of
the country may be granted except by virtue of a law and for a limited period, provided the national
interests are safeguarded.
76

Oman Legal Network website http://www.omanlegal.net/ provides access to royal decrees in Arabic language.
Translation to English is done by the author.
77
Petroleum and Mineral Law promulgated by royal decree no. 42/74, issued on November 8 th, 1974, published
in official gazette (issue 70).
78
State General Reserves Fund Law promulgated by royal decree no. 1/80, issued on January 6th, 1980.
79
Basic Statue of the State promulgated by royal decree No. 101/96 issued on November 6 th, 1996, published in
official gazette (issue 587).

38

The recent Oil and Gas Law issued in 2011 repealed the previous oil and minerals law
promulgated issued in 1974. The current law came to separate petroleum from mineral
resources which is regulated under a separate law now.

Industry development has

necessitated issuance of new law to regulate new blocks formed by relinquished areas by
petroleum development Oman holding a concession license and licensing. More terms were
defined and references were made to subsequent laws issued since 1974 including the law on
joining United Nations Convention of the Law of the Seas (UNCLOS). Many other aspects
were included such as abandonment provisions (article16) and unitization measures (article
35). Confidentiality clause mentioned in the previous law was relaxed giving more discretion
to the ministry to the extent of promoting research and development (article 5). Article 36
calls upon licensees to employee Oman nationals, train and develop them for all positions
ranging from technical to managerial.80 All petroleum agreements signed by the ministry
with IOCs however have to be ratified by the Sultan via royal decree which brings the
license into effect.
Oman established its audit function since 1970 and has been a department within the Ministry
of Finance to audit government entities. The State Audit Law was issued in year 2000 where
the State Financial and Administrative Audit Institution has become an independent
government entity.

The institution is given an autonomous state to audit financial,

administrative and operational audits to protect public funds. All audit reports are issued to
concerned bodies to review findings and respond within 2 months (article 18). Entities which
come under the jurisdiction of the state audit intuition are all ministries, government
organizations, pension funds, and private companies where government owns at least 51%
including companies holding natural resource exploitation license (article 12).81 This law was
repealed via royal decree 111/2011 which issued new state audit law.82 The current law gives
stringent audit responsibilities and rights to the institution and brings into its jurisdiction
entities with government investment of at least 40% (article 20). State audit institution has
been also given the right to interrogate concerned parties or pass instruction to Omans Public
Prosecution to intervene (article 23). The new law was accompanied by the Public Fund

80

Oil and Gas Law promulgated by royal decree no. 8/2011, issued on January 24 th, 2011, published in official
gazette (issue 928).
81
State Audit Law promulgated by royal decree no. 55/2000, issued on July 12 th, 2000, published in official
gazette (issue 675).
82
State Audit Law promulgated by royal decree no. 111/2011, issued on October 24 th, 2011, published in
official gazette (issue 949).

39

Protection and Avoiding Conflict of Interest Law issued on the same day.83 All government
officials including entities where government holds at least 40% interest are required to
submit their annual declarations of their financial assets.
Omans legal regime ensured on establishing necessary laws to govern practices necessary in
oil and gas sector and protecting sovereign wealth for its own citizens. Legislation is the first
step towards managing natural resource wealth and the second step is the implementation and
enforcement which is the responsibility of the ministries. It is worth noting that additional
audit rights and stringent controls passed to State Financial and Administrative Audit
Institution coincided with the 2011 public protests calling for more transparency and job
creation. Major changes were made in the ministerial cabinets and the parliament was further
empowered. There have been few allegations to government officials of misusing their
discretionary powers. Although bad institutions aspect of the resource curse is not covered in
depth in this study, it is worth mentioning that the Sultan has taken immediate corrective
measures to ensure more transparency and accountability.

83

Public Fund Protection and Avoiding Conflict of Interest Law promulgated by royal decree no. 112/2011,
issued on October 24th, 2011, published in official gazette (issue 949)

40

3.4 Development Planning

First oil container was exported in 1967 as stated earlier. Prior to that, Omans exports were
limited to dates, fruits, vegetables, cow skin and henna84. Oman also imported most of its
necessities like rice, tea, cotton and fabrics, machinery, furniture and pharmaceutical
products.85 The government initiated development plans at early stages given that the country
was lacking the basic infrastructure. This was done through strategic allocation of resources
to achieve long term national plans which were split into economic development and social
development. Planning process has considered short term vision gearing for various changes
and utilizing the annual budget process to achieve the overall objective of growth and
sustainable economy. The main direction of the government was to utilize petroleum revenue
in developing the required infrastructure and boost economy as well as raising standard of
living. The government adopted a five year based planning system where results are reviewed
and learning is reflected in the following FYP.86

Each FYP represented a theme that

government wanted to pursue to achieve the overall objectives as discussed below:

Five Year Plans
The first FYP was put in place following the establishment of the Development Council in
1975. The plan which coincided with high oil prices (1976-1980), focused on establishing the
foundation of the government through establishment of government buildings, power
stations, communication systems, hospitals and schools.

These five years established

political, economic and experience exchange with the world where Oman benefited from
other countries experience in sustainable development.

The creation of SGRF was

announced in 1980 and coincided to benefit from booming oil prices during the period.
SGRF is the equivalent of sovereign wealth fund or oil stabilization funds cited in literature.87
The second FYP (1981-1985), continued with infrastructure project and broadened its scope
to develop natural water resources and promote infrastructure projects in other regions.
The third FYP (1986-1990) complemented on the previous FYPs to focus on improving
health and education. Improvement of social welfare and the overall achievement of this

84

Henna refers to dye (tattooing). The material prepared from plants is used to dye hair, hands or skin.
Ministry of National Economy, Oman-The Development Experience and Investment Climate (6th ed.), 2008.
86
AlYousef, M., The State and Market in Omans Development: Conflict or Co-operation? PHD Thesis
submitted to University of London, 1997), at 241.
87
State General Reserve Fund (SGRF), http://www.sgrf.gov.om/aboutus.html, (last accessed April 13th, 2013).
85

41

periods objectives were challenged by low oil prices to drive governments contractionary
fiscal policy.88
The Fourth FYP (1991-1995) focused on productive sectors and diversifying the economy
through enhancement to private sector.

