Logistical expansion: Investments aim to link regions by land and foreign markets by sea

Industrial zones, port developments, railways and fisheries projects are but a few examples of how investments are transforming Oman’s outlying regions. Such projects involve both public and private sectors, and many are large-scale. Big developments outside Muscat, which make up the largest chunk of investments, both domestic and foreign, are concentrated in three cities: Sohar, Muscat’s well-developed neighbour in the Al Batinah North governorate; Salalah, the established southern port city and capital of the Dhofar governorate; and Duqm, the burgeoning port city on the southern coast of Al Wusta governorate.

The government, intent on boosting non-oil revenues and keen to advance its plan to diversify the economy, wants to see better productivity from non-oil sectors in these three regions. To this end, it has allocated 87m sq metres of land plots for industrial estates in Sohar, Salalah and Duqm – an investment of $9.4bn.

The country still depends on high oil prices to maintain growth. To curb this dependence and broaden its base of industries, the government is pursuing regional free zones and ports, real estate schemes, large-scale infrastructure projects and service activities. All of this bodes well for future economic stability: in 2012, while oil GDP grew 10.9%, non-oil GDP grew 12%.

Rail Links

Of high potential for regional development is the Oman National Railway, a OR6bn ($15.58bn) project to link Oman’s major regional transit hubs. Initial designs show the track running the sultanate’s full length, from Al Buraimi near the UAE to Al Mazyona near Yemen. The Ministry of Transportation and Communication (MoTC) floated a preliminary design tender in early February 2013, and a project management tender in June. According to Abdulrahman Al Hatmi, the project’s director, the ministry plans to choose a preliminary design consultancy by the end of 2013, a project management consultancy thereafter, and then begin the pre-qualification process for a design and build (D&B) contract to be announced by the end of 2014. At that point, construction is to begin on the first phase of the project, connecting Al Buraimi to Sohar, and from there onward to Muscat, Nizwa, Ibra and Sinaw.

The added value such a rail network would generate for Oman’s intra-state commerce is immense, even before considering the proposed inter-state link to the GCC rail network. Together with investments in regional airports and highways around Oman’s port cities, the rail network would bring Oman a logistical renaissance in the years to 2020 (see analysis).

Salalah

A city of about 200,000 near the southern tip of the Dhofar governorate, Salalah is, after Muscat, the most populous city in Oman. Aside from being a centre of shipping and industry, Salalah’s non-arid climate draws investments in tourism and agriculture, which has helped diversify its local economy.

The city’s heavyweight is the Port of Salalah. Oman’s largest seaport and main trans-shipment hub, it is among the world’s 30 largest container ports and employs 2200 workers (1300 of them Omani), making it the largest employer in the southern region. The port is operated by Salalah Port Services Company and is owned by the Danish shipping firm APM Terminals (30%), the government of Oman (20%), institutional investors (21%), and pension funds and the general public (29%). Public investments there total OR268.95m ($700.9m); private ones, OR243.39m ($634.29m).

The port has two terminals, one for containers and one for general cargo. Its container terminal has six berths, 16.5-18.5-metre-deep approach channels, 2205 metres of quay and a capacity of 5m twenty-foot equivalent units (TEUs) per annum. The general cargo terminal has 12 berths with drafts 16 metres deep, and four more are being constructed. Traffic at the latter terminal has risen to 7.5m tonnes in 2012, up from 6.5m in 2011. From 1999 to 2012, container growth rose 665%, and general cargo by 600%.

In 2012, the government announced a OR55m ($143m) plan to upgrade the general cargo terminal. Construction is under way. According to Archirodon Construction, the Netherlands-based contractor, the general cargo terminal post-upgrade will have 1266 metres of multi-purpose berths, a new northern breakwater, space for dry-bulk commodities and a new liquids jetty. Its capacity will consequently rise to 20m tonnes per annum (tpa), of which 6m will be able to accommodate liquids. The northern breakwater will be 3.5 km long and funded at $250m by the MoTC, which aims to put the project out to tender by the end of 2014. “The port needs a breakwater for a number of reasons,” said Ahmed Akaak, Port of Salalah’s acting CEO. “To protect itself from the environment, currents and the khareef (autumn) season – used to denote the monsoon in southern Oman, south-eastern Yemen and Sudan that brings with it significant marine perils in the form of waves, surge, and so on – as well as for security concerns. We have a wide open port today, which cannot be easily closed off to unknown vessels.”

