Executive summary Oman is a producer economy with net zero ambitions. Hydrocarbon production has a dominant role in Oman’s economy with oil and gas representing around 60% of the country’s total export income in recent years. Currently, Oman’s energy needs are almost entirely met by domestic fossil fuel resources, with natural gas accounting for over 95% of electricity generation. In 2022, Oman announced a target to become net zero by 2050. It also aims to significantly ramp up domestic production of hydrogen from renewable electricity. This commitment is in addition to earlier targets to increase the use of renewables in the power mix. Long-term targets for renewable hydrogen exceed the size of current LNG exports. The country has set targets to produce at least 1 Mt of renewable hydrogen by 2030, up to 3.75 Mt by 2040 and up to 8.5 Mt by 2050. Achieving this would make renewable hydrogen a significant new source of export revenue. Meeting Oman’s 2040 hydrogen target would represent 80% of today’s LNG exports in energy-equivalent terms, while achieving the 2050 target would almost double them.

Oman: A producer economy on the brink of transition Oman is located on the south-eastern coast of the Arabian Peninsula. It borders Saudi Arabia and the United Arab Emirates on the north and Yemen on the west and faces the Arabian Sea and Gulf of Oman on the south-east. Located at the crossroads of Africa, Europe and India, Oman is well positioned for global trading. The capital and most populated city of Oman is Muscat, and the country covers a territory of 309 500 square kilometres (km2) with a total population of 4.5 million people in 2021. The economy of Oman relies on its national oil and gas industries. After oil was first discovered in the country in 1964, commercial production and export started quickly, subsequently contributing to the country’s social and economic development. With a production of 971 million barrels (mb) of oil and 43.6 billion cubic metres (bcm) of natural gas in 2021, Oman was the fourth-largest producer of oil and natural gas among the Gulf Cooperation Council (GCC) member states.1 Oman is a producer economy2 and has the largest production of oil and natural gas in the Middle East outside the Organization of the Petroleum Exporting Countries (OPEC). The production of hydrocarbons dominates Oman’s economy: revenues from exporting oil and gas are a key source of income for the government. In 2020, they represented 60% of total export income and 25% of the country’s GDP

To put Oman’s current hydrogen ambition in proportion, it is useful to contrast it against the current level of LNG trade. With almost 14 bcm (560 petajoules [PJ]), Oman was the third-largest LNG exporter in the Middle East-North Africa region (behind Qatar and Algeria) in 2021. Based on the IEA’s analysis of the current project pipeline, the 78 PJ (0.65 Mt) export of hydrogen in 2030 would represent only one-seventh of today’s LNG exports. However, meeting its 2040 renewable hydrogen production targets would already represent 80% of current LNG export volumes in energy-equivalent terms. Meeting the 2050 target of 1020 PJ (8.5 Mt) would significantly exceed current LNG volumes.

Size of Oman’s LNG exports in 2021 vs. renewable hydrogen export project pipeline and renewable hydrogen targets (2030, 2040, 2050)

Benefits from scaling up domestic renewable power While opening the door to exporting low-emission fuels, and creating domestic opportunities for renewable hydrogen, there are several benefits that could follow the scaling up of domestic renewable power generation. First, renewable electricity is already cost-comparable with existing sources of generation, and accelerating its deployment would have the benefit of immediately reducing fuel costs. Moreover, as a source of emission-free power, it is a low-cost abatement option that can be implemented today to help Oman move towards its net zero ambitions by 2050. Second, increasing the penetration of renewable electricity and hydrogen would reduce the consumption of natural gas. This would reduce the need to tap new supplies and save gas for exports. Finally, scaling up renewable electricity projects brings down costs as the local power industry gains experience. This would help ensure lower cost of electricity and consequently, lower cost of hydrogen.

Solar PV and onshore wind can produce costeffective electricity today An additional benefit from accelerating the deployment of utility-scale solar PV and onshore wind are lower generation costs in Oman. Over 95% of Oman’s electricity generation is from natural gas, operating at an estimated levelised cost of electricity (LCOE) between USD 30/MWh and USD 40/MWh. Recently awarded bid prices for utility solar PV projects in the region are comparable or below these costs. Since 2019, all but one utility-scale solar PV project was awarded below USD 40/MWh in the Middle East and North Africa (with the only exception of Israel). Bid prices in other markets where solar irradiation is similar to Oman such as Qatar, the United Arab Emirates and Saudi Arabia have seen prices well below USD 20/MWh owing to high-capacity factors, beneficial financing and land costs, and large project size, which allows for economies of scale. Onshore wind benchmark prices, which can be used as proxy for Oman, also fall within the range for natural gas-fired plants. This suggests that the generation cost of utility-scale solar PV and wind in Oman is likely already competitive with natural gas and using it today would lower electricity costs for both electric utilities and consumers.

