News Round Up. Tour of Oman and Amouage gets us some good PR

A few miscellaneous stories readers.

The Tour of Oman seems to have been a reasonable success. It got us some great tourism friendly advertising in Europe and US with shots of the country looking pretty and safe, and the event itself seemed to go relatively smoothly. OK, there were a few problems with the traffic and access, because of the fundamental geography of Muscat using the picturesque roads for cycling means there are few other roads to either get anywhere or to actually get to the cycling or park once you did. They could have used more motorbikes to protect the riders and announce who the on-coming riders were. But all in all, a good job. I don't know how much it cost us, but at least we got the press and TV. The Wall St Journal even managed a story that worked the pun on bicycle and business cycle, Escaping the Business Cycle, Oman Embraces Cycling, that nicely noted the way Oman escaped the worst of the recent global crash.

Contrast that good news with the free press being generated across the globe by the new Dubai Mall aquarium springing a leak. Nicely summarised in quality Dubai-based blog Life in Dubai, the stories naturally drew a link with the closure of 'the world's highest viewing platform', and noted the instinctive response of those who run the mall to try and stop people taking photos. LOL. When will it sink in with the powers that be in this region that, thanks to the internet and a truly global media industry, the old methods for controlling information just don't work anymore. Thanks to camera phones, 3G networks, twitter and, yes, even blogs, stories need to be managed, and managed fast, not blocked. Sh. Maktoum's infamous "Shut up" comment to analysts, as he was under a bit of pressure to pay his vast debts, was beamed around the world in an instant. Stamping one's feet and behaving like a spoiled brat in the face of a bad news story being reported, or trying to suppress stories that are obviously already in the infosphere, are not how to handle PR problems. Toyota and Tiger Woods are lessons to learn too.

Photo: Twitter had the Dubai Mall Aquarium leak out within minutes. See Twitpic


So I'd just say, Oman, please learn these lessons from others. As our economy becomes more dependent on tourists and foreign trade, our reputation and brand need active professional management. I just hope that's what we are getting. What people want to see when a bad story breaks is not cover-ups and non-answers. Evidence of a problem being confidently and professionally handled is essential. Like any celebrity brand, long won gains aquired over decades can be eroded in an instant. It is essential we learn from the PR disaster that is Dubai. I emphasise that this is not about spin (although that is important), but about the fundamentals. For example, getting stories out about how progressive we are wrt women's rights in the Sultanate are OK, but when one sees stories about the ROP stupidly trying to stop an Omani lady getting a motorbike licence because of prejudice, this inconsistency between reality and PR is a problem.


Moving on. In news just in from Moscow, Omani crude oil may see a slightly lower market price in the future as a new Siberian Oil blend 'ESPO' hits the trading markets in the far east. As its closer to the far east markets (hence cheaper to ship) and is a higher quality oil (lighter, less sulphur) it looks like being a fast winner. This will impact not just Omani crude, but a lot of the Gulf too. OK, as long as global growth resumes, it won't be a huge problem, people will still need our crude, but it does indicate Oman will probably take some sort of trading hit on the price people are willing to pay for Omani Blend. Even if it's as low as $0.50 per barrel, remember that's over $120mln a year. Ouch.

...
"The crude is much better than other Persian Gulf grades, and the voyage is much shorter, so it's attractive for most of us," said a trader with an East Asian refiner that may soon try ESPO.

"ESPO is a very vanilla kind of grade, a good grade, much more pleasant than Oman, so refiners in Northeast Asia should be all over it," a trader said.

The completion of a pipeline to China from the Siberian town of Skovorodino by 2012 will take output to about 600,000 bpd from 250,000 bpd projected in the first quarter, making it easier for Chinese refiners to buy ESPO regularly, possibly via term deals.

"Once you have that kind of volume and consumer acceptance, you are looking at a situation where Middle East grades would be at a disadvantage," said Tchilinguirian from BNP Paribas.