Salalah Free Zone

The 18-sq-km Salalah Free Zone (SFZ) was established in 2006 to complement port activities and aid industrial growth in the Dhofar region. The SFZ is divided into two plots, Adhan and Raysut, the former to serve light industries and logistics firms, the latter to house chemical and material plants and other heavy manufacturing. According to SFZ’s chief commercial officer, Ali Tabouk, investments of about $6bn are expected by 2015.

The draw is palpable. Adhan and Raysut are the headquarters of many of Oman’s top local firms, such as OCTAL Petrochemicals, Salalah Methanol and Salalah Mills, which often use both port terminals to run their distributions. The SFZ has also had success in convincing foreign companies to set up shop. It offers strong incentives to international investors: 100% foreign ownership, zero income tax, and no minimum capital requirements or import restrictions.

Foreign firms have begun to arrive. In early 2012, Belgium’s Carmeuse Group signed a $140m contract to build a limestone-processing plant, which its CEO, Rodolphe Collinet, expects to put out 50,000 tonnes of product in its first year, and 750,000 tonnes when fully operational in 2020. In mid-2013, the free zone granted approval to CK Group, an Ivoirian manufacturer of cocoa derivatives, to build a plant there. Salalah’s reputation for quick trans-shipment between Africa, Asia and the Middle East has led Deutsche Post DHL, an international logistics firm, to set up a southern Gulf centre in Raysut as part of its 2015 strategy. Such anecdotes suggest that the city’s proximity to emerging markets will attract investors from all continents.

Duqm

At coastal mid-point between Muscat and the Yemeni border sits Duqm, with a population of more than 11,000 spread among about 23 villages. Since 2011, when the government declared Duqm host to a new SEZ and a major port and drydock, the city has seen a development boom. Duqm’s favourable location – at a pivot point for shipments across the Indian Ocean, outside the Strait of Hormuz, away from the Gulf of Aden – makes Duqm’s port development a convenience to shipping lines, and a boon to the city’s economy.

The Duqm Special Economic Zone Authority (SEZAD) was set up in 2011 to manage, regulate and develop the city’s economic zone. With more than 1770 sq km, the zone will include a port, major industrial facilities, fishing harbours, a new residential area for 100,000 inhabitants, and a multimodal transport system linking Duqm to surrounding regions. Yahya Al Jabri, SEZAD’s chairman, told OBG that making Duqm competitive for construction is another goal. “The answer is to start by building storage facilities which will also cater to the logistics sector,” he said. Officials suggest that the zone is capable of creating 15,000-20,000 jobs by 2020 and attracting $10bn-$15bn in investments.

Duqm Port & Drydock

The port is run by Port of Duqm Company (PDC), a $2.6bn joint venture between the government of Oman and Consortium Antwerp Port, each owning half. With its strategic location, it forms the centrepiece of the economic zone and is a priority in Oman’s Vision 2020 plan. It sits on 13,954 ha, with an adjacent 6000 ha allotted for phase one of an industrial zone, where officials plan a new oil refinery with an output of 230,000 barrels per day (bpd).

Duqm’s location – on the coast yet close to Oman’s major oil blocks – makes it an ideal site for petroleum logistics. By the end of 2013, PDC expects to wrap up the D&B tender for a liquids terminal to supply crude to the new refinery. The terminal is to start operating by 2017, with size enough to handle new volume from both the refinery and future petrochemicals projects.

One stretch of the 2.2-km quay has already opened in “early operation phase”, and the entire length is to do so by 2016, according to the port’s commercial director, Reggy Vermeulen. The first phase will have eight berths, with a depth of 18 metres along the quay and 19 metres in the approach channel. Pending market demand, the second phase would see up to 13.5 km of commercial quays with up to 36 berths. Tenders for paving, cranes, utilities and other kit are ongoing.

