Oman considers taking early payments for oil to avoid new debt

The government of Oman is considering financing structures that let it get advance payments from oil traders, reducing the government’s need to borrow more money from banks, sources familiar with the matter said.

Under the proposed structures, Oman’s national oil company might get paid as much as two years before oil was delivered, in exchange for price discounts on the oil, the banking sources said, declining to be named because the matter is not public.

The government, which is running a large budget deficit because of low oil prices, is considering such a step because it wants to limit its new borrowing. One reason for this is that it feels any rapid increase in government debt could in the long term hurt Oman’s credit ratings, the sources said.

Oman Oil Co, the finance ministry and the central bank did not respond to emails seeking comment. Advance payment deals have been made by other oil producers, including Russia’s Rosneft.

The sources said the Omani government had made no decision on whether to use such a structure. Sources at several oil trading companies which deal with the region said they had not been approached by Omani officials to discuss the matter.

State-owned Oman Oil Co originally considered raising debt via a pre-export financing (PXF) loan for its upstream unit, Oman Oil Company Exploration & Production, banking sources told Reuters last October.

The loan would have had a structure similar to a $4bn syndicated loan raised last June by Petroleum Development Oman, another Omani state-linked firm. In PXF loans, which are often used by commodity producers, the borrower obtains money based on confirmed orders for its production.

But as oil prices have crept up over the past several months, with Brent crude rising to around $55 a barrel from last year’s average of $45, “the tone of the discussions has changed slightly, from ‘we need money’ to ‘let’s find other avenues’,” one of the sources said.

The finances of all six wealthy oil exporting countries in the Gulf have been hurt by the plunge of oil prices since mid-2014. But Oman, which lacks the huge oil and financial reserves of its neighbours, has been hit particularly hard.

The government posted a budget deficit of OMR4.94bn ($12.8bn) in the first 11 months of 2016 compared with a deficit of OMR4.07bn a year earlier, Finance Ministry data shows.

In November, Standard & Poor’s cut its outlook for Oman’s BBB- sovereign credit rating to negative from stable, saying Oman’s efforts to stabilise its finances might take longer than expected and the economy’s external debt could exceed its liquid external assets by more than anticipated.

For 2017, the government has projected a budget deficit of OMR3bn, which it plans to finance partly with OMR400m of domestic borrowing and OMR2.1bn of international borrowing.

Oman has appointed banks for a new U.S. dollar-denominated bond issue, which is likely to take place in March, bankers said.

Last month, an Oman-based source and a Qatari official told Reuters that Oman was negotiating with other Gulf Arab states to secure a multi-billion dollar deposit in its central bank that would increase its foreign exchange reserves. Oman’s finance ministry denied the report.