VZCZCXYZ0000
PP RUEHWEB

DE RUEHMS #1646/01 3361450
ZNR UUUUU ZZH
P 021450Z DEC 06
FM AMEMBASSY MUSCAT
TO RUEHC/SECSTATE WASHDC PRIORITY 7476
INFO RUEHRH/AMEMBASSY RIYADH 0226
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS MUSCAT 001646 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ARP, EB/CBA 
STATE PASS USTR FOR JBUNTIN 
RIYADH PASS TO AUSTR SHAUN DONNELLY FROM THE AMBASSADOR 
 
E.O. 12958: N/A 
TAGS: BEXP ECON ETRD EAIR EIND PGOV PREL OTRA MU
SUBJECT: SCENESETTER: VISIT OF AUSTR FOR EUROPE AND THE 
MIDDLE EAST SHAUN DONNELLY 
 
REF: STATE 192487 
 
¶1. (U) Greetings and welcome to Oman.  My team and I look 
forward to your arrival on December 4 to promote the 
U.S.-Oman Free Trade Agreement.  In addition to your 
participation as the keynote speaker and panel participant in 
the December 6 U.S.-Oman FTA Awareness Conference, we have 
confirmed meetings with the Minister of Commerce and 
Industry, Executive President of the Omani Center for 
Investment Promotion and Export Development (OCIPED), and 
Executive President of the Oman Chamber of Commerce and 
Industry (OCCI).  You will also be the featured luncheon 
speaker at a Muscat American Business Council (MABC) event, 
and will attend the 10th anniversary gala dinner of Oman Oil 
Company, which is partnering with the Dow Chemical 
Corporation to form the Oman Petrochemicals Industry Company. 
 We are further seeking meetings with the Minister of 
Manpower and CEO of Salalah Free Zone Company, among others. 
 
----------------- 
Economic Overview 
----------------- 
 
¶2. (U) Oman's economy is based primarily on petroleum and 
natural gas, which are expected to account for 81% of the 
government's revenue in calendar year 2006.  Oman's proven 
recoverable oil reserves are estimated at 4.8 billion 
barrels.  The main producer of oil is the government 
majority-owned Petroleum Development Oman (PDO, in 
partnership with Royal Dutch Shell), which controls 90 
percent of reserves and the lion's share of total production. 
 U.S.-based Occidental Petroleum is the second largest 
producer in Oman, and has committed to investing over $3 
billion over the next several years in enhanced oil recovery 
efforts in mature fields. 
 
¶3. (U) High oil prices in 2005 led to a record Omani budget 
surplus of $3.8 billion and blistering GDP growth of 21.7 
percent, despite the steady decline in oil production since 
¶2001.  The 2006 budget, announced on 
January 1, projects significant government spending on 
industrial and tourism projects, though with the continuation 
of high oil prices, the government currently is running a 
ten-month surplus of $3.4 billion.  Under the government's 
Seventh Five-Year Plan, to cover 2006-2010, the average 
investment rate over the five-year period is estimated to be 
24 percent of GDP.  Thanks to windfall oil prices and strong 
tourism growth, Oman's economy is currently running at a 
brisk pace. 
 
¶4. (U) Oman actively seeks private foreign investors, 
especially in the industrial, information technology, 
tourism, and higher education fields.  The largest single 
industrial investment target is the port city of Sohar, near 
the UAE border.  It has witnessed over $12 billion in 
government investment alone in the financing of several 
industrial projects, including a petrochemical plant (with 
Dow Chemical), a steel rolling mill, a fertilizer plant, and 
an aluminum smelter (being built by Bechtel).  Investors 
transferring technology and providing employment and training 
for Omanis are particularly welcome.  The permitted level of 
foreign ownership in privatization projects is 70 percent, 
with up to 100 percent in certain cases.  The government has 
proceeded with several major privatization projects, 
including power generation projects in Salalah, Barka, 
Rusayl, and the Sharqiyah region. 
 
-------------------- 
Free Trade Agreement 
-------------------- 
 
¶5. (U) With the ratification process complete, USTR and the 
Embassy are engaged with relevant Omani government agencies 
in ensuring that all pertinent regulations are FTA-compliant 
in order for the Agreement to take effect.  The government 
has amended its labor codes, is finalizing updates to its 
corruption and investment codes, and is working with USTR and 
the World Intellectual Property Organization (WIPO) to revise 
its intellectual property regulations.  The USG is also 
working with the Omani government on transparency regulations 
and on technical assistance programs for labor and customs 
administration. 
 
