Oman's LNG producers bracing themselves for a tax hike

As part of a broad series of austerity measures aimed at plugging the sultanate’s growing budget deficit, a joint council of the State Council and the Majlis Al Shura – both advisory bodies appointed by the sultan – voted on May 26, 2016 to increase the corporate tax rate on liquefied natural gas (LNG) firms from 15% to 55%. The new raft of legislation, which is subject to approval by royal decree, will bring the taxation of LNG production activities into line with that of oil exploration and production companies, which has been fixed at 55% since 1970.

Government Revenues

In conjunction with a simultaneous resolution to raise income tax rates for petrochemicals firms and exports of non-oil natural resources, the new legal measures are expected to provide the government with an additional OR300m ($779.1m) in revenue, according to Majlis Al Shura member Tawfeeq Al Lawati.

“We won’t be able to totally resolve the financial crunch caused by the oil price dip with these tax reforms. However, these are the only measures which can be adopted … with less impact on citizens,” Al Lawati told the Times of Oman at the time of the announcement in May 2016.

State Player

If accepted by the Omani government, the tax hike on LNG firms will most directly impact the bottom line of majority government-owned Oman LNG (OLNG), which operates all LNG activities in the sultanate through a 10.4m-tonne-capacity three-train gas liquefaction plant at Sur. In its 2015 annual report, the company announced that net income after tax had dropped from $1.77bn in 2014 to $965m in 2015. This decline was attributed primarily to the collapse in international oil and gas prices and a significant shortfall in domestic LNG production, which had fallen to its lowest point since 2011, as the government began to divert natural gas to meet feedstock demand from the power sector and water desalination facilities.

The compounding effect of the new tax regime following the steep slump in OLNG revenues has led some to speculate that the tax hikes may actually have a negative impact on growth, forcing the company to cut jobs and discouraging investments in LNG. Responding to the joint resolution raising taxes, Redha Juma Al Saleh, vice-chairman of the sultanate’s Chamber of Commerce, told the Times of Oman that “this will eventually aggravate the economic crisis, not solve it.”

Further Developments

However, the decision comes amid major developments on two fronts in Oman’s LNG market. The first is an agreement with Iran for the construction of a subsea pipeline to transport Iranian natural gas to be liquefied at OLNG’s processing facility at Sur before being re-exported to markets in Asia and Europe. The state company has also declared itself prepared to receive more gas from the second major development in the sultanate’s LNG market, exploitation of the Khazzan tight gas field.

The combination of these two developments should help address the underutilisation of OLNG’s capacity, which amounted to 2.49m tonnes in 2015, or approximately 15% of the integrated plant’s total capacity of 10.4m tonnes per year. The additional gas supplies provided by BP’s Khazzan project, in particular, will be vital to Oman’s economic diversification strategy, with significant downstream investments planned in the sector and domestic demand for natural gas expected to rise in the short term.

Though the timing of the decision to tax LNG producers is challenging, OLNG is already focused on offsetting the impact of market volatility on its revenue objectives, resorting to cargo swaps and diversions to optimise earnings. With the additional revenue foreseen in developments including Iranian gas conversion at Sur and the coming on-stream of Khazzan, the outlook remains buoyant for LNG.