Investment in infrastructure, tourism, energy and human capital

The construction sector in Oman is expanding rapidly on the back of government investment in major infrastructure projects, private sector-driven tourism development, and strong growth in the oil and gas industry. Vision 2020’s economic diversification strategy has already seen the government expand its infrastructure investment substantially in recent years, and while the sector had previously faced criticism regarding its tendering processes, new legal reforms and a targeted crackdown on corruption have led to noticeable improvements in industry transparency. While planned mega-projects represent the largest growth driver, supply of construction materials is set to shrink in the lead up to major regional events, including Dubai’s Expo 2020 and Qatar’s 2022 FIFA World Cup, as well as the development of the expansive Oman National Railways project. This has created opportunities for industrial and manufacturing expansion, further enhancing economic diversification and industrialisation in the sultanate.

Oversight 

Oman’s construction industry is overseen by several government ministries, including the Ministry of Commerce and Industry (MCI), the Ministry of Manpower (MoM), the Ministry of Oil and Gas (MoG), and the Ministry of Transportation and Communications (MTC.) Policy is guided by the over-arching Vision 2020 economic diversification plan, which aims to reduce the oil and gas sector’s share of GDP from 41% in 1996 to 9% by 2020. This ambitious goal has led to a host of new projects aimed at developing the sultanate’s industrial base; expanding and improving road, air, and port links to better facilitate trade; and expanding the health care and tourism segments to bolster non-oil revenues.

The public sector is the largest procurer of construction services, and in its eighth five-year development plan, running to 2015, the government allotted an estimated OR30bn ($77.68bn) for development projects, an increase of 113% over the previous five-year plan, according to Al Maha Financial Services research.

Growth in the sector has been driven by the government’s targeted spending in transportation and social infrastructure projects, and expansion within the oil and gas industry. According to Deloitte’s “GCC Powers of Construction 2014” report, the total value of projects planned or under way in the sultanate stands at $150bn.

Growth 

The National Centre for Statistics and Information’s (NCSI) April 2014 quarterly update reported that Oman’s construction sector grew by 8.6% in 2013, outpacing earlier estimates of 6.3%, and following a period of steady expansion in which the industry grew by a compound annual growth rate (CAGR) of 11.8% between 2008 and 2012, with revenues reaching OR1.75bn ($4.53bn), from OR1.12bn ($2.9bn) in 2008.

In March 2014 Al Maha Financial Group reported that transportation projects comprise 66% of total construction projects in Oman, followed by oil and gas (15%), power (7%), industrial (5%), commercial (4%) and water projects (3%). “Large development projects are still driving growth in the construction sector,” Andy Jones, regional managing director at Carillion Alawi, told OBG. “Therefore there are plenty of opportunities for national and international contractors.”

Nonetheless, recent regulatory changes and a crackdown on corruption have led to a brighter outlook for long-term growth. In 2011 a royal decree separated the public prosecutor from the Royal Oman Police, enabling financial and operational independence.

The Economistreported in February 2014 that the decree has had a strong impact, noting that Oman is the only Gulf state to bring prominent businessmen, including those involved in tenders for major construction projects, to trial in cases linked to corruption.

Transportation Hubs 

Transportation and infrastructure comprise the bulk of public construction spend, with the government working to enhance industrial development and expand capacity at its sea and airports. Duqm and Sohar are slated to become major players in coming years, while airport upgrades and construction in Muscat, Salalah, Duqm and Sohar will avail private sector contractors of new opportunities in site preparation, infrastructure and civil works contracts.

Duqm 

Located 450 km south of Muscat, Duqm is set to be transformed into a vast international business centre, on the back of developments at the Port of Duqm and its special economic zone, a multipurpose industrial development spanning hundreds of kilometres.

The Port of Duqm’s $1.5bn dry dock, the second largest in the Middle East, started soft operations in 2011, while the Port of Duqm Company (PDC) is currently developing the 177,000-ha special economic zone, which will offer a new refinery and petrochemical facilities, an airport, beachfront hotels, and housing for 100,000 people when complete. The PDC is working to establish a subsidiary, the Duqm Industrial Land Company, to develop the zone’s planned northern and central industrial zones, which cover more than 221.75 sq km of land collectively. In August 2014, KEO International Consultants was awarded a design contract for the two zones, a move expected to kick-start development and lead to a host of new tenders and contracts for private sector contractors.

