Too good to refuse

Downstream industries hold untold potential, both to grow the Omani economy and to enlarge the scope of its downstream services

It is not often that the prime minister of any country starts choking back tears during a press conference. But on 9 August 1965, Lee Kuan Yew, Prime Minister of Singapore was doing just that. What was getting Lee so down? A concept that economics professors explain on the first day of class: scarcity.

Singapore, an island slightly smaller than Bahrain, had just been expelled from its union with Malaysia. The newly declared Republic of Singapore, severed from the rest of Malaysia, had virtually zero natural resources, yet it needed to house, educate and employ its 1.9 million people, all while defending its fragile sovereignty in a changing region.

One could hardly blame the leader for getting emotional.
The scarcity that Singapore faced, however, turned out to be a blessing of sorts. In the absence of conventional natural resources, the country developed its human resources. Over the past 55 years, the city-state moulded an educated workforce that could handle increasingly complex downstream industries and eventually knowledge-based industries. Within one generation, the young republic became one of the richest countries in the world.

When speaking of the GCC, an area well-endowed with hydrocarbons, scarcity is not typically a buzzword. In Oman, however, oil and gas reserves – though plentiful now – are set to deplete more quickly than those of its neighbours. The authorities have long acknowledged this and are looking for ways to diversify the Sultanate’s economy by investing in other sectors. Although these efforts have helped drive growth in a number of industries, many of them, like metallurgy and petrochemicals, indirectly rely on hydrocarbons for low-cost energy and feedstock: foundries need gas to fuel their operations and petrochemicals require oil for primary production.

Mature fields
Lately, a combination of steadily growing consumer demand and an expanding industrial sector have put more pressure on the Sultanate’s maturing gas fields. This consumption in recent years has necessitated imports from Qatar via the Dolphin pipeline. In response, authorities have been investigating ways to decrease demand. Last November, Muscat mulled price increases on gas for industrial customers to better reflect international markets. For industries, however, higher energy prices could shrink profit margins and ultimately slow growth.

One relatively untapped source of energy savings, recycling, might hold some solutions. A number of industries in the Sultanate could benefit from increasing use of recycled materials, which is often less energy-intensive than primary production. In the long run, incorporating more recycled materials in supply lines could lead to cheaper, greener production that preserves increasingly valuable hydrocarbons.

The aluminium industry demonstrates this potential. Primary production has risen steadily in the Sultanate and is set to continue doing so. Last May Sohar Aluminium announced a $3bn investment in a bid to double its output. Since the metal is extremely versatile, downstream industries have been developing in tandem with primary production to serve specific sectors like transport, retail and construction. Oman Aluminium Processing Industries (OAPIL) locally sources its feedstock to make rods and overhead conductors. The firm has plans to double its annual capacity in coming years, Vice-chairman and Managing Director Hussain Salman Al Lawati said at the Arabal conference last November. The company currently produces 48,000 tpa but would like to see that top 100,0000 tpa.

These expansion plans will depend on availability of feedstock, he added. “It depends on how much aluminium Sohar Aluminium can supply. Our expansion will depend on commitments from Sohar and the government for natural gas.” Enter recycling. Oman’s aluminium producers rely on natural gas to fuel the primary production which is highly energy intensive. Creating aluminium from recycled products, on the other hand, requires 95 per cent less energy. Even better, aluminium can also undergo multiple lifecycles without quality loss.
Although incorporating more recycled aluminium in production lines may require significant upfront investments, industry players see potential for incorporating more recycled materials in the Sultanate. “Recycling has huge benefits for future generations by preserving energy and natural resources,” OAPIL CEO Frederic Rouyer said in a speech at the Arabal conference. “[T]here is clearly a case for looking to develop a sophisticated aluminium recycling industry here in Oman that could benefit all of the GCC smelters.” Indeed, with a few critical shifts, the industry could begin producing at lower costs, preserving energy and, as an added bonus, cutting waste and greenhouse gas emissions.

Plastic recyling
Another downstream industry on the up in Oman, PET plastic production, could benefit from recycling as well. PET (polyethylene terephthalate) plastic is a synthetic material popular for beverage bottles, food containers and product packaging. Although some companies have started finding ways to create the plastic from plant materials, the majority of the plastic is produced from petroleum. Given the GCC’s rich oil reserves, the region has been quick to develop the industry as part of a wider push to increase petrochemicals output.

“The Gulf region’s share of petrochemical and chemical total output is currently 16 per cent, and this will grow to 20 per cent by the year 2015,” Abdualwahab al Sadoun, secretary of the Gulf Petrochemicals & Chemicals Association (GPCA), said at the GPCA’s Supply Conference Chain in June 2011. As part of the diversification plans outlined by the government in Oman Vision 2020, PET production has also grown in Oman. The Salalah-based company OCTAL, for example, produces PET plastic and resin. Founded in 2006, OCTAL has built itself into the region’s largest PET resin manufacturer and the world’ largest integrated PET sheet manufacturer. The company reported $500mn in sales in 2010, the majority of which were shipped overseas, making PET a significant portion Oman’s non-oil exports.

Still, the industry relies on petroleum feedstock for primary production. Since recycling uses post-consumer products as feedstock, using recycled PET does not require the petroleum that would be needed to create new plastic, leaving more oil saved for other purposes. Additionally, creating recycled PET uses 50-70 per cent less energy than primary production. Since virtually all of Oman’s electricity is generated by burning gas, that energy savings translates to gas savings as well.

Of course, Oman’s current resource situation is a far cry from that of Singapore in 1965. By most metrics, its hydrocarbons are still plentiful. However, successful integration of post-consumer production lines could save those energy resources for overseas export, where they can fetch high prices. In the long term, using more recycled materials in industries like aluminium and PET could also allow downstream industries to further wean themselves off their oil and gas dependence. That way, Oman will still be able to capitalise on the industrial expertise and infrastructure it is developing now through conventional production, even if hydrocarbons do become scarcer. Moving forward, these sorts of industries hold untold potential, both to grow the Omani economy and to enlarge the scope of its downstream services. 

 

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