Regions outside the capital received 60% of

government funds for development projects compared to 34% in previous plans.89

The Fifth FYP (1996-2000) and all subsequent plans were built around vision 2020
(discussed in following section). The main direction was to create stable macroeconomic
framework and developing Omanis human capital.

Henceforward, FYPs focused on

highlighting major projects that will help achieve vision 2020s objectives.
The Sixth FYP (2001-2006) continued aiming at economic growth, sustainable development,
human resource development, economic diversification, private sector development and
privatization. Diversification aimed at creation of new energy dependent industries such as
fertilizers, petrochemicals, aromatics, and iron and steel industries. Privatization was adopted
as part of Omans liberalization policy and plans were set to privatize electricity and water
sectors.

The plan was to follow partial privatization of government owned companies

specialized in cement production, flour mills and petroleum product marketing.

The Seventh FYP (2007-2010) presented a general theme of improving level of general
education, preserving heritage and cultural links, tourism development, and research and
development plus many others.
It is clear that all FYPs aimed at improving all aspects that aim at achieving a sustainable
diversified economy and maximizing social welfare of citizens. One way to promote private
investment climate was the state intervention through its planning process to develop roads,
ports and industrial areas which serve multiple purposes.
Vision 2020
The second strategic planning phase took place in 1995 when the government released its 25
year long- term plan called Vision 2020. This capitalized on experience gained from past
FYPs. The aim was to take Oman to a higher level of prosperity and growth and below was
the key objectives:

88
89

Expansionary and contractionary policies are demonstrated later in Figure 9.

Ministry of National Economy, Supra note 85, at 16-17.

42

Development of human resources and national talents.

Creation of stable macroeconomic framework aimed at development of private sector.

Enhancing the standard of living of Omani people.

Promotion of economic diversification and optimum use of natural resources and

strategic locations of Oman. The aim is to release the economy from petroleum sector
dominance by increasing the size of non-petroleum sectors.

The plan was to reduce oil contribution to 9% in relation to overall GDP by 2020, with its
standing at 34% when the vision was set in 1995. The planned increase of oil contribution to
36% in year 2000 was made in line with rising oil prices. Gas sector has been set to increase
its contribution from 2% in 1995 to 10% in 2020 denoting more investment in gas as a future
energy source compared to the sooner-to-peak oil and as an important source for domestic
energy requirements. Table 4 shows vision 2020 comparative structure of GDP using year
1993 as base year.
% of total GDP
Oil
Gas
Agriculture
Fisheries
Manufacturing
Services
Non Petroleum Sector including Natural Gas
Total GDP

1995
34
2
3
1
8
53
67
100

2000
36
2
2
1
7
52
64
100

2005
23
4
2
1
12
59
77
100

2010
17
4
1
1
11
67
83
100

2020
9
10
3
2
19
57
91
100

Table 4 Vision 2020 Comparative Structure of GDP in percentage terms

(Source: SCP)

Manufacturing sector (covers industries, electricity, water and mining) has been set to
increase its contribution to GDP by more than a double and stand at 19%. Service sector
including tourism, banking, financial services, transportation and communication also set to
increase to 57%.

43

3.5 Socio-Economic Impact of Petroleum Dependence

Omans population was around 658,000 before 1970 with 10 kilometres of asphalt roads and
3 schools occupied by 909 students. Oil endowment has been low compared to neighbouring
countries where Omans reserves were estimated to be 2.5 billion barrels in 1980 forming
less than 1% of the Middle East and GCC countries.90 Oil revenue was perhaps the only way
to shift away from stagnation and backwardness. The following discussion is based on
analysing social and economic trends in Oman in addition to comparisons with neighbouring
GCC.
Effect on GDP
Table 5 represents as summary of main macroeconomic indicators obtained from SCP reports
on 5-year intervals for the period 1980 to 2010. All subsequent illustrations are based on
yearly figures including 2011 to reflect better presentation of trend.

Table 5 Omans Macroeconomic Indicators (1980-2010)

(Source: SCP)

Significant growth is expected for a country endowed with petroleum, but how much growth
rate should have been achieved is the question asked in order to analyse resource curse
theory. Nominal (current) GDP growth rate shows a declining trend until 1995 and this is
because oil prices were declining between 1985 to 1995.91 A second reason for the decline is
because data begins with 1980; hence base year is high in Table 5. Year 1970 was the year
when new government was established where the economy is expected to show very high
growth initially considering previous stagnation and idle resources. Therefore, Oman may
have reached maturity in 1980 on available resource utilization. As nominal growth is linked
90
91

BP Statistical Review 2012, Supra note 13. Proven reserves figures are available from 1980 onwards.
Dubai Mercantile Exchange (DME) is used to benchmark Oman selling price.

44

to oil price, it is good to examine GDP in real terms (base year 2000 in this case). Between
1980 and year 2010, Real GDP has shown a growth of more than 600% (from $4.2 million to
$31.4 million).
Petroleum sector has been the main contributor to Omans GDP historically. In line with
governments efforts to diversify its economy and reduce dependency on oil export revenue,
petroleum sectors contribution relative to total GDP has shown deterioration (Table 6).
However, absolute values have been increasing at multiples over the past 31 years. Historical
increases in oil prices at which Oman sells its crude oil and the need to sustain optimum
production volumes have mainly increased absolute values, demonstrating lower drop in
percentage terms proportionately to non-petroleum sector over time. Non petroleum sector
faces a great challenge to increase its contribution to 91% by year 2020 given high oil prices.
Oil sectors percentage contribution to total GDP is shown at 42% in year 2010, while vision
2020 envisaged 17% for that year (refer Table 4).