Sohar 

Sohar boasts an even more impressive list of planned construction projects. In late August 2014, Sohar Industrial Port (SIP) assumed commercial shipping duties from Port Sultan Qaboos in Muscat, resulting in rapid expansion of shipping activities and cargo volumes. The ensuing surge in vehicle traffic has led the government to move forward on finalising its expansive Al Batinah Expressway project, while new developments at the SIP’s special economic zone and industrial estate should provide decades of opportunity to construction contractors.

At over 21.6m sq metres, the Sohar Industrial Estate is one of the sultanate’s largest, with development split into seven stages. The seventh stage is expected to expand the estate by 8m sq metres and include a new steel processing facility. In September 2014, the Public Establishment for Industrial Estates (PEIE) announced it had awarded a $51.4m contract for Sohar’s seventh stage expansion to Omani firm Hasan Juma Backer Trading and Contracting, a contract comprising roads, sewage, water, and irrigation infrastructure, with work expected to finish in 2016.

Airports 

Also slated to see significant expansion are airports, as the government moves forward on a handful of construction and expansion projects in Muscat, Salalah, Sohar and Duqm.

Muscat International Airport’s $1.8bn terminal project has dominated government transportation spending in recent years. The new terminal is expected to help boost the airport’s total capacity to 12m passengers annually, with related projects involving construction of two parallel runways, 96 check-in counters, 29 passenger boarding bridges, 30 aircraft remote stands, baggage facilities that can process 5500 bags per hour, a 90-room hotel and an 8000-vehicle car park.

Salalah International Airport, meanwhile, will undergo an expansion project encompassing building of a new terminal and air traffic control facilities, which are expected to boost capacity to 2m and, eventually, 6m passengers annually, while plans are also under way for new terminals at Duqm and Sohar International airports.

In July 2014, Larsen and Toubro won a OR36.27m ($93.92m) contract to build Duqm airport’s new passenger terminal, and in September the company submitted the lowest bid, OR34.53m ($89.41m), out of four pre-qualified companies vying for the Sohar airport’s terminal contract. In September 2014, the MTC floated four new tenders for facilities at Muscat and Salalah airports, as well as a tender for construction supervision at Duqm International Airport.

Over Land 

Perhaps most significantly for the sultanate, land links are expected to significantly boost trade and connectivity, both domestically and within the GCC. The Oman National Railway project is easily the largest construction project currently under development in the sultanate, and will connect every major urban centre and port to the GCC-wide railway project when construction is completed in 2018. Highway projects are also undergoing significant expansion, driven by the government’s efforts to reduce traffic congestion and improve links between its resource-rich hinterland and major industrial ports (see analysis).

Oil & Gas 

The oil and gas industry is the second-largest segment in Oman’s construction sector, with new upstream and downstream investments leading to a steady expansion in the extraction and refining industries, and also presenting lucrative new opportunities for private contractors.

The sultanate’s rapid industrialisation has led to unprecedented demand for natural gas, and the Khazzan tight gas project is predicted to expand natural gas feedstock, with extraction expected to hit 1bn cu feet per day of gas when the field becomes operational.

The field’s development has presented an array of new activities for domestic and foreign contractors, most recently in October 2014 when BP, which holds a 60% stake in the $16bn project, announced it had awarded two contracts worth an estimated $730m for the project. Germany’s KCA Deutage was awarded a $400m contract for construction and operation of five land rigs, while Oman’s Abraj Energy Service won a $330m contract to supply three drilling rigs for field development.

Downstream

In the downstream segment, one of the largest oil and gas projects currently in the pipeline is the planned Duqm Refinery and Petrochemicals Complex, a multi-billion-dollar facility that will add refining capacity of 230,000 barrels per day (bpd) of capacity when construction finalises in 2019.

