The development of the Oman Gas (OGC) $650 million gas pipeline has put Oman back on the project finance map - big time.

At the southern edge of the Arabian Peninsula, Oman has not realized its project finance potential to the same degree as its neighbours. So far only two energy projects have come through: the 90MW Al Manah power plant and the Oman LNG. Financing for $217 million Al Manah was closed in the February 1996 while financing for the LNG closed in November 1997. Shipping of gas out of Oman LNG will start at the beginning of 2000 when the project will be operational.

The construction of the new OGC pipeline is expected to boost the development of projects in both the north and south of the country. Bidding for the construction mandate are Italy's Techint, India's Dodsal, LG/Hyundai of South Korea, Italy's Saipem with Snamprogetti, Technip Germany with J&P, and US-based Wilbros with Itochu of Japan. All of them submitted technical proposals by the deadline date of October 17 this year. The commercial and financial bids are due in by the second half of December.

OGC has submitted drafts of concession, tariff and asset transfer agreements to the government of Oman. OGC is seeking a 27-year concession to develop the project, which is expected to be operational in the 2002. The government of Oman has an 80% stake in OGC while the state-owned Oman Oil Company controls the remaining 20%. HSBC is the financial adviser to OGC and  expects financial close to be reached by the end of 2000. Richard Grantley, director in project finance at HSBC in London, believes the pipeline will be the backbone for the development of more projects in Oman.

The project entails construction of two separate gas pipelines. One will be 305km long and will connect Fahud near the Yibal gasfield in central Oman to the northern city of Sohar, while another 700km long pipeline will link the Sail Nihayda in central Oman to the port of Salalah in the southern part of the country.

The Omani government intends to develop both Salalah and Sohar as industrial zones, spawning a number of projects across different sectors: An aluminium smelter with a capacity of 500,000 tons a year is planned in Sohar, and Salalah has been chosen for development of a 200MW gas-fired power plant.

Paribas is arranging the financing of the Salalah power project. The bank was behind the successful bid made by  PSEG after having worked together for the realization and financing of the $250 million Rades power plant in Tunisia.

Ian Catterall, director of project finance at PSEG Global in London, confirms the company was invited to discuss commercial aspects of the $220 million project at the end of October by the Omani Ministry of Water & Electricity (MW&E). Negotiations will start in the third week of November and will be completed within the first quarter of 2000 after the end of Ramadan. MW&E is advised by PricewaterhouseCoopers. Bidders not selected for Salalah were US' AES and UK's National Power.

Meanwhile the Omani sponsor is looking to attract the interest of a number of export credit agencies. At the end of October OGC together with its financial adviser HSBC roadshowed the deal to European and Asian agencies including UK's ECGD, France's Coface, Germany's Hermes, Italy's Sace, Japan's Jexim and South Korea's Keximbank. London-based ECGD and Sace in Rome want a stake in it.

Martin Crane, managing underwriter for the Middle East at the ECGD in London, says: "Oman has been on a credit watch following the drop in the price of crude at the beginning of 1999. At the time the Omani authorities realized there was a potential for overspending and decided to be cautious. It is also an heavily indebted country." Referring to the project Crane adds: "We are unhappy about the limited portion of equity of around 10% that OGC is offering into the project. They should put more of their own at stake."

A third project financing is expected to close in Oman at the end of November - the $90 million expansion for an additional 180MW of generating capacity to be added to the other 90MW belonging to the already existing Al Manah power plant.

Arrangers for the deal are Paribas and ABN Amro. Participants are Credit Agricole Indosuez, BNP, Mitsubishi, Fuji, Arab Bank. Gulf International Bank, Generale, ING, Kredietbank and National Bank of Bahrain. With syndication being launched three months ago the date for closing is expected for the end of November. Both the UK's and France's export credit agencies ECGD and Coface will play a role in the provision of full political and partial commercial risk guarantees. Washington-based IFC will be involved as well.

ABN Amro and Denton Hall are advising the Omani government on the sale of existing power plants and the developments of new ones. The program also comprises a number of new desalination plants and the sale or revamping of the transmission networks. Mott McDonald won the technical advisory mandate.

The Omani government identified three projects to be developed on a fast track, with another three on a more slow-paced track. The first fast track project is development of the 600MW Raysul power plant together with a new plant with a generating capacity of 1200MW. The second is the construction of the 250MW Shariqiyya power plant, and the third focuses on the Barqa 400MW plant. Development of the 310MW Wadi Jazzi and 500MW Gubrah power plants has been identified as lesser priority.

Oman is the smallest member of the Gulf Cooperation Council. But according to Richard Ingham, senior vice-president and head of project finance advisory unit at ABN Amro in Amsterdam, "Oman is at the forefront of development of private power projects. With privatization at the heart of the governments' objectives Oman has shown an extremely responsive approach to the concerns of foreign investors."

In his annual speech in October, Oman's ruler, Sultan Qaboos bin Said, stressed the need for privatization in order to enhance the country's future economic development. Combined with the stabilization of crude's price at around $16 a barrel, there is confidence among foreign analysts that some Oman credit risk will be now waived by investors. Bids for the development of the Shariqiyya and Barqa projects will be called in early 2000.

According to ABN Amro's Ingham, project finance in Oman has a bright future despite having less to offer than neighbouring heavy weights such as Qatar, Saudi Arabia or the United Arab Emirates. Considerable gas reserves found in the central part of the country are expected to create the right platform for a more heavily industrialized Oman.

There is already enough new business to keep sponsors and financiers busy for the next couple of years. A headline deal is the development of Sur fertilizer plant in the southern part of the country. Together with JP Morgan, Banque Nationale de Paris is arranging the financing for the $1.1 billion Sur plant. The project is sponsored by a consortium made of state-owned Oman Oil (50%) and a Rashtruya Chemicals & Fertilizers (25%) and Krishak Bharati Co-operative (25%) both from India.

The project has been on hold for the greater part of 1999 due to one of the Indian sponsors pulling out in January. But at the end of August 1999 the Indian government decided to remove both volume and price risks from the deal. The Indian government has also issued a guarantee to be the project's offtaker.

Laurent Devin, head of project finance at Banque Nationale de Paris in London, is confident the project is now fully back on track with the renewed support of the export credit agencies most likely to get involved - ECGD and Sace. He says: "The finalization of the offtake agreement will be the cornerstone of the deal." Following the commitment made by the Indian government, a meeting between sponsors and financiers will take place on November 15 when the project will officially kick-off. Devin started looking at the Sur project in March 1998 and he expects financial close to be reached by the second quarter of 2000.

Other smaller projects in Oman will also come to market in 2000. Financing for the construction of a $600 million water-treatment plant in the Omani capital Muscat is another initiative to be developed on a BOT basis. The project will involve the management of the wastewater system in the city under a 30-year concession.

The Oman government is hoping to attract more foreign investment on the premise of the country's good anti-corruption record and its commitment to award deals openly. It was the first country in the Middle East to develop an independent power-producing project  - Al Manah - which set in stone Oman's ideas towards a positive role for private investors in the energy sector.

But concerns do remain. And the slow pace of projects in Oman is holding a few investors back. More familiarity with project finance, as more deals complete under the fast track scheme, will give the Omani government a clearer vision on how to meet investor needs.