Table 6 Economic Activities Percentage Contribution to GDP

(Source: SCP)

Omans GDP has been improving where the initial $5.7 billion in 1980 has risen to almost
$70 billion (see Figure 5). The exponential growth line shows a 7.1% growth rate and with
this, Oman seems to have avoided severe adverse impacts of oil price volatility. Regression
analysis results in Figure 6 show a good sample of data (0.928) and a positive correlation
(0.862) between Omans oil selling price and GDP.
Omans first oil shock was in 1986 when Oman oil price dropped from $27/bbl to 13/bbl
resulting in negative annual GDP growth (current) by 12%. The second oil shock was
experienced in 1998 when Oman oil prices dropped from $19/bbl to $11/bbl resulting in

45

(negative 11%) GDP growth.92 These two shocks were important lessons to better manage
economic policies but the third shock came in 2009 during global financial crisis. Due to
weak international demand and declining oil prices, oil export revenues have declined by
nearly $2 billion between 2008 and 2009 while total export revenue dropped by $10 billion
which severely resulted in GDP to decline from $60 billion in 2008 to $48 billion in 2009.
Central Bank of Oman (CBO) reported $280 million current account deficit following 9
consecutive years of surplus.93 The overall balance of payment which combines current and
financial accounts showed a surplus of nearly $770 million in 2009 reflecting a reasonable
strategy in avoiding adverse effects of oil shocks on a highly-oil dependent economy.94 In
other words, the impact could have been worse.

Oman's GDP at Current Prices Vs. Oil Price

(1980-2011)

$'millions
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0

US $/Bbl
120
100
80

y=

4955.8e0.0714x

60
40
20
-

1980

1985

GDP Current

1990

1995

2000

Oman average crude price (US$/barrel)

2005

2010

Expon. (GDP Current )

Figure 5 Omans GDP at Current Prices vs. Oil Price (1980 2011)

(Source: SCP)

Regression Statistics
Multiple R
0.928507551
R Square
0.862126272
Adjusted R Square
0.857372006
Standard Error
6551.994964
Observations
31
Figure 6 Regression Results on Oil price vs. GDP

92

Impacts of first two oil shocks on GDP are not visible in Figure 5 due to scale parameters.
Current account is defined as total exports of goods and services less total imports and does not include
financial assets and liabilities.
94
Central Bank of Oman, Annual Report 2009, http://www.cbo.gov.om/ (last accessed June 6th, 2013).
93

46

Another successful petroleum resource management strategy was to remain independent of

OPEC. Oman has been attending OPEC meetings as an observer and indicated in several
occasions of no intention to join. Figure 7 shows trend of average daily production versus
Oman and worlds crude price for the period 1980 to 2011. With no restriction on production
quotas, Oman was able to boost its production and compensate for oil price decline during
1980-1986. Oman was fortunate of its additional reserves discovery to compensate for oil
shocks. OPECs restrictions on production would not assist Oman achieve its strategic
objectives with limited oil reserves.

Oman's Daily Production Vs. Oil Selling Price

(1980-2011)
Daily Production

Oil Price
120

1000
100
800
80
600

60

400

40

200

20

World Oil Price

2010

2008

2006

2004

Oman Selling Price $

2002

2000

1998

(Source: SCP)

1996

Figure 7 Omans Daily Oil Production vs. Oil Price

1994

1992

1990

1988

1986

1984

1982

1980

Production Mbbl/D

47

Effect on Fiscal Budget and Trade Balance

Oman managed to build the main infrastructure and services in the first 40 years, and by
2012, most of the infrastructure was complete. Figure 8 shows Omans revenue and level of
expenditure.

$'millions

Oman's Yearly Budget Deficit / Surplus (19802011)

$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1980

1985

1990

1995

Total Country Expenditure

2000

2005

2010

Total Country Revenue

Figure 8 Omans Yearly Budget Deficit / Surplus (1980-2011)

(Source: SCP)

The high budget deficit represented by increased expenditure and lower revenues in 2009 was
caused by the global financial crisis and was recovered by the surplus reported in 2011. The
government has been utilizing most of the revenues to fund fiscal expenditure and reduce the
level of borrowings. Withdrawal from SGRF has been made during low oil revenues to
reduce budget deficit and pay its loans. In its 2012 budget, Oman was expected to report a
deficit of OMR 1.2 billion ($3.1 billion / 5% of domestic product) at an average oil price of
$75/barrel and expected oil production of 915 bbl/d.95
Omans total expenditure is highly correlated with its petroleum revenue (59% correlation) as
depicted in Figure 9. In many oil exporting countries, oil revenue has been the main driver of
expenditure policy.96

95

Ministry of Finance, Oman General budget 2012, Supra note 12

Mansur, A. and Treichel, V., Oman Beyond the Oil Horizon-Policies Toward Sustainable Growth,
(Washington, International Monterey Fund, 1999)
96

48

$'millions

Oman's Petroelum Revenue Vs. Country

Expenditure (1980-2011)

40,000

200%

Correlation (R Square)= 0.59

30,000

150%

20,000

100%

10,000

50%

0%
1980

1985

1990
1995
Petroleum Export Revenue

2000

2005

2010

Total Country Expenditure

Pet. Revenue to Country Expenditure (Ratio)
Figure 9 Omans Petroleum Revenue Vs. Total Expenditure (1980-2011)

(Source: SCP)

Petroleum revenue and government expenditure have been trending together until early 2000,
where Oman has been following expansionary policies.