The port’s drydock, recently completed by Oman Drydock Company (ODC) and 100% owned by the government, is one of the largest of its kind in MENA, costing $1.5bn. Run by Korea-based Daewoo Shipbuilding & Marine Engineering Company (DSME), it began full operation in June 2012. The ODC yard includes 1.28m sq metres of land, 1.14m sq metres of sea, and 2800 metres of quay length. It has two 10-metre-deep docks, one measuring 410 metres by 95 metres, and the other 410 metres by 80 metres. The quay’s length and space can support the repair of 10 ships of up to 600,000 deadweight tonnes at once.

Duqm Airports & Roads

Duqm International Airport is scheduled to begin operation by 2016, with a passenger terminal capacity of 500,000 per year, and a starting cargo terminal capacity of 50,000 tonnes. Initial routes will connect Duqm to all major airports in Oman and to key international destinations. For the vertiginous, a high-standard arterial road network, now being built, will connect Duqm with Oman’s regional hubs as well as the UAE and Saudi Arabia. Thus connected, the city will better compete with GCC logistics centres and become a strategically important unit of Oman’s economy. By 2020, indeed, the government expects 5-8% of non-oil GDP to come from this zone.

Development Plan

The object of the first phase of construction at the Duqm SEZ is to provide the cargo needed for its own development. In mid-2013 Ahmed Al Futaisi, the minister of transport and communications and chairman of the Port of Duqm, signed agreements with four firms, local and international. Each contract targets an industry whose presence will be a key ingredient to SEZ operations. Raysut Cement (RCC), the first signatory and Oman’s largest maker of cement, agreed to install a cement distribution terminal at the port. Most of the initial burst of output will be funnelled into infrastructure projects around the SEZ. RCC plans to commence operations by the third quarter of 2014. Duqm Ahlia Development, the second signatory and a joint stock company founded by local residents, will provide services in shipping, warehousing, logistics and maritime navigation. Masirah Oil, the third and a concession holder of offshore Block 50 near Duqm, signed up to use the port as a logistics centre for its crude supply operations. The fourth contract gives UAE-based Aerogulf Services rights as the exclusive helicopter operator for Masirah Oil. Once these firms are integrated on site, the port will be able to supply itself with the energy, construction materials and logistical support needed to run its operations, and at lower cost. Already, between the launch of “early operation phase” in May 2011 and mid-2013, the port has handled about 15 vessels and 33,000 tonnes of project cargo.

Mining

Recent geographical surveys have found evidence of extensive mineral deposits in the Al Wusta region, within a 300-km radius of Duqm’s port. Once the port and SEZ are fully operational, these nearby stores of limestone, silica sand, basalt and gypsum will help Duqm gain a comparative advantage in mining. Limestone, the key ingredient in cement, is abundant near Al Safiya and Al Hydaybah, both about 15 km from the port. “RCC and Oman Cement have conducted a joint study and found that the area is rich in minerals like limestone. We are going ahead with our plans to invest in these raw materials,” said RCC’s group CEO, Mohammed Ahmed Al Dheeb.

The government limits exports of Oman’s raw materials, and promotes value-added and downstream industries. The vast majority of newly harvested minerals will be required to be processed locally. No current legislation prohibits the export of raw materials, but a new mining law is expected in late 2013.

To further exploit Al Wusta’s mineral reserves, two firms – the Takamul Investment Company, a subsidiary of Oman Oil Company, and Medallion Resources, a Canadian mining firm – are looking into the feasibility of monazite-based, rare-earth extraction at Duqm. They expect to publish a report on this by early 2014. A gas pipeline also in the works will provide the energy to process these raw materials. All of this will help Duqm compete in refined minerals, especially cement.

Sohar

Oman’s most developed city after Muscat, is Sohar, 228 km north-west of the capital, on the coast of the Al Batinah region. Its population is roughly 140,000, according to the 2010 census, making it the country’s third most populous city. Sohar’s location – near shipping lanes outside the Straight of Hormuz, and between Muscat and the UAE – has allowed it to grow fast. It now has a major industrial zone, including a seaport, an industrial estate, a free zone and a planned airport and rail project (see analysis).

These together make up the Greater Sohar Industrial Zone, or Gateway Sohar. Some of the largest heavy industry and international companies in Oman are found there, including Vale, Air Liquide, Larsen & Toubro, and several local power suppliers. Inside the Sohar Industrial Estate (SIE), Sohar Aluminium produces 360,000 tpa of the silver metal, while Oman Oil Refineries and Petroleum Industries Company (Orpic) operates two refineries, an aromatics plant and a polypropylene facility. This industrial capacity opens many opportunities in downstream industry and services to small and medium-sized enterprises (SMEs). In mid-2012, a senior port official estimated that the around 330,000 jobs – 80,000 direct and 250,000 indirect – could be attributed to the zone’s increasing activity.