And finally, Amouage does well.
Even perfume can create good press when handled correctly. Kudos to shockingly young Amouage CEO David Crickmore and his team for getting the good press out on their launch in Dubai (urh, wouldn't Abu Dhabi be better?) and London. Read the CNN story at Oman's royal family scents global profit in luxury perfumes. (yes, all headline editors love puns)


Photo: Left to right: David Crickmore, Amouage CEO with Syrian Actress Soulaf Fawakherji and Sayyid Khalid bin Hamad Al Busaidi, Amouage Chairman, during a private tour of the new flagship store in Muscat [AME info].

I didn't realise that Amouage was started at the direction of HM in 1983 by His Highness Sayyid Hamad bin Hamoud Al Busaidi, nor that the 'Amouage Gold' scent was created by a famous Parisian Nose & legendary French parfumier, Guy Robert. Its a pity the CEO, Art Director and Nose are expats, but hey, that's how it goes sometimes when you want the best and the best is what it takes in the International Smellies business. At least most of the employees are, I believe, Omani. You can read more about Amouage in an excellent article here.

I also like the idea of further investment in developing and extending the Amouage brand. It could be a very good way of high-grading and expanding local products, as long as extreme quality and (always an ephemeral thing) 'class' are maintained.

But well done Amouage.

Oil price continues to plummet - Omani crude $36. Central Bank injects $700 mln of liquidity into Omani banks

As the world recession hits, oil demand falls, speculative cash goes bear, and OPEC fails to act decisively to cut production, the usual is happening - a crash in oil prices, now at their lowest since 2004. And it seems to keep getting worse; see a great (but depressing) article in The Market Oracle.



As I have said all along, Oman was fine as long as oil stayed above $60. But that ain't happening. As it goes now, next month could see $25/bbl or less, albeit only temporarily. Oman already cut their 2009 budget assumption to $45. So, expect some serious belt tightening from HE Mr Macki in 2009, at least on the Government Fiscal spending front, if oil stays this low or lower for the next 60 days. Government budgets are being reduced as we speak, but there will be a big battle within the Cabinet to claw back Ministry budget already approved. The big money made over the past few years has been channeled into repaying debt and recapitalising the Sovereign wealth fund, along with allowing a huge increase in Government spending - some of it good infrastructure stuff, some of it pretty optional if real spending is to now be slashed - did we really need an Opera House, for example?

Meanwhile, Hamood Sangour Al Zadjali announced that the Oman Central Bank has relaxed the reserve requirements for Oman's banking system, now allowing them to count cash on hand and short-term certificates of deposit held with the central bank towards their 8% reserve, thereby allowing a significant boost in their ability to lend into the domestic market by making $700 million extra available. The bank had previously reigned in the banks earlier this year as credit soared by over 50% and inflation hit over 15%. This will help ensure project financing can be kept up for the Galfars and Renaissance type companies. Oman has already posted a (rather small) promise of a fund with 150 mln rials to underpin shares in the stock market, which perhaps fortuitously seems to have been announced when the world markets paused on their downward trend.

Oman always has a problem during lower oil price times: how to maintain adequate Government cash flow from the oil and gas sector vs taking counter-cyclical opportunities to make sound longer term investments as costs drop? Steel and cement, for example, are now expected to be a lot cheaper next year as world demand drops and before inflation appears.

How much can and should the Government borrow in 2009? It seems strange that the Government seems to allow off-balance sheet project borrowing for the Sohar projects, but keeps funding their domestic oil and gas investments from day to day production cash flows. One way out for Mr Macki would be to ring-fence, at least in part, the Government's shareholdings in the upstream oil and gas business, and allow some of the significant long-term production investments currently underway and planned (such as the massive multi-billion dollar Harweel project, which won't start to flow any extra crude until at the earliest 2010) to be financed by borrowing.

HE Rumhy, Minister of Oil and Gas, has done well recently to leverage high oil prices and get big spending commitments from new entrant IOCs - they spend their money now, take most of the risk, and are rewarded by higher returns later (the Government is essentially borrowing this investment against future payments from their oil and gas production). The deal he did with BP was excellent in that regard, getting British Petroleum to commit $600 mln without a commercial deal for production. But with a few others subsequent the Ministry was too slow, and so recent deals are not as good, nor are they getting anything like the number of bids they did just 12 months ago.