Generally, a falling ratio of

petroleum revenue to total expenditure is noticed in expansionary policies and a rising ratio in
contractionary policies.97 Omans has been shifting between contractionary and expansionary
policies, but the later has dominated since 2009 aggressively.98
From 1990 to 2000, consumer price index movements resulted in an average annual inflation
rate for the period at 1.4%. Omans inflation rate has averaged at annual 3% over the past 11
years.99 Effective monetary controls resulted in manageable inflation. Inflation tax refers to
increasing money supply without increasing currency reserves and the practice is followed in
many countries.100 Oman has never had to pursue inflation tax to cover budget deficits.
Omans currency has been pegged to US dollar and no intentions were expressed to shift to
another currency or follow floating method. The Omani government has been confident in
the strength of the US currency which dominates the world foreign exchange transactions as

97

Mansur, A. and Treichel, V., See Supra Note 24, at 28-30

Expansionary fiscal policy aims at expanding money supply and government expenditure for economic
growth. Contractionary policy aims at slowing down economic growth during high growth periods.
99
SCP
100
AlYousef, M., Supra note 86, at 207.
98

49

well as world reserves; hence a stronger Euro for example will require long time for reserves
currency to shift.101 Oman has therefore opted out from the future GCC monetary union.
Oman has got into many bilateral treaties with other countries to promote trade and economic
cooperation including a free trade agreement with the United States in 2009. Oil export has
been the primary driver to total export revenue as shown in Figure 10. There is no argument
that Omans export was heavily dependent on oil revenues, and diversification process called
upon during FYPs did not result in significant improvement of non-oil exports. Oil export in
the graph does not include LNG which is illustrated later. The increase in Omans average
crude selling price from $57/bbl in 2009 to $77/bbl in 2010 and then to $103/bbl in 2011
resulted in steeper slope compared to the overall export revenue indicating slower recovery
for non-oil exports from 2009 global recession. Dutch disease seems to be present during the
first 20 years where percentage of oil export to total export reached as high as 83% in 1986.

Figure 10 Oman's Oil Export vs. Total Export Revenue (1980-2011)

(Source: SCP)

The composition of trade balance over the past 14 years is demonstrated in Table 7 which
clearly shows strong dominance over other exports and on overall trade balance. Data period
is inconsistent with the overall sample in this study which starts from 1980, but the
illustration is aimed to demonstrate the effect of Dutch disease. The significantly high
101

Al Balushi, D., Oman-a Country on the Rise and a Country with a Plan, WorldFolio,
http://www.worldfolio.co.uk/region/middle-east/oman/darwish-bin-ismail-al-balushi-minister-responsible-forfinancial-affairs-oman-n1575 , (last accessed April 14th, 2013).

50

percentage of oil to total export that never went below 65% and the impact of oil price
volatility have certainly overridden non-petroleum commodities in the competition to export.

Table 7 Omans Foreign Trade indicators (1998-2009)

(Source: SCP)102

Economic analysis of such a long period of time can extend beyond this study, but
observation of figures and their trends sufficiently allow drawing a concluding remark on
Dutch disease. Oman has been raising its efforts to reduce dependency on oil sector and its
efforts to diversify sources of income. The government has also been incentivising nonpetroleum industries through subsidies to diversify its economy and create more jobs. Above
analysis however reveal strong domination of oil sector over manufacturing and service
sector which supports manifestation of Dutch diseases syndrome in Oman.

Research

performed by AlYousef, M., (1997) revealed the same based on detailed comparison of
Omans several economic indicators over the 1970 to 1995 with developing countries of
equal size. His comparison of petroleum, agriculture, manufacturing and services revealed
the same pressure of oil domination on foreign exchange which was discussed earlier in
literature.103

102
103

SCP, Statistical Year Book 2012, Foreign Trade, Supra note 67

AlYousef, M., Supra note 86, at 222-225.

51

Effect on Social Life

In an attempt to measure impact of petroleum endowment on the social life in Oman, this
study considers several indicators to draw an argument. These indicators include income per
capita, education, health, employment and infrastructure. Between 1970 and 2012, Oman has
achieved the following milestones as shown in Table 8:
Achievement

In 1970

By 2012

Income Per Capita

$2,600

$28,500

GDP (Market Prices)

$280 million

$84 billion

Educational Institutions 3

1,525

Number of Students

1,900

627,000

Asphalted roads

7 Kilometres

30,000 kilometres

Health Facilities

2,100

Life Expectancy

49

73

Electricity Production

14,000 Mega Watts/hour 30 million Mega Watts/hour

Population

N/A

3.3 million (1.3 ml. expatriates)

Table 8 Selected Main Achievements in 1970 and 2012.

(Source: SGRF website).

The relatively poor standard of life has improved dramatically following the exploitation of
oil and revenue utilization in improving social life. Figure 11 demonstrates that Oman
received more than $200 billion in the form of oil revenues over the past 31 years and that
has significantly improved real GDP per capita from nearly $4,000 in 1980 to $9,564 by year
2011, using year 2000 prices as base line (graph on the right side). Nominal GDP per capita
(graph on left side) has improved from $5,359 in 1980 to more than $20,000 by year 2011.
Year 2000 in both graphs shows a sharp increase in GDP per capita. While population has
only increased by 100,000 between 1999 and 2000, it was the actual petroleum export that
drove the increase in GDP. Table 7 illustrated trade balance increase from $2.4 billion to
$6.2 billion in 1999 and 2000 respectively which were mainly driven by increase of oil
exports from $5.5 billion to $9.4 billion. Oman had its peak oil year in 2000 when production
increased by 18.4 million barrels compared to 1999 and reached the level of 960,000

52

bbls/d.104 Production increase was coupled with an increase in Omans average crude price by
$10/- (Table 5).

Figure 11 Impact of Oil Revenues on GDP per Capita at Current and Real Prices

(Source: SCP)

Education remains the key factor to developing nations and countries like Japan and China
are often cited as examples of resource-poor countries that are ranked among top developed
nations utilizing human capital. Old scholars like Adam Smith have considered human
capital to be the main source of economic strength and growth stating in 1952 that:
Those talents as they make a part of his fortune, so do they likewise of that of the society to
which he belongs.105
Heinrich Von Thnen (1875) stated that
since a more highly schooled nation, equipped with the same material goods, creates a
much larger income than an uneducated people, and since this higher schooling can only be
obtained through an educational process which requires consumption of material goods, the

104

BP Statistical Review 2012, Supra note 13

Cohn, E., and Geske, T., The Economics of Education, 3 rd edition, (Oxford, USA: Pergamon Press, 1990), at
14.
105