The project is being developed by the Duqm Refinery and Petrochemical Industries Company (DRPIC), a 50:50 venture between the Oman Oil Company (OOC) and International Petroleum Investment Company, owned by the Abu Dhabi government. Other private sector players involved include Allen and Overy, which is acting as legal advisor, and Credit Agricole-CIB, the project’s financial advisor. Its $6bn first phase will see a merchant export refinery constructed within the Duqm Special Economic Zone (SEZ), while plans for an associated petrochemical complex in the second phase could bring the total value of the project to $15bn.

In June 2014, the DRPIC announced its plans to appoint a civil contractor in order to prepare the site before refinery construction, awarding a tender for prep work in early 2015, with work expected to finish within 12 months. In September 2014, the company invited expressions of interest for the project’s engineering, procurement, and construction (EPC) contract, although no deadline has been set for the announcement of pre-qualified bidders. Moving forward, the SEZ Authority of Duqm plans to invest in support infrastructure for the project, including roads, drainage facilities and coastal protection works.

SIRP

The Sohar Refinery Improvement Project (SRIP), meanwhile, will further bolster oil and gas capacity. The SRIP will see 82,000 bpd added to the Sohar Refinery’s existing capacity of 116,000 bpd. This will result in 70% growth in fuel production, 90% for diesel, 37% for gasoline, 93% for kerosene, 93% for jet fuel, 91% for LPG, 175% for naphtha and 44% for propylene.

In November 2013 a 50:50 joint venture (JV) between Petrofac, the UK-based international oil and gas services provider, and Korean firm Daelim Industrial Company was awarded a $2.1bn engineering, procurement, and construction contract for the SRIP. The 36-month contract includes EPC work, start-up and commissioning services, and improvements at the existing facility, as well as the addition of new refining units.

Investment in the petrochemicals sector is also poised for strong expansion in the coming years. In October 2012, Takamul Investment Company, a subsidiary of the state-owned Oman Oil Company, announced plans to invest between $500m and $1bn on 10 new metals, petrochemicals and minerals projects by 2015. A number of petrochemicals projects are under development, including the $3.6bn Liwa Plastics Project, a PET-PTA plant and an $800m purified isophthalic acid plant, all located in Sohar and developed in conjunction with the SRIP. Takamul is also planning to invest in Salalah’s Luban ammonia plant, a $550m project under development in partnership with the Linde Group.

Utilities 

Industrial and population growth have led to unprecedented demand on water and electricity supply, and the sultanate’s Authority for Electricity Regulation (AER) has announced a host of new independent power, water and power, and water projects (IPP, IWPP and IWP) in recent years, with the relatively liberalised market offering opportunities for both private contractors and private ownership of new facilities.

In 2013 AER-licensed operators approved 276 new projects worth a total of OR128m ($331.44m), while the Public Authority for Electricity and Water (PAEW) announced in 2012 that it planned to invest $2.9bn in water infrastructure. Outside of Oman’s major urban centres, the Rural Areas Electricity Company announced in May 2014 that it plans to invest over $1bn to boost power generation capacity by over 80% by 2019.

Oman Power and Water Procurement (OPWP) plans to award six sizeable contracts for new megaprojects before 2019, including one for an IPP in Salalah, offering between 300 and 400 MW of capacity, as well as IWPs in Quryat, Suwaiq, Khasab, and Duqm, offering capacity of between three and 50m imperial gallons per day (MIGD) of water supply.

Most significantly, plans are in the works for a $1.5bn IPP in Suwaiq with a projected capacity of 2600 MW annually, expected to come online in 2018. In June 2014 OPWP requested proposals for the project. Prequalified bidders are expected to be announced in 2015.

Outside of public works, the sultanate’s growing population and economic diversification have also put heavy new demand on the tourism and health care sectors, with private sector developers now expected to build megaprojects including Salalah’s International Medical City, as well as five-star hotels and multi-billion dollar integrated tourism complexes (ITC).

Tourism 

Although civil works contractors are poised to reap the highest rewards from new construction activity, Oman’s burgeoning tourism sector has also presented sizeable new opportunities for private contractors. The government’s focus on tourism development activities will see thousands of new rooms come online in the mid-term; in July 2014 the Ministry of Tourism (MoT) announced it had approved 54 new hotel facilities which will add 2908 rooms to the market, as well as 74 hotel apartments.

