Omani Hydrogen for Germany and the EU

Oman’s hydrogen policy: Framework and background

Oman’s hydrogen policy is embedded in the country’s overall development goals and is connected to its economy and efforts to fight climate change.

A general framework for the country’s approach to hydrogen is provided by Vision 2040 – an overarching sustainable devel­opment agenda for 2021–2040 period. This is the country’s primary strategy document, and it defines various goals as well as ways to harmonise and monitor how they are being achieved. Among those goals are eco­nomic leadership and diversification. To this end, future industries and key sectors that complement the petroleum business are being identified and developed. Within this context, Vision 2040 aims to have the con­tribution of non-oil sectors grow from 61 to 91.6 per cent of Oman’s economic out­put; it also envisions their share of the public budget doubles to 18 per cent. Oman’s green economy, especially clean energy, is to be expanded to increase the country’s competitiveness. By 2030, Vision 2040 foresees 20 per cent of Oman’s energy demand being met by renewable energy, and 35 to 39 per cent by 2040.

While this plan is not unusual for a Gulf state, its context certainly is. After 50 years in office, Oman’s Sultan Qaboos bin Said passed away in 2020. Concerns over politi­cal destabilisation did not materialise. In­stead, the new ruler, Sultan Haitham bin Tariq, was able to quickly consolidate his power, and he continues to largely pursue the policies set by his predecessor. Nonetheless, he did inherit economic and social chal­lenges. For example, in 2021, youth unemployment and the rising cost of living led to otherwise rare protests. The demonstrators’ demands included the creation of new (public sector) jobs, the removal of recently introduced taxes, and the reinstatement of previously cut subsidies; the calls for change continue to this day. How­ever, the public’s demands for (much needed) expansionary fiscal policy is at odds with the country’s budget. Oman’s public debt is unusually high for an oil exporter; it amounts to about 50 per cent of the coun­try’s economic output and has steadily grown since the collapse of oil prices in 2014 and the 2019 outbreak of the Coronavirus pan­demic. It may continue to rise if the budget is not cut. With an annual per capita income of about €19,000, Oman is wealthy, although to a lesser extent than its neigh­bours. At around €39 billion, Oman’s sovereign wealth fund is relatively small, limiting its scope to engage in any game-changing investments.

Oman’s current strategic approach to the energy sector and the wider economy is therefore to limit current spending while creating mid-term prospects in promising areas. It does so through capital structure management – especially by way of lever­ag­ing – and through targeted support for future industries. First, (partial) privatisation and debt leverage provide additional liquidity and reduce current liabilities, which eases the burden on the fiscal state. For example, in 2021, concessions for devel­oping central oil fields were transferred to a newly founded company that is state-owned albeit debt-financed. Shares in various pub­lic (energy) companies are scheduled to be sold and traded in the future. Oman sees foreign and borrowed capital as the main source of funds for hydrogen, as the Sulta­nate considers itself a natural resource pro­vider first and foremost. Secondly, Oman is targeting structural unemployment by on­shoring jobs, reserving positions for nation­als, and by identifying key sectors for in­vest­ment in the future. Alongside Vision 2040, an “In-Country Value” framework stipulates that the Omani (energy) economy must demonstrate a substantial contribution to the socio-economic development of the Sultanate. The country is pinning its hopes on the hydrogen sector, where it ex­pects to generate 70,000 new domestic jobs.

The creation of jobs in sectors of the future is also a key element of the country’s strategy to achieve climate neutrality, which was published in November 2022. The docu­ment outlines the complete decarbonisation of Oman by 2050 along a pragmatic though ambitious path of transformation. The hydrogen economy’s central role in this vision is twofold. First, the plans intend for hydrogen to drive domestic decarbonisation in industry and transportation. Second, hydro­gen is the main vehicle for the crea­tion of the green economy and green jobs. According to the strategy, 55 per cent of the jobs created during the transformation and two-thirds of the economic growth are to come from the hydrogen economy.

The beginning of an Omani hydrogen economy

In October 2022, Oman quantified and published its national hydrogen plans. Accordingly, it aims to produce 1 to 1.25 million tonnes (Mt) of hydrogen by 2030; and 3.5 and 8 Mt by 2040 and 2050, re­spectively. These are colossal goals for the rather small Gulf state. As an illustration, neighbouring Saudi Arabia, which is about eight times larger in terms of its area and population, plans to produce 4 Mt of hydro­gen annually by 2030; the EU-wide produc­tion target by 2030 is “only” 10 Mt per year. The Sultanate projects that achieving its goals will necessitate electrolyser capacities of 8–10 gigawatts (GW) and additional re­new­able power generation of 16–20 GW by 2030, while increasing these requirements to 100 GW and 185 GW, respectively, by 2050. Oman’s energy ministry estimates that €132 billion worth of investments will be re­quired, including by way of infrastructure.

