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Oman’s $3 Billion Railroad Plan to Blunt Iran Oil Risk: Freight

Oman, which faces Iran across the Strait of Hormuz, said it’s poised to start raising cash for a $3 billion rail line offering an alternative route for oil and freight shipments that funnel through the 21 mile-wide channel.

The nation of 3.3 million people, located on the southern side of the strait, is considering issuing bonds by the end of 2014 to kick-start funding for the track across some of the Arabian peninsula’s harshest terrain, Abdulrahman Al Hatmi, a director at Oman National Railway Co., said in an interview.

Iranian threats to close the Hormuz waterway have been a recurrent theme in Western relations with the Islamic republic since the 1979 revolution. While tensions have begun to ease after an interim deal aimed at halting Iran’s nuclear program, Al Hatmi said the “very expensive” rail line is more than justified by the new trade opportunities bypassing the strait would offer Oman’s southern port of Salalah.

“We are moving fast now,” he said at a rail conference in Dubai. “One of the key changes we’ve made is to connect to Salalah, which is the mouth of the whole region and will play a major role in transforming the whole logistics map.”

Oman wants to push on with its leg of the so-called Gulf Cooperation Council Railway due to stretch 1,350 miles from the borders of Iraq to the shores of the Indian Ocean by 2018 just as nations including Kuwait -- which have less to gain from the project -- say they’ll struggle to meet agreed deadlines.

Obstacle Course

Oman yesterday signed a 13.6 million rial ($35 million) deal for design work with Italferr SpA, the engineering arm of Italy’s state railway. Awards to construction companies will take place by the end of this year, with work commencing by the first quarter of 2015, Al Hatmi said.

Rather than hugging the coast to reach Oman, the line will take the shortest route east from Abu Dhabi on the Persian Gulf, crossing the border from the United Arab Emirates near the city of Al Ain before plowing for 100 miles through the Hajar Mountains, which rise to 10,000 feet, and reaching the ocean near Suhar, 150 miles north of Omani capital, Muscat.

The terrain makes the leg the most challenging of the GCC line and the bill may be higher than the current estimate, according to Al Hatmi, who said studies are under way to pin down the final cost. From Muscat, Oman wants the line to continue south across its arid interior to the ports of Duqum and Salalah, ending at the border with Yemen, he said.

Chokepoint

By circumventing the Strait of Hormuz the railway would dilute the impact of further closure threats to a waterway through which some 20 percent of crude supplies pass to reach global markets, equal to 35 percent of seaborne traded oil, according to the U.S. Energy Information Administration.

About 17 million barrels of oil passed through the channel each day in 2011, almost five times the total for the Suez Canal, the next busiest chokepoint, the EIA estimates.

The line’s scope for serving as an alternative route for crude exports will be determined by its proximity to oil fields and loading terminals and a need for thousands of tanker cars, according to Robin Mills, head of consulting at Manaar Energy Consulting & Project Management in Dubai, who said the link may come into its own in an emergency lasting at least six months.

Other means of bypassing the Strait of Hormuz include a 263-mile pipeline stretching from Abu Dhabi to the emirate of Fujairah on the Indian Ocean, built at a cost of $4.2 billion. A second pipe carries Saudi oil from the Gulf across Arabia to the Red Sea, though the two routes could carry only a fraction of ship-borne crude capacity.

Foreign Investors

Oman will consider both conventional bonds and sukuk, the version compliant with Islamic law, as funding options for the line, and could structure some contracts as public-private partnerships under which successful bidders would assume a high degree of financial and operating risk, Al Hatmi said. International investors are also offering to buy trains and lease them back to the government, he said.

The GCC Railway has a projected cost of $20 billion and aims to provide a route spanning six Gulf countries by 2018. Work is most advanced in the U.A.E, where the seven sheikdoms that form the nation are backing the railway to boost integration and ease pressure on congested roads.

Saudi Arabia has built 125 miles of track, a rail symposium in Riyadh was told last month. The Arab world’s largest economy will award a design contract for other sections of the line running from Kuwait to the U.A.E. border in two months, with five companies bidding, Mohammad Al Suwaiket, president of the Saudi Railway Organization, said in Dubai.

Slow Progress

Progress in Kuwait has been far slower, with no consultant chosen to design 320 miles of track, said Mansour Al Bader, chairman of the country’s advisory committee on the project. A construction tender will be issued in about 18 months with the aim of finishing work three years after the contract has been awarded. That’s likely be the end of 2019, a year late, he said.

Qatar and the island state of Bahrain will be linked via a loop from the main line, requiring further major engineering projects. Talks are under way on building a causeway between the countries, and the GCC is evaluating a $4.2 billion bridge that would carry the track to Bahrain from Saudi Arabia.

GCC ambitions stretch beyond a rail system simply reducing the bloc’s reliance on the Strait of Hormuz. The U.A.E. public works minister, Abdullah Al Nuaimi, suggested in Dubai that a study be carried out into a link to Arab countries in the north creating a long-distance line to the borders of Europe.

The extension to southern Oman could also stretch a further 100 miles to the borders of Yemen, bolstering links with a would-be GCC member and aiding a clampdown on truck-based smuggling operations in a territory that’s become a haven for terror group al-Qaeda in the Arabian Peninsula.

To contact the reporter on this story: Deena Kamel Yousef in Dubai at dhussein1@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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