In its efforts to boost hotel capacity and bolster tourism , the government has also moved forward on ITCs, mixed-use tourism developments spanning huge areas and offering benefits of foreign ownership.

ITCs currently under development include Jebel Sifah just south of Muscat, The Wave and the City Walk in Muscat proper, Salalah Beach in the sultanate’s south, As Sodah Island, and Salam Yiti, located between the Al Hajar Ash Sharqi Mountains and the Gulf of Oman. The most recent $600m Saraya Bandar Jissah was announced in September 2014 and is the first ITC announcement in seven years. The 2.2m-sq-metre facility will eventually house residential units, two five-star beachfront hotels, and recreational areas.

Developers 

Omran and Saraya Holdings, developers of the Saraya Bandar Jissah ITC, recently awarded a OR10m ($25.9m) contract to Carillion Alawi to deliver the development’s infrastructure construction. Carillion’s contract includes installation of all utilities, including electricity and water, irrigation, storm water drainage, sewage, and communications networks, as well as road finishing work and street lighting.

Most significantly for the sector, Omagine, a consortium 25% owned by the Royal Court Affairs (RCA) and 15% by two subsidiaries of Consolidated Contractors International Company, signed an agreement with the government to develop a $2.5bn tourism project in October 2014. The Omagine project will span 1m sq m of beachfront land west of Oman, less than 10 km from Muscat International Airport, and offer hotels, retail space, and over 2000 residential units.

Notably, 245 acres of the Omagine site was allocated to the government from Sultan Qaboos bin Said al Said, with the specific mandate of developing it as a tourism complex. Omagine will receive up to OR27m ($69.9m) in investment from RCA and CCIC, with the company expected to enter a payment-in-kind arrangement for the site’s land, which is valued at over $700m.

Conferences & Conventions 

The government’s push to increase activity in the meetings, incentives, conferences, and exhibitions (MICE) segment will also see a new $1bn conference centre open in Muscat in 2016. The Oman Convention and Exhibition Centre (OCEC) will include a five-star hotel, two four-star hotels, a three-star hotel, and serviced apartments, as well as a shopping centre on opening in 2016.

AEG Ogden was selected to manage and promote the new centre, while Carillion Alawi won a construction contract for the project’s second phase, which included exhibition halls, car park facilities, and a district cooling plant, in June 2013. Work on the second phase is expected to finalise in 2015, and in February 2014, developers issued a request for proposals for the project’s third phase, which will include construction of the centre’s primary buildings and facilities.

Healthcare

The healthcare sector offers significant long-term opportunities to the construction industry. In June 2014 the Ministry of Health (MoH) announced plans to build five new public hospitals in the sultanate, offering hundreds of new beds and a wide variety of medical services. The North Batinah, Musandam, Dakhiliyah and South Shariqyah governorates will each become home to new hospitals, which will offer general medicine, surgical, and medical testing services, as well as specialty care and emergency facilities.

At the announcement, the MoH also revealed plans to award building contracts for the upcoming Saham, Al Namaa and Muscat Public Hospitals. In September 2014, the MoH signed contracts with Zawya Engineering Consultancy to design and supervise the building of 17 new health centres in Oman.

In the pipeline for long-term projects, private contractors will also benefit from two new health care cities in Muscat and Salalah. The first, Sultan Qaboos International Medical City, will open in Salalah in 2016. Developer Apex Medical Services announced that American firm POSMAS had finished a detailed master plan for the $1bn project in March 2013, while GE was selected as the project’s partner of choice in February 2013, and will provide technological solutions and medical products during the design and construction phases. The city is expected to include a 540-bed tertiary care multispecialty hospital, a transplant and dialysis centre, a rehabilitation centre, and a diagnostic centre. Muscat’s medical city, while still in its planning stages, is expected to open before 2020 and house a variety of residential, retail, and hotel facilities, as well as five new private hospitals.

Materials 

Construction material supply, including cement, steel, and aluminium, is expected to face growing mid-term demand in the wake of new oil and gas, transportation, and infrastructure megaprojects, as well as regional events including Dubai’s Expo 2020 event in the UAE, as well as Qatar’s 2022 FIFA World Cup, presenting new construction opportunities in the extraction, production, and manufacturing segments.