Time for a garage sale?
The Government will also need to look at asset sales, even in the current climate, there may be deals to be done. The State's shares in Omantel, for a start, are a long term strategic liability due to technology risk. The electricity and water infrastructure too should be substantially sold off - control can be mmaintained by smart regulation. And the older hotels the Government still owns, such as the Intercon and Crown Plaza, that are soon in need a major overhaul. The land they occupy could just be leased long term if selling that is politically impossible.

Crude prices collapse 25% in the last week
By Dalton Garis, Special to Gulf News
Published: December 06, 2008, 23:53

Abu Dhabi: The New York Mercantile Exchanges benchmark West Texas Intermediate light sweet crude contract finished last week at $40.81 per barrel, a 25 per cent decline from the previous week's $54.43. Now, no back month price is above $81 per barrel, even for delivery in December 2015.

Brent, against which 60 per cent of the world's crude is priced, closed the week at $39.74, down from the previous week's $54.41. The local Dubai Mercantile Exchange's Oman heavy sour nearby future closed the week at $36.60, a 28 per cent fall from the previous week's $50.88.

Adding to the gloom, the basket of the Organisation of Petroleum Exporting Countries (Opec) hit $40.75, further pressuring Middle East and North African (Mena) economies that rely heavily on crude exports.

Last week's broad-based market sentiment that a local bottom at $50 per barrel had been reached failed to support prices after the worst jobs report in 34 years in the US was released on Friday.
...
The crude market supply price insensitivity is exacerbated by Opec's seeming inability to discipline its members to cut production. Possibly, that was the reason last week's quasi-meeting announced no new cuts. It needed to assure enforcement of its last announced production cuts before imposing new cuts. So any cut announcements were pushed back to mid-Dec-ember.

...

Oman to pump 270m riyals into banking system
Reuters
Published: December 04, 2008, 23:35

Dubai: The Central Bank of Oman on Thursady said it had amended bank reserve requirement rules to release 270 million riyals (Dh2.57 billion) into the banking system to help lenders cope with the financial crisis.
...The Omani central bank, tackling record inflation rates above 13 per cent this year, had raised reserve requirements in August to eight per cent from five per cent in an effort to curtail credit growth. ...Oman has since "effectively" reduced the reserve requirement back to five per cent to prevent any indirect effects on liquidity from the global credit squeeze, Central Bank Executive President Hamood Sangour Al Zadjali said.

"The central bank decided to effectively reduce the reserve requirement, which as a result injected about 270 million riyals back into the banking system," Zadjali said.

Under new rules, banks are allowed to hold up to three per cent of deposits "in the form of currency held in banks vaults and or investments in certificates of deposit issued by the central bank", he said. The eight per cent official reserve requirement remained intact, he said.

"Since all banks would have cash on hand and almost all banks have interest-bearing central bank CDs as part of their portfolio, it is considered an effective reduction in the reserve ratio," Al Zadjali said. The central bank chief said there was "no evidence of any major liquidity problem" in Oman, where credit growth hit 52.7 per cent in October.

Still, the central bank allocated about $2 billion to local banks to provide them with dollar liquidity, while the government set up a 150 million riyal market-maker fund with the private sector to help stabilise the country's bourse.

Interbank rates have moderated to less than one per cent from 2.6 per cent in the first week of October, Al Zadjali said.

"The year 2008 as a whole... could end up with very high growth in credit, even if one presumes some moderation in November and December," he said.

Inflation - which has almost doubled in the last year - could "moderate significantly" in 2009 as price pressures decline in developed countries, food and non-oil commodity prices ease and the US dollar appreciates, he added.

"These favourable effects could be imported to Oman, and thereby create sobering influence on the inflation," Al Zadjali said. "Because of the fall in oil prices, despite fiscal stabilisation, there could be some moderation in domestic demand, which may ease pressure on supply constraints, helping thereby to improve the inflation situation."

Oman reduces oil price assuption for 2009 budget from $55 to $45

Oman is cutting the assumed 2009 oil price from $55 a bbl to $45 - a cut of 18%.

The Government was already forecasting a deficit based on $55, so indeed there will either have to be some budget cuts, or a big slice of money transferred from the reserve fund(s), or a bit of both.