53

more educated nation also possesses a larger capital, the returns of which are expressed in
the larger product of its labor.106
Oman has achieved a remarkable milestone in education and gender equality. The starting
point of 1970 with indicators mentioned in Table 8 with limited details is compared with
achievements as of 2012 and statistics reported by SCP. By end of 2011, the number of
government schools was 1040 occupied by more than 500,000 students with an average of 10
students per teacher, and 27 students per classroom. The Ministry of Education has been
receiving increasing budget year over year, where 2011 expenditure was reported at $1.9
billion (OMR 737 million) representing 7% of total government spend. Education policy also
called for equal opportunity to males and females although earlier periods showed limited
number of female enrolment. Higher education statistics consists of government and private
universities, technical and medical institutes hosted 422,000 students by year 2010 including
government scholarships abroad. The remaining balance of educational institutes mentioned
in Table 8 is made up by nurseries of which majority is located in the capital region.107
Omans planning process also paid special attention to improving accessibility to health
facilities and raising living standards which is not only governments responsibility towards
citizens but also to ensure achievement of sustainable development. Health sector received
major investment which resulted in increasing life expectancy to 73 years while high income
non-OECD life expectancy is 77 years according to world development indicators published
by World Bank.108 From 3 health facilities as of 1970, the number has reached 2,100 in year
2011 which includes 251 government hospitals and health centers, 1363 private hospitals,
clinics and pharmacies. Additionally, there are medical facilities that are designated specially
to the military sector, Sultan Qaboos University, and some private sector institutions but they
also provide health care to referred and emergency cases.109
Job creation has remained a major concern for Oman over time. Past 10 year employment
statistics in Table 9 show increasing role of private sector over time. The total of 1,473
reflects the number of employees registered under government and private sectors pension
fund bodies and does not include entrepreneurs in small to medium enterprises including taxi
drivers, fishermen and farmers. Nationalisation program (Omanisation) has been adopted in

106

Ibid.
SCP, Statistical Year Book 2012, Education, Supra note 67.
108
The World Bank, World Development Indicators, http://data.worldbank.org/country/oman (last accessed
May 31st, 2013).
109
SCP, Statistical Year Book 2012, Health, Supra note 67
107

54

1988 to replace expatriate personnel with trained Omanis and several incentives have been
provided to private sector entities achieving their promised targets. Omans oil and gas
private sector statistics revealed 79% nationalised positions in producing IOCs and 45%
among those in exploration stage.110 The dilemma of nationalising top positions in private
sector remains a hot issue. The government is aware of the importance of enhancing private
sectors role and started to promote small-medium enterprises through various funds and
youth programs.

Table 9 Employment Statistics (2002 2011)

(Source: SCP)111

While no data is available on poverty, the above achievements and government thrill to
improve social welfare is noticeable.

Various achievements in education, health,

infrastructure development areas defend poverty chances or social inequalities that have
resulted in some countries as a result of poor resource revenue management.
The United Nations publishes an annual human development report analysing various
development measures in its member countries.

The 2013 human development index

measures the dimensions of human development through income, education and health.
Figure 12 shows Omans position compared to Arab states, world and high human
development countries.

110

Lower percentage in companies in exploration stage is driven by lower number of staff. The riskiness of
exploration phase does not attract Omani labor who seek job security.
111
SCP, Statistical Year Book 2012, Government Sector (Employment), Supra note 67.

55

Figure 12 Human Development Index : Trends 2008 Present

(Source: UNDP)

The report demonstrates Omans progress between 1980 to 2012 on social development
parameters where life expectancy at birth increased from 60.8 years to 73.2 years. Expected
years of schooling increased by 10.1 years to stand at 13.5 years by year 2012. Omans gross
national income (PPP) improved from $9,404 to $24,092 (2005 prices). These indicators
combined, resulted in a total score of 0.731 for Oman to rank 84 out of 187. 112 Omans score
is below the average of 0.758 of high human development group, but above the average 0.652
for Arab countries.

3.6 Comparison with GCC Countries for Selected Indicators

GCC was formed in 1980 with 6 member countries sharing similar historic, religious, cultural
and economic interests. These member countries are Saudi, Oman, UAE, Qatar, Kuwait and
Bahrain. The main objectives included effective coordination, cooperation, and formulation
of regulations; stimulate scientific and technological progress and uniting relations that help
member countries citizens.113 Together, they hold 30% of world proven oil reserves, 20% of
proven world gas reserves, and have been producing 25% of world production.114 These
countries have utilized their oil endowment in their economic and social development
programs but have caught symptoms of resource curse in a way or another. While this study
112

Human Development Report 2013, Explanatory Note on 2013 HDR Composite Indices, United Nations
Development Program, http://hdrstats.undp.org/en/countries/profiles/OMN.html , (last accessed June 6th, 2013).
113
The Charter, Gulf Cooperation Council, http://www.gcc-sg.org/eng/indexfc7a.html?action=SecShow&ID=1, (last accessed June 1st, 2013).
114
BP Statistical Review 2012, Supra note 13.

56

does not focus at individual GCC states experiences, it aims to compare Omans ranking
among its neighbours. GCC data is inconsistent compared to Oman, hence was not explored
further and the main purpose is to provide a broader view.
Selective key indicators have been presented in Table 10 reflecting Omans comparative low
petroleum endowment among other economic indicators. This translates into trade balances
GDP where all member countries are petroleum export dependants.115
Similarities in growth are based in attracting expatriate workers since 1970s where most of
the domestic workforce was hired by government entities. Later, all countries adopted
nationalisation policies to promote employment of local workforce.

All countries have

shown rapid developments where petroleum revenue was utilized.

Many services and

products are highly subsidized by governments, particularly water and electricity while
corporate income tax is only based on foreign companies in some GCC countries while Oman
taxes local corporations also.