The Oman National Railway Project is perhaps the largest construction project under way in Oman. According to the project’s master planner Italferr, materials requirements include 10.2m concrete sleepers, which could require the establishment of at least five new production plants, as well as 23m cu metres of ballast and sub-ballast, which would require development of an additional 10 stone quarries. The project will also require a considerable 1.7bn cu metres of cut-and-fill materials, as well as 20.25m cu metres of earthworks, 60m sq metres of geotextiles, 2.25m metres of drainage pipes and 13,500 manholes.

Industrial production is already ramping up in the sultanate in anticipation of construction growth as India’s Jindal Steel and Power recently commissioned an $800m, 2m tonnes per annum (tpa) steel melting plant. Furthermore, in December 2013, Sohar Aluminium announced plans to invest $35m to boost factory capacity over the next five years, with an estimated 60% of output earmarked for local consumption.

The UAE’s Moon Iron and Steel Company will also build a steel production facility in Sohar, offering 1.2m tpa of steel billets, of which 700,000 tpa will be used for rebar production, and 500,000 tpa earmarked for the local market. In November 2013, Bank Sohar announced it would arrange financing for the $270m, which is expected to come online in September 2015. The coastal city of Sur, meanwhile, will welcome its own 2. 5mtpa-capacity steel mill plant, when South Korean firm POSCO, working under contract for Oman’s Sun Metals, constructs the $400m facility, with operations expected to begin in 2018.

Cement

The bulk of Oman’s cement demand is met by two local players: the Oman Cement Company and the Raysut Cement Company. These two companies offer a combined 6m tpa of clinker production capacity and 7.2m tpa of cement production capacity.

Although annual cement sales stood around 5m tonnes in 2008 and 2009, a slowdown in the industry following the global financial crisis saw sales volumes decline to 4m tonnes in 2010. With the UAE’s construction market slowing significantly in 2010, the market was suddenly faced with oversupply, and indeed, low-cost cement imports from the UAE continue to hamper growth in the local industry, according to industry sources who spoke to OBG. However, the industry has slowly rebounded on the back of higher regional demand and growing exports; in 2013 Oman’s two major cement providers recorded a combined sales volume of 5.8m tonnes at an average price of OR25 ($64.74) per tonnes. Demand is expected to show a steady uptick as neighbouring GCC states move forward on their own planned megaprojects and international events, and as a result of Saudi Arabia’s recent decision to re-open its market for cement imports.

Maha Financial Services reported in March 2014 that Oman’s producers have been operating at 80% of total capacity utilisation, producing 5.8m tonnes of cement in 2013, following a near-doubling of cement capacity in 2011, with Raysut’s acquisition of the UAE’s Pioneer Cement, as well as domestic factory upgrades.

Omanisation 

While supply of raw materials will likely remain steady on the back of these developments, one of the greatest challenges currently facing the industry is the government’s Omanisation policy, which mandates that 30% of the workforce in the contracting sector be comprised of nationals. Statistics released by the MoM in September 2014 show that there are 665,679 foreigners employed in the sector, compared with 57,464 Omanis, which has presented considerable challenges for contractors and enforcing bodies alike.

Omanisation is just one initiative, among others, encompassed within the government’s far-reaching in-country value (ICV) programme, which mandates that firms source services and products locally, especially in the materials segment, and stipulates that foreign companies offer certain knowledge transfer and training programmes for their Omani employees.

Outlook 

Vision 2020 has seen the government invest heavily in new development projects, which have offered opportunities to private sector contractors. Although transportation continues to dominate construction expenditure, the health care, tourism, oil and gas, and utilities sectors have each shown impressive growth, leading to steady expansion despite volatility in international markets. Use of public-private partnerships (PPPs) should also see continued expansion. “The success of the PPP model can be seen in the utilities and energy sectors,” Fawzi Hamed Al Harrassy, executive director of Teejan Group of Companies, told OBG. “This success can be duplicated in all other sectors if more projects are launched under this model.” With supply of materials and new transport links set to grow steadily over the medium term, the industry is poised to extend its growth record, guided by regulatory reforms that will improve industry and economic diversification.