Oman's economy, despite the efforts of diversification, still effectively runs Government spending of one form or another, and Government spending runs on oil and gas. The drops in oil price to less than $60, if sustained, will have a nasty effect on the local economy, which will reduce tax revenues too. OK, it won't be as bad as the recession in most of the world, but a chill wind will still be blowing.

Most Omanis don't know what 'lay-offs' or 'redundancy' mean. The only example I know of was the closure of the Gulf Air call centre back-office last year when the Oman Government pulled out of Gulf Air, and the papers were full of stories of shell-shocked Omanis worried about the fact they were in debt to the eyeballs and were about to be ... OMG!!! out of work. There was a strong expactation that it was up to the Government to 'do something!'.

If the sub $50 oil stays for a while, some of the local employees might start to find out what happens in most other countries when there is a big slowdown: unemployment.


But, as there is no system of unemployment benefit in the Sultanate, this would indeed be potentially devastating, what with school fees to pay, and debt payments to make.

As anyone who works here knows, sacking Omani employees is far from easy, if not effectively impossible without a clear case of fraud. Because of family connections somewhere, or if lacking wasta they will complain to the Ministries, who will then put pressure on the company to keep them on the payrole. This situation may come under some pressure in 2009, and that may turn out to be a good thing. I think the system should be radically updated to both provide some form of compulsory unemployment insurance and to make it as easy to hire and fire local staff as Expat staff.



Of course, under-employment is nothing new in Oman, but this sort of thing has been common for some time in the real world...

The National

Oman, Iran, budget on $45 a barrel oil
Tamsin Carlisle
December 03. 2008 3:35PM UAE

Oman and Iran are planning 2009 budgets based on $45 a barrel oil, following a record decline in crude prices by about $100 a barrel since July.

The Omani council for financial affairs and energy resources agreed this week to amend the average oil price assumed in the sultanate’s budget to $45 from $55, while Iran’s government and a parliamentary committee have an initial accord to base next year’s budget on $45-a-barrel crude, in place of a previous price assumption of $55 to $60 a barrel.

The revisions are likely to mean that both Gulf states will either run deficits next year or will have to slash government spending to balance their budgets.

The International Monetary Fund has estimated Oman’s break-even oil price at $77 for the current fiscal year, and Iran’s at $90, significantly higher than for most other Gulf states.

Record oil revenues earlier this year helped Oman post a large budget surplus of 912 million rials (Dh8.7 billion) for the first quarter of its current fiscal year, instead of a forecast deficit. However, sharply lower oil prices later in recent months will have eroded the state’s chances of avoiding a deficit for the full year.

...

Oman's Budget and Oil Price Impact

A few days ago the Government published its 2009 budget. News Briefs Oman gives a good summary.

First off, its great that the Government does this. Publishing the countries budget is a good thing. Of course, that is nowhere near comparable to what a public company would have to report, ie a country's version of balance sheet, cashflow, profit and loss, assets and liabilities.

The question going around now is 'what is the effect of the lower oil price in the Gulf economies?'

Oman's 2009 budget is based on a premise of $55 a bbl for its crude exports, and includes a deficit. Note that represents a year average oil price, as Omani crude trades on a monthly officially set price.

On the face of it, that doesn't look too bad. Last years budget - set on $45 / bbl - was easily topped by average oil prices at least 120% above that at around $100. Nice. Assuming Oman exports around 600mln bbl a day, that's almost $22 billion.

So what about a $60?
On the face of it domestic spending will be almost financed at $60. But its more complicated than that.

The so-called 'break even' oil prices being quoted in a very good article in the National.



This is a higher price than Oman'$55 budget, but tries to take account some of the off balance sheet items.Most interesting is the statement:

Economists differ on which GCC economy is the most vulnerable to low oil prices. Mushtaq Khan, an economist at Citigroup, said it was Qatar, which requires $57 a barrel to balance its fiscal budget. Others, like the IIF, report that Bahrain and Oman have the highest break-even oil prices – about $72 and $76 a barrel respectively. Outside the GCC, the economies of other Gulf oil producers like Iran ($90) and Iraq ($110) are even more vulnerable to falling oil prices, according to Mohsin Khan.