Table 10 GCC Economic Indicators 2011

(Source GCC website)116

A comparison of GDP as of 2011, GDP growth and GDP per capita growth among the six
countries from 1980 to 2011 is shown in Table 11. Although Oman ranks the 2nd lowest GDP
in GCC (Table 10), it has achieved the second best growth rate between 1980 and 2011 after
Qatar while other countries overall growth rate was affected by negative annual growth
periods. Kuwait experienced the most volatile annual growth rates with 10 periods of
115

Oman figures obtained from GCC website are slightly different from figures obtained from SCP and used in
this study. No attempt has been made to reconcile in order to allow comparison with other countries based on
information from one source.
116
The Cooperation Council of the Arab States of the Gulf, http://www.gcc-sg.org/eng/, (last accessed June 1st,
2013). Oil and gas indicators from BP statistical Report 2012 since GCC statistics show 2009 figures on oil and
gas.

57

negative growth, Qatar and UAE with 8 periods, Saudi Arabia with 6, Bahrain with 3 periods
and Oman with 2 periods.117 Omans initial strategy to develop the country in a stable
sustainable pattern, which was led by the FYPs along with the dynamic role of SGRF have
led to stable GDP growth rates and avoid oil price shocks. Another contributing factor is the
OPEC membership where all GCC countries are subject to OPEC quotas except Oman and
Bahrain. Alternatively, Omans GDP per capita in 2011 was comparatively in line with
Saudi and Bahrain but the growth rate in purchasing power parity (PPP) from 1980 to 2011
was remarkably the highest among GCC countries achieving 573%, followed by Bahrain at
203% growth rate over the past 31 years. One reason is that both Oman and Bahrains GDP
per capita (PPP) was low in the base year of analysis presented in this study. Qatar, Saudi,
Kuwait and UAE had relatively high GDP per capita in 1980; hence their growth percentage
when compared to 2011 is low.

Counry
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE

GDP Per Capita PPP

Real GDP
Growth
Growth
1980
2011 1980-2011 1980-2011
9,153
27,735
203%
302%
25,281
38,332
52%
87%
4,184
28,148
573%
473%
51,446
97,987
90%
550%
15,659
29,401
88%
80%
33,897
47,729
41%
229%

Table 11 GCC Countries Growth in Real GDP & GDP per Capita (PPP)

(Source: IMF data mapper)

A debate may arise to choose between high economic achievements which are subject to oil
price volatility and OPEC quotas versus a stable economic growth with limited impact of
externalities. An economy that does not jeopardize its social welfare and development
programs during adverse economic periods may be favourable than nations spending valuable
efforts and time to recover from oil shocks.
Petroleum revenues assisted all GCC countries in development and achievement of
remarkable milestones. UAE has spent its petroleum revenues in development as well as
attracting foreign investment where it has become the favourable destination for employment
and tourism. UAE is one of those countries which are argued to have converted their
petroleum resources into a blessing.118 Qatars volatile GDP growth has only changed to
117

Oman Figures obtained from IMF website vary slightly from what has been obtained through SCP in this
study. Figures used based in graph are based on IMF definitions. http://www.imf.org/external/datamapper/.
Omans experience with oil shocks has been discussed through Figure 5.
118
Ploeg, F., Supra Note 52, at 3.

58

positive following discovery of its large gas field and change of political regime. Qatar has
now ranked the highest in GDP, but its adverse effects started to show in boosted inflation
and cost of living. Kuwait has achieved little on diversifying its economy mainly because of
its high oil export revenues resulting in positive fiscal position, poor business climate
political set up that controls economic reforms.119 Saudi possessed the highest oil
endowments and experienced most of the oil shocks but started enhancing private sector role
to meet its national objectives including diversification. Bahrain also relied heavily on
petroleum export revenue but managed to compete internationally on Islamic banking,
aluminium and tourism. However, political unrests in 2011 and 2012 severely affected its
economic growth and the country is going through recovery process.

119

Central intelligence Agency (CIA), Supra note 51.

59

CHAPTER 4: PETROLEUM ABUNDANCE AS A SOLUTION

The previous chapter has revealed significant achievements despite diversification plans
which have not fully succeeded. Oman has been known for its political, investment stability
and conserving of its cultural values. Oil revenue has been the main driver of the economy
and achievements. Despite these challenges which arguably remain inevitable for a country
like Oman, petroleum endowment itself can be a path for escaping resource curse. This
chapter briefly taps on potential of petroleum in resolving the dilemma by highlighting the
role of gas as a solution to support income diversification objective and an education reform
funded by oil revenue.
Vision 2020 is being reviewed by authorities in Oman, but it is obvious that current trends do
not suggest achievement of diversified economy in the next 7 years. High oil prices have
tempted the government to establish more petroleum based sectors and diversify the sources
of energy supply emphasising gas development. Depleting oil fields have been alarming
where Oman has initiated EOR methods to sustain its plateau achieved in year 2000
successfully.

EOR techniques used in Oman include miscible gas injection120, steam

injection121 and polymer flooding122 which makes Oman to be the first country to combine
technically challenging EOR methods on a global scale.123 This intellectual property can
perhaps be capitalized to the benefit of the country.
Oman has been blessed with rich geological structures that make it an attraction for
geological studies. However, this came at an expense of cost of petroleum extraction which
is comparatively high compared to neighbouring countries.

The transition into EOR

techniques has raised the burden on development costs; hence high oil prices are a motive to
sustain development of expensive fields in Oman. Shale gas revolution in the United States
and its potential impact on the supply market is accepted given all environmental challenges
surrounding the development program. Oman will be one of those countries who will be
severely affected by lower oil prices given todays high dependence of trade balance on oil
exports. Nevertheless, Oman will benefit from its strategic location facing the Arab Sea

120

Natural Gas is injected into the gas cap of the formation to boost reservoir pressure. Miscible gas injection
uses carbon dioxide, nitrogen and LPG.
121
Steam injection heats oil and reduces viscosity to allow easy flow towards producing wells
122
Dissolving polymer in injected water to increase viscosity and improve reservoir efficiency.
123
The World Bank, Oman Energy Sector Review, October 2010.