Awarded bid prices for solar PV and onshore wind in selected MENA countries versus estimated levelised cost of electricity generation of gasfired plants in Oman

Economically attractive solar and wind prices can reduce fossil fuel subsidies and help the transition to more cost-effective electricity tariffs. For utilities, lower generating costs can reduce what is spent on subsidies to bridge the cost between the generation and end-user tariffs. This in turn lowers deficits, frees up capital for new power system investments and can help improve the overall financial health of the utility. Lower generating costs also reduce the gap that consumers will face as subsidies are phased out and end-user tariffs rise. Increasing the pace of renewable electricity also helps achieve climate goals in a cost-effective way. Renewables can be considered an optimal starting point for emissions reduction pathways that favour deploying low-cost abatement first. Such is the case for Oman, where the net zero emissions strategy aims for an orderly transition that prioritises minimising energy system costs while optimising economic impact, among others. Therefore, increasing renewable project development can help save costs while simultaneously progressing towards net zero goals.

The Oman power system consists of three main grid areas with limited interconnections between them. The MIS is the largest, serving around 89% of Oman’s electricity demand in 2020, with 9% of demand in Dhofar and around 1% each in Duqm and Musandam. In 2021, the share of variable renewables in the MIS was only around 4%, and the system was in integration Phase 1, where VRE has a minimal impact at the system level. The coming years will see a rapid increase in VRE as Oman pursues its 20% by 2030 target of renewables in consumption. Due to the large share of solar in the planned additions (2 GW solar versus 300 MW wind in 2026 in the MIS) this will result in a high peak in supply during daylight hours. Oman also has a particularly strong seasonal pattern in its electricity demand driven by cooling requirements in the summer (for analysis on seasonal variability of renewables see the IEA’s report on Managing Seasonal and Interannual Variability of Renewables). Average monthly demand in winter typically falls to 35-40% of peak demand. Our analysis based on the demand forecast and project pipeline to 2026 indicates renewables could frequently reach 60-70% of MIS demand during winter days, placing.

By 2030 with the achievement of the 20% target, available VRE generation could reach more than 90% of demand in some hours. A range of proven flexibility solutions are available to help integrate these shares. Oman has put forward a plan to integrate up to 35% renewables based on integration measures including more flexible operation of thermal generators, weather forecasting and interconnections with neighbouring countries. Additional measures targeted to Phases 3 and 4 such as demand response to shift load towards the daytime and fast frequency response services could also help the system to accommodate more renewables. Exploitation of Oman’s rich wind resources also has the potential to better distribute renewables supply across the day, although this benefit will need to be balanced against the cost to connect areas of strong wind resource to the grid. Integrating renewables beyond the 35% target may require investment in additional technologies such as energy storage.

Conclusions Renewable hydrogen and renewable energy will play a key role in achieving Oman’s ambitious climate goals and economic diversification objectives. Crude oil and natural gas exports are currently a key source of revenue for Oman, representing 60% of total export income. Ahead of the 27th Conference of the Parties (COP27) in 2022, Oman launched its Net Zero National Strategy. The country commits to reach net zero emissions by 2050 and to broaden energy transition objectives, including expanding renewable capacity to free up domestic natural gas consumption for exports. Oman is endowed with high-quality renewable resources, a convenient location well-placed to access the main import markets, and vast amounts of land for largescale project development. Oman also has a skilled workforce, existing infrastructure, and extensive experience in producing and exporting LNG and ammonia. Large-scale development of the renewables potential together with repurposing of existing fossil fuels infrastructure and expertise can help Oman to simultaneously achieve its climate, energy and economic objectives. Oman is among the top candidates for producing and exporting renewable hydrogen. Owing to its high-quality renewable resources and ongoing global cost reductions in PV, wind and electrolysers, the cost of renewable hydrogen in Oman is expected to decline significantly this decade. By 2030, the cost of renewable hydrogen production in Oman could be as low as USD 1.6 per kilogramme of hydrogen. The current project pipeline slates Oman as the sixth-largest global exporter by 2030.

Source:http://IEA