If oil prices approach these levels, most economists agree that governments will probably have to stop increasing their spending at the current rate. In a region where government-backed infrastructure and property projects are keystones of national economies, a slowdown in government spending could have serious consequences.

“If there is a concern that the oil price might continue to fall, I think there are a number of projects that might be scaled back – especially those that are still in planning phases or that have just been started,” said Ms Ziemba.

In the short term (~1 year) there is probably not much any of the Gulf countries could do to significantly reduce spending anyhow, as its basically committed, and any additional budget short fall would almost certainly be able to be financed, given the status of their 'Sovereign Wealth Funds' holding over a Trillion $.

In the very short term for any business, the most important factor is marginal cashflow. It's a company's oxygen. And a country's, financially speaking. [see Iceland]. And having that cash & assets on hand is critical. So there is no need in the short term for any problems at all, as Oman probably has at least $6 bln in spare foreign assets, and relatively low debt financing costs (a huge difference to 1998). Being linked to the dollar has now helped too lately.

The oil business is also a cash business, like fast food. Oman actually gets paid cash up front for its crude.

But what about long term?
It depends what you mean by long term I guess. If oil prices stayed below $50 for many years, that would certainly mean Oman perhaps could have been richer if they had avoided a few investments they've made in the last few years. As the article says, projects just starting would certainly be mothballed.

But also, by then, contracts would have been renegotiated. (low oil price = no world demand = cheaper materials and services). And by then Oman would be able to cut its costs back to survive in $30 long-term. So they would remain solvent.

You have to remember that in the day-to-day, what would be important is the marginal cost, not the overall profitability taking into account sunk costs and future investment. Ignoring those long term things, even today, it means Oman is making money on each bbl even if the price reached $8. The big boys even lower. The incentive, if anything, would be to accelerate production to try and partially offset any cash shortfall. What some of my contacts in this rather colorful industry call 'pump like fuck'.

This is what happened in 1998, and is partially responsible for Oman's subsequent rapid production decline in the early 2000s. Also in 1998, Saudi was trying to re=establish its control over world price and Opec, and had started a price war to bring Opec into line (as Saudi had the lowest cost to produce and the biggest reserves, it basically went 'all in').

Hopefully OPEC has learnt that lesson well from 1998 and will move decisively to bring oil at least to $60-$80 by cutting (real) production. Then everyone would be happy I think.

Of course, the rate of Oman's growth would plummet. Oman has gotten used to big growth rates of late, all driven by huge Government spending and slightly iffy real estate developments. This would be a big long-term problem. If the birth rate was ~1.5 and there were lakes of oil for 100s of years, no worries. But it makes the forward development a lot slower and more painful without the blessing of obscenely high oil.

And Oman has picked a very high Capital, 'global bull-market' set of growth industries.
Aluminum, Methanol, Urea, copper - all are highly correlated in price to oil. And anyhow are effectively subsidised by artificially low gas prices.

Mega Real Estate investment dependent on foreign money from relatively rich older people: who have just seen 50% of their stock portfolios vanish.

Tourists jetting in from Europe. Hmmm. There are a lot of credit cards that need paying off, and a luxury foreign holiday is perhaps not going to be as much of a priority when you're afraid of losing your job. Tourism may need to switch to Asia and more GCC.

And a domestic economy highly based on land, housing, a booming stock exchange and new cars, (+ Government spending) with a lot of debt financing. That looks a little shakier now too. The fisheries don't look like being able to grow, if anything in decline. Oil will probably drop to around 500k bbl a day, but will continue to act as the core engine of the economy OK.

So all in all...

Short term
everything will be fine, almost no matter what the oil price.

Medium term
at low oil price also still looks OK. Steady growth at a few % per year. A few long term projects stopped. More focus on diversifying domestic growth, esp agriculture and tourism. Problems of rising electricity costs and financing any new projects. Domestic fuel prices are forced up. A lot less new cars.

Long term.
Not so great. Low growth will be overtaken by the population curve. Big problem. Upside is a bit of reasonable austerity might help improve the Omani average work ethic.

But who reasonably thinks that in the long term oil price will be less than $50?
Not me.