Port Of Sohar

The Port of Sohar, recently expanded to include Freezone Sohar, is the chief development and shipping hub of north-west Oman. It is managed by Sohar Industrial Port Company (SIPC), a 50/50 joint venture between the government of Oman and the Port of Rotterdam. Now fully operational, its investments are worth more than $14bn, making it one of the biggest port development projects in the world.

In the medium and long term, Sohar will benefit from the government’s push to transform Port Sultan Qaboos into a tourism and maritime heritage centre, as shipping traffic shifts away from Muscat to Oman’s other ports. It is the nearest port of scale to the capital and has established infrastructure. “A consortium of large container shipping lines, the so-called ‘G6’ are already using Sohar as their port of call,” said Andre Toet, CEO of SIPC. “Combined with the transition of commercial cargoes from Muscat Port to Sohar by the end of 2013 and the fast-pace development of Sohar Freezone, this will serve as a strong addition to the captive base.”

Throughput spiked in every category of cargo in 2012, according to the Port of Sohar, and container traffic nearly doubled. Volume increased by 51% to 43.9m freight tonnes (FRT), from 29.1m a year earlier. Container traffic rose 83% to 198,817 TEUs from 108,440 over the same period. In May 2013, a OR50m ($130.3m) plan to expand the container terminal went into effect, which will raise capacity from 800,000 TEUs to 1.5m by the end of the year. With help from iron imports for Vale’s new pelletising plant, dry bulk volumes also increased by 78% to 26.1m tonnes, and vessel traffic was up 29% to 1918 ships. The growing influx of non-local suppliers should further help reduce logistics costs in the local supply chain.

Sohar Freezone

The Sohar Freezone, also managed by SIPC, is a joint venture between the government of Oman, the Port of Rotterdam, and India’s SKIL Infrastructure. A concession was granted to the free zone to develop 4500 ha of land in four phases, subdivided into clusters. The first phase, a 500-ha zone to house 14 companies with an initial investment of $70m, focuses on downstream industry and logistics. Its first seven clusters allocate space to trading and logistics (121 ha), iron and steel (100 ha), light manufacturing (68 ha), petrochemicals (26 ha), aluminium (18 ha), education and services (20 ha) and cement grinding (7 ha). Much like the SFZ, incentives for international investors include 100% foreign ownership, a 10-year corporate tax holiday and no Customs duties.

Metals

As Sohar’s transport infrastructure develops, major players in metals, especially from India and the GCC, are choosing the city for their processing centres. India-based Jindal Steel & Power operates a $500m iron and steel plant in Sohar, with the capacity to produce 1.5m tpa of hot-briquetted iron and hot direct reduced iron. In July 2012, the company announced a plan to spend $6.3bn to augment its combined production capacity in India and Oman to 13m tpa by 2015. Oman’s capacity is expected to reach 5m tpa by then.

The sultanate is also set to pioneer ferrochrome production in the GCC. Plans are well along for four smelters in Freezone Sohar, part of a 50/50 joint venture between Muscat Overseas Group and India’s Indsil Group. In phase one, the company invested $35m to jumpstart production with two furnaces at 6000 tonnes per month by mid-2013. Phase two, adding another two for around $50m, is to double production capacity to 150,000 tpa per year by mid-2014. These four units, combined with three other pending smelter projects – a $100m deal with Metkore Alloys and Industries, a $30m one with Oman-based Gulf Mining Materials, and a joint venture of around $100m-$150m by unnamed firms – would together provide Oman with about 2m tpa of the alloy. With little demand for the stuff in Oman, virtually all of this would be for export.

Outlook

The range of new industrial projects shows a clear development strategy aimed at regional economic diversification. Major investments in transport and logistics, especially the Oman National Railway Project, will help drive growth and attract further investors. However, to maintain current rates of increase in productivity for major industrial projects, a sustained gas supply seems a challenge. The government is currently mulling present allocations to prioritise projects based on their contribution to the national economy.