60

should sanctions on Iran and the threats to Strait of Hormuz go to a serious level blocking
20% of world oil supply to pass through.
Petroleum sector development is the responsibility of MOG and although final approval
resides with Sultan, MOG has received high level of discretionary rights to attract
investments by IOCs. With the exception of PDO which has been holding concessionary
rights since 1973 with governments equity of 60%, all subsequent licenses were issued in the
form of exploration and production sharing agreements. Article 10 of the oil and gas law
stipulates award of petroleum licenses to technically and commercially qualified companies
of which criteria to be decided by MOG.124 This is an important part of the discretion given
technical challenges in Oman and lower cost of extraction in neighbouring countries.
Natural gas on the other hand has been of another dilemma.

Vision 2020 has drawn

promising plans to increase the level of value creation by gas to 10% and has started
developing many industries which are gas dependent. The creation of LNG plant has been a
successful achievement considering economic and employment value addition. However, its
controversy appeared when commitments over long term LNG contracts resulted in shortage
of supply to feed growing domestic requirements. The manufacturing value addition to
overall GDP has increased from 5% in 1995 to 18% in 2011 (Table 6) and industrial areas
have become starving for gas which resulted in gas import from Qatar. Oman exports around
55% of its gas on long term LNG contracts and the first one will expire by 2020 which should
free some gas for domestic use, and perhaps utilize LNG export facility for spot sale purposes
until upstream sector produces more gas.125 MOG has been actively working on EOR
projects to improve recovery factor as well as engaging in exploration programs to find new
reserves.
Omans oil and gas law has considered the commercial challenges imposed by gas
development compared to oil. Article 42 of the law incentivises exploitation of natural gas to
reward investors by prolonging evaluation terms.

Licensees who manage to declare

commerciality are eligible to recover their investment should MOG seeks to postpone
development of such discovery to meet future domestic demands. The same article also calls
for unitization of small adjacent fields and reduction of financial burdens on licensees to

124

Oil and Gas Law, Supra note 80.

US Energy Information Administration (EIA), Oman, August 22nd, 2012,
http://www.eia.gov/countries/cab.cfm?fips=MU (last accessed June 4th, 2013).
125

61

assist viability of investment.126 Omans mature fields promise another 17 years of oil at
2011 rate of extraction but gas is expected to last for another 35 years.127 Technology
advancement and promising oil prices have been of great assistance in improving recovery
factor over years, but gas shortage remains a problem given that MOG avoids gas
acceleration programs to safeguard reservoirs from fast depletion.
All gas related production sharing agreements are accompanied by gas purchase agreement
with MOG being the sole supplier of gas in domestic market at reasonable pre-agreed pricing
mechanism. The government in turn engages in gas sales agreements with industrial
consumers including power generation companies.

Perusal of national objectives of

employment, diversified economy through private sector enhancement has led to subsidised
prices. Subsidy has therefore made domestic utilization of gas less economic compared to
LNG, but national interest has always driven government development programs. There is an
option for the government to re-structure the subsidy program to challenge subsidized
industries operational efficiency or remove subsidy from those who achieved the national
objectives. Nevertheless, removal of subsidy which is around $3.1 billion per year128 should
be carefully structured to avoid potential increase of prices paid by consumers.
Gas is the alternative to oil as a future to achieving diversification program over short term.
A portion of oil export revenues can be redirected towards enhancing gas imports from Qatar
to feed growing industrial requirements. Gradual reduction of investments in oil sector can
shift towards gas and renewable energy over the long run.
A recent step that has been taken by MOG to enhance value creation by other sectors and
promote private sector role in economy is the local content initiative called In-Country Value
(ICV). PDO has been the pioneer in supporting local community contractors around its
concession area and has also been providing valuable training and scholarships to its Omani
staff. Given that infrastructure and business environment is available; ICV initiative is taking
the shape of a responsibility by all petroleum companies in Oman. ICV strategy aims at
supporting procurement of local goods and services to improve the capability of Omani
people and companies to achieve sustainable development.129 Article 36 of Omans Tender
126

Oil and Gas Law, Supra note 80

BP Statistical Review 2012, supra note 13.
128
Ministry of Finance, Supra note 12.
129
Petroleum Development Oman, Annual Report 2011,
http://www.pdo.co.om/Publications/_PublicationsFile_Annual%20Report%20201120127309952.pdf (last
accessed June 5th, 2013), at 24-27.
127

62

Law states 10% price preference is given to Omani origin goods and services.130 The 10%
preference appeared first via royal decree 86/1984 promulgating government tender
procedures and law. ICV initiative is capitalizing on this preference to retain more spending
within the country and enhance business development. While the initiative is still at its early
stage, collaboration of oil companies focuses on development of joint qualification system in
petroleum tendering procedures chaired by MOG, and the development of Made-in-Oman
Index to support ICV.131 ICV initiative pursued by petroleum sector takes different forms in
other sectors through youth investment funds and other organizations to support local content
development.
Tremendous efforts have been spent on increasing the number of educational institutions.
From 3 schools in 1970 to over 1500 facilities is remarkable, however unemployment ratio
ranges between 12% - 15% as no official figure is reported.132 International Labor
Organization (ILO) website has also been consulted but most recent statistics pertain to year
2003 which will not be valuable to analyse in this study.133 Vision 2020 emphasized on
upgrading education quality earlier and certain achievements were noted. However, labor
market still lacks qualified national talents and employers are tempted to import foreign
workers. According to 2011 global competitiveness report, the top three problematic factors
to doing business in Oman were restrictive labor regulations, inadequate educated workforce
and poor work ethics in national labor force.134
Figure 13 presents Oman as a country in a transition between efficiency driven economy to
innovation driven. Macroeconomic environment and infrastructure are highly ranked, and
remaining factors seem to be highly elastic to innovation and education.

130

Tender Law promulgated by royal decree no. 36/2008, issued on March 24th, 2008 published in official
gazette (issue 860).
131
James, A., Oil Firms to Include Made in Oman Index, Times of Oman, March 5 th, 2013,
http://www.timesofoman.com/News/Article-10136.aspx (last accessed June 5th, 2013).
132 Bertelsmann Stiftung, BTI 2012 - Oman Country Report. Gtersloh: http://www.btiproject.org/countryreports/mena/omn/ , (last accessed on June 1st, 2013), at 15.
133
International Labor Organization, Statistics and databases by country, www.ilo.org, (last accessed June 4th,
2013).
134
Sala-i-Martin, X., et al, The Global Competitiveness Report 2011-2012, World Economic Forum,
http://www.weforum.org , (last accessed June 4th, 2013).