¶6. (U) The Omani government is now beginning to promote the 
FTA domestically.  Minister Maqbool, in an October address to 
the Omani Journalists Association, noted that concluding the 
 
FTA with the United States was "no surprise," and that it was 
a result of the "natural process and the rational development 
of the Sultanate's economic and commercial vision."  In 
addition to the FTA's advantages for Oman in the services 
sector, Maqbool expressed his view that the Agreement would 
attract U.S. investment in the transport, electricity 
production, real estate, and tourism sectors.  He further 
remarked that the FTA would open export possibilities for new 
plastics and aluminum production facilities once they come on 
line over the next four years.  Maqbool commented that Oman 
would continue to expand its trade links by negotiating, 
through the GCC, free trade agreements with the European 
Union, Turkey, China, Singapore, Australia, India, and 
Pakistan. 
 
¶7. (U) During the event, Maqbool fielded concerns regarding 
Oman's participation in the Arab League boycott of Israel, 
stating that the government already had lifted the ban on 
trade with Israel in preparation for its 2000 accession to 
the World Trade Organization.  Maqbool also dismissed 
concerns that U.S. products would swamp locally-produced 
goods once the FTA was implemented, noting that the types of 
U.S. imports to benefit most from the Agreement - such as 
automobiles and heavy industry equipment - would not pose a 
threat to domestic businesses.  Finally, in answering 
concerns that U.S. service providers would crush their 
less-competitive Omani counterparts, Maqbool pointed to the 
presence of a safeguards chapter to address such potential 
outcomes. 
 
¶8. (SBU) The Embassy is collaborating with the government on 
FTA promotional activities.  Both Minister Maqbool and 
National Economy Minister Ahmed bin Abdul Nabi Macki hope to 
participate in a multi-state promotional tour of the United 
States during the autumn of 2007, with proposed stops in New 
York, Chicago, Houston, Los Angeles, and Washington.  In 
formulating such a tour, we have stressed the importance of 
the delegation bringing a clearly defined message for the 
American business community.  To this end, we are in contact 
with the Business Council for International Understanding 
(BCIU) and the National U.S.-Arab Chamber of Commerce (NUACC) 
regarding assistance for Oman in developing a framework for 
the tour, as well as a public relations strategy. 
 
¶9. (U) The Omani government recognizes the importance of the 
FTA in raising the Sultanate's profile internationally.  In 
addition to the direct U.S. investment that the FTA will 
attract, Oman has taken note of the spillover benefits that 
would be equally important.  For example, Dow's investment in 
a petrochemicals complex had already spurred an additional 
$350 million in investment from India.  To attract further 
foreign interest, Oman will continue to promote itself as a 
country that adheres to the rule of law and facilitates the 
ease of doing business. 
 
------------------- 
Tourism Development 
------------------- 
 
¶10. (U) With Oman aggressively marketing itself as an 
environmentally conscious tourist destination, international 
investors are taking advantage of significant improvements in 
local infrastructure to develop ambitious new tourist 
projects.  U.S. construction and financial firms are joining 
a slew of regional and international consortiums that seek to 
capitalize on the region's annual 6.5 percent growth as a 
tourist destination.  Investors hope to lure 3 million 
visitors annually with several resort developments currently 
planned or under construction. 
 
¶11. (U) In 2004, Oman welcomed 1.5 million tourists, 
generating revenues of $284 million.  Through aggressive 
marketing campaigns and improved infrastructure, Oman hopes 
to increase the industry's meager 1 percent contribution to 
GDP to 3 percent.  The Omani government estimates that the 
tourism sector could eventually create over 114,000 jobs. 
 
¶12. (U) The Ministry of Tourism and government-owned Oman 
Tourism Development Company (OTDC) are moving forward on 
plans to construct or renovate 16 hotels and a convention 
center within the next five years, which will alleviate 
chronic hotel room shortages in Muscat.  The OTDC primarily 
serves as the government's investor in tourism projects, 
either as the sole investor in projects such as the 
development of a Muscat beachfront resort and convention 
center complex, or in partnership with the private sector, in 
 
which it takes a 30% stake in a silent capacity.  The Wave 
project has already broken ground, with U.S.-based Turner 
Construction serving as the project manager.  This 
development will represent the first opportunity for non-GCC 
residents to purchase freehold property.  Multi-hotel 
complexes at Yiti and Sifah are also in final planning 
stages, and the government plans to finish a three-hotel 
convention center complex by 2010.  U.S.-based investor Frank 
Drohan of Contact Sports.net is also interested in leasing 
land from the Ministry of Tourism to develop a theme park 
complex along the beach  Existing al-Bustan, 
Intercontinental, Sheraton, and Crowne Plaza hotels are 
scheduled for major renovations in the next 12-24 months to 
expand capacity. 
 
¶13. (U) Complementing Oman's development as a tourist 
destination is Gulf Air's recent decision to consolidate its 
hubs at Muscat and Manama after the withdrawal of the Abu 
Dhabi emirate from the consortium.  As a result, Gulf Air has 
rolled out new direct service from Muscat to Paris, 
London-Heathrow, Bangkok, Jakarta, Kathmandu, Karachi, Mumbai 
and Kuala Lumpur.  The government is finalizing plans to 
build a new terminal at Muscat's Seeb International