Regions suitable for hydrogen production are dispersed across the country and linked to (deep water) ports (see figure). Duqm, Salalah, and Sohar are developed industrial ports and special economic zones, while Sur is home to the Sultanate’s LNG terminals. Currently, the Omani energy ministry has pinpointed the regions around Salalah in the Dhofar governorate as well as Duqm and Al-Jazir in the Al-Wusta govern­orate as the sites most suitable for sustain­able hydrogen production. They have favour­able sun and wind conditions and are located near the coast – an important consideration as the water needed for electrolysis will be obtained from desalinated seawater. Also, their location near the coast eliminates the need for expensive transport pipe­lines to reach ports. Salalah (like Sohar) is an urban centre, which allows for better access to human resources.

While the construction of hydrogen infra­structure will be the responsibility of various state-owned actors and will be tendered separately, Oman calls on private international consortia to implement hydro­gen production. This approach matches Oman’s general approach to the (energy) economy outlined previously.

Its plans will primarily be realised though a competitive bidding process for 47-year-long concessions for individual tracts (blocks) of land determined by the Omani royal palace. In the (current) tender­ing phase A, six blocks will be at stake over two rounds. The first round comprises two blocks in Duqm (see figure) that will be awarded in April 2023. Sub­sequently, four blocks in Dhofar enter the bidding process, which is scheduled to start in May 2023.

The procurement conditions seek to simultaneously satisfy domestic interests – primarily, participation and local devel­op­ment – and create attractivity for (foreign) investors. The framework stipulates certain floor prices: Any consortium must offer at least approximately €0.04 per square metre for the land lease, 5 per cent of the hydro­gen produced as a royalty in-kind, and profit royalties. Moreover, the Omani group OQ, represented by its Alternative Energy unit, must be made a shareholder of at least 20 per cent of the project. Furthermore, con­sortia will be subject to corporate tax. Projects must be vertically integrated and contain all elements from electricity gen­eration to producing hydrogen derivatives. The bidding rules stipulate that electricity is to be produced with a cost-efficient and dynamically expandable solar-wind mix. The consortia are at liberty to choose elec­trolyser technology and the kind of hydro­gen derivative. However, bidders are also expected to provide (preferably binding) buyers (so-called off-takers).

Ahead of the tendering phases, Oman’s Ministry of Energy has already signed nu­merous declarations of intent with poten­tial importing countries, including Ger­many, Belgium, the Netherlands, and Japan, as well as with strategic partners such as the energy giant Shell. Beyond the open tender, some consortia have already signed land use agreements. The Hyport-Duqm project, led by the Belgian company DEME, for example, is working on producing green ammonia from 1.3 GW of solar and wind energy in the Duqm region. Co­ordination and cooperation within the region have been limited so far. There are declarations of intent for Saudi and Emirati investments in Oman’s hydrogen sector as well, and Kuwait’s sovereign wealth fund has also expressed interest in the past.

A distinctive aspect of Oman’s plans is the deliberate inclusion of hydrogen and its derivatives for domestic use. Authorities plan to develop a local distribution net­work, through which the already existing demand from the petroleum and agriculture sectors will be decarbonised. The Sulta­nate is actively tapping into the potential of its ports as hydrogen hubs with export and production facilities. Most importantly, the plans also consider the production and ex­port of green steel. For example, Jindal Sha­deed – the local offshoot of the Indian giant Jindal Steel and Power – plans to in­vest about €2.8 billion in a plant that would produce five million tonnes of steel annually. OQ has also expressed interest in setting up green cement plants. Furthermore, there are purchase agreements with the Norwegian com­pany Yara International for the use of green ammonia as ship fuel and exportable fertiliser.

Key players in Oman’s hydrogen economy

A national network of public companies and ministries is in charge of developing Oman’s hydrogen economy. The two most central actors are the Ministry of Energy and Min­erals (MEM) and the state-owned company Hydrom (see figure). MEM, whose mandate includes both the energy sector and other portions of the economy, provides political, strategic, and regulatory leadership with respect to hydrogen. Hydrom, which was founded in 2022, orchestrates the sector. Its responsibilities include arranging land con­cessions, devel­oping shared upstream infra­structure, organising the bidding process, distributing product, and coordinating the various actors involved. Hydrom reports to MEM and is a subsidiary of Energy Develop­ment Oman (EDO). Since a restructuring of the energy sector in 2021, EDO also controls the national oil company Petroleum Devel­opment Oman (PDO), which is not a hydro­gen actor per se, but still has strong indirect impact on the sector due to its close ties to and role in hydrogen-related committees. The royal palace, which oversees all other actors, establishes the foundations of the hydrogen economy through royal decrees and the allocation of national resources (such as land).

Other public companies and authorities primarily occupy the mid- and downstream (see figure). For example, the OQ group – a vertically integrated conglomerate of Omani companies involved in the energy sector – not only supplies infrastructure, but also develops the production of hydro­gen through its Alternative Energy division. The ASYAD group – Oman’s central logis­tics holding company – is responsible for the mari­time transport of hydrogen and its derivatives as well as the management of several export ports. These ports are indi­vidual special economic zones with strong international ties, some of which operate as joint ventures with Belgian and Dutch firms. Oman seeks to develop these special economic zones into integrated hydrogen ecosystems in the spirit of the European “Hydrogen Valleys”. The ports’ locations along the Arabian Sea – which provides direct access to major international trade routes – extends their potential as inter­national hubs, including for hydrogen-derived fuels. The Public Authority for Special Economic Zones and Free Zones is an overarching entity that exercises regu­latory power over the special economic zones and, furthermore, coordinates all downstream hydrogen infrastructure. The Hy-Fly Alliance, established in 2021, brings together public and private as well as national and international hydrogen stake­holders in a comprehensive national coordi­nation body.

Beyond these core actors, other players are also shaping the hydrogen economy. International oil companies hold shares in the national energy industry (see figure) and have thus been able to quickly gain a foothold in the hydrogen sector. Some have already realised renewable energy projects in Oman and signed declarations of intent for joint hydrogen projects. Applied research institutes, especially the Oman Hydrogen Centre, compliment these developments with their technical and project-related studies.

In summary, the hydrogen sector exhibits a diffuse institutional structure that features complex entanglements among key stakeholders (see figure). Among these insti­tutions, one faction is primarily influenced by MEM while another is shaped by state-owned enterprises under the Oman Invest­ment Authority. Established in 2020, the Oman Investment Authority is the nation’s sovereign wealth fund, holding most public companies and reporting to the Council of Ministers, which is the Sultanate’s highest executive body. On the other side of the coin, public companies are guided by board members who represent a wide array of parties and interests. In this environment, despite MEM’s dominance in the hydrogen sector and the monarch’s absolute power, the hydrogen sector is comprised of deeply intertwined actors who create a unique system of checks and balances. This high degree of institutionalisation may necessitate increased coordination on the part of international partners, but it also enhances the reliability of potential collaborations.

Reasons for cooperation

Conclusion: Aligning foreign policy and fast-tracked hydrogen imports

As of July 2022, Germany and Oman have a declaration of intent to collaborate in the hydrogen sector. However, progress towards its implementation is slow. This needs to change, and not only as a matter of energy policy.

Germany’s approach appears to be driven by the belief that the hydrogen market will continue to favour buyers, even in the medium-term, allowing them to continue their careful search for exporters. However, the number of buyers is rapidly growing, with Japan and South Korea charging ahead. But also, other EU countries, such as Bel­gium and the Netherlands, are closing deals – partially anticipating the chance to some­day resell hydrogen to Germany at a higher price. Exporters are also increasingly aware of their popularity, which could drive prices up instead of down. Critically, bottlenecks in electrolyser construction will initially make renewable hydrogen a scarce commodity.

With all of this in mind, Germany should coordinate public and private actors to acquire hydrogen imports as soon as pos­sible if it wishes to prevent high prices and further deindustrialisation. In addition to its current approach, joint ventures with other EU member states could help, espe­cially with the Netherlands, Belgium, and Italy. Such cooperative formats create syn­ergies and prevent disparities in energy prices and competition within the EU. Fur­thermore, joint concession agreements in­volving the private sector could be formed within the framework of direct intergovern­mental cooperation. This would support the expansion of German and European tech­nological leadership in hydrogen and, at the same time, ensure hydrogen imports. The German government should also not shy away from taking a more proactive role in securing hydrogen, even in the form of a strategic reserve, for example.

At the same time, hydrogen imports can and should be linked to geopolitical, value-based, and climate diplomacy goals. Strength­ening the national hydrogen economy of Oman also serves global efforts to fight cli­mate change, promote regional stability, and establish key diplomatic partners for Germany. Moreover, Oman stands out as a regional conflict mediator with low politi­cal risk. It would also benefit Germany, as well as global climate efforts, to have Oman produce green goods, such as steel and maritime fuel, in the centre of the heavily travelled EU-China transport corridor. How­ever, importing hydrogen from Oman would entail the same problem that befalls all potential imports from outside the EU neighbourhood: How far can the cost of maritime hydrogen transport truly fall, and how easy will it be to use hydrogen deriva­tives such as ammonia?

It would be advisable for Germany to establish a permanent hydrogen task force between its Federal Foreign Office and Federal Ministry for Economic Affairs and Climate Action. Such an instrument would facilitate successful collaboration and allow for the effective assessment of future part­ner­ships against criteria of energy economics and foreign policy alike.

In addition to ramping up the sector, Ger­many’s hydrogen import strategy should pay close attention to long-term diversification, both internationally and regionally. Hydrogen from the Gulf states, especially Oman, would be a crucial enabler of this approach.