63

Figure 13 Omans Ranking Global Competitiveness Index

(Source: World Economic Forum)

Education curricular is suggested to go through transformation to promote students taking

initiative, critical thinking and research. Attention should be directed to process talented
students who can access job market confidently. The focus of education reform should target
producing job creators and not job seekers. Government has developed the infrastructure
over the past 43 years, and it is the time to redirect investing oil revenue in a new economy
based on knowledge based industries that can create and assist in achieving the overall
diversification objective.

64

CHAPTER 5: CONCLUSION
Resource curse is a serious phenomenon that landed on rich-resource countries and drove
their progress slower than countries endowed with less or nil natural resource. Resource
curse is often used interchangeably with Dutch disease which is incorrect. The two have to
be distinguished clearly as the later forms one symptom of resource curse. Dutch Disease is
unhealthy for the economy for its crowding out effect over other sectors. However, oil
endowment is still a blessing for developing countries. The adverse economic effect because
of Dutch disease is only hyped by expectations, since huge oil revenues distract
competitiveness of other sectors.

Non-diversified economies run the risk of oil price

volatility and their development planning gets distracted. High cash generating industries
attracts rent seekers and natural resource industry will always lead the group. Resource
abundance is a blessing, but incorrect management of its revenues turns it into a curse. The
fact that a resource should be turned into a blessing is subject to many factors which have
been discussed in this dissertation with other countries examples including Oman.
Diversified economy coupled with establishment of SWF and good governance are essential
to avoid resource curse.
The Omani experience of development planning reveals a successful example of
transforming a stagnant economy to a modern one which has its international presence. This
success was mainly driven by oil revenues, and the stable political and legal regime. Both
economic and social achievements have been highlighted in this study.

Among other

achievements which are a fundamental arm to stability of a nation, is that no dominant tribe
or group exists. Oman experienced tribal problems and power groups before the 1970s, but
today all tribes and religious groups come under the national umbrella. The states power has
promoted equal opportunities among citizens irrespective of ethnicity, religious group or
gender. Inequality issues have arisen in many countries and resource abundance was blamed.
In fact it is the countrys leadership style that drives its success. Oman today, possesses great
potential through its strong patriotic Omanis.
Omans achievements over the past 41 years cannot demonstrate resource curse. High oil
prices helped Oman to achieve its fiscal objectives set in vision 2020 through lowering
deficits and repayments of loans. Oil revenues also funded most of the infrastructure and
development of non-petroleum industries. Development FYPs demonstrated an effective tool
to achieve sustainable growth. The creation of SGRF was of great assistance to avoiding

65

severe impacts of oil shocks, but on the other hand, no information is available to assess its
strength and to what extent it can perform as a shock absorber. Oil export revenues have
dominated export revenues as discussed earlier through Figure 10, and the non-petroleum
sector is struggling for a higher position to contribute to GDP. This cannot be achieved in
light of high oil prices. Omans diversification efforts did not succeed in avoiding Dutch
disease. The author views that Dutch disease is inevitable for a poor country with a visionary
leader who wanted to develop Oman very fast using petroleum revenue. Without oil revenue,
Oman would have shown very slow progress given the countrys position before oil
discovery. Oman perhaps could have received a resource curse derived by the thrive for
illegal rent seeking which could have ultimately led to political and economic instability like
Nigeria, Yemen and Iraq. Stable legal, political and economic framework is to be given
credit for safely embarking on steady socio-economic growth.
Oil remains an important asset to the country and its declining output has been stimulating
government to look for alternative sources of energy as well as diversifying the economy.
Oil revenue is indispensible over short term until diversification is fully achieved. Oman can
become a center for EOR technology as stated earlier and future oil revenues should be
redirected towards escaping Dutch disease. The importance of gas in taking the lead going
forward is acknowledged and FYPs have been successful in expanding gas based industries.
Oman receives a lot of sun light throughout the year in many parts of the country which gives
potential for solar power energy development to reduce dependency on non-renewable
sources. Omans location on worlds arid belt also makes it receive lower rainfalls and
heavily dependent on ground water. This may create potential problems given that the
country has started with unconventional gas development and hydraulic fracturing which may
expose contamination of ground water.135 Alternatively, Omans great strategic location
gives it a benefit over its neighbouring GCC countries to avoid the Strait of Hormuz for its oil
exports. The long coast line and topographical variety can make Oman a great destination for
tourism in the rich GCC region.
Oman diversification program has received great attention locally and internationally. This is
in line with growing population, oil price volatility and declining oil reserves. Governments
efforts to enhance non-petroleum industries through its subsidy program needs careful review
to assess achievement of national objectives. Subsidized energy prices will attract higher

135

Omans oil and gas law is strict on environmental pollution especially on fresh water contamination.

66

demand and overload fiscal budget over long run hindering open market competition.
Subsidy removal may in fact adversely affect Omans trade balance as certain products will
not be able to compete in export market which will worsen Dutch disease.
Many options are made available to replace dependence on petroleum as a non-renewable
source. Options like adopting technology, enhancing tourism, service, manufacturing and
private sectors are viable options, but perhaps the most critical part for Oman now, is an
education reform.

There is a growing awareness around the world that knowledge based

economies achieve faster growth capitalizing on technology growth than non-renewable

resource based economies. The revised education curricular which should be based on labor
market requirement and encourage research and critical thinking would lead to innovation.
Human capital development is another aspect that should result in gradual reduction of
dependency on imported labor gradually.
The above recommendations are critical to achieve sustainable growth and objectives set in
vision 2020. These recommendations were made in line with discussions presented in this
study; however require further research to achieve a clear road map that gives appropriate
weight of oil revenue allocation to implement each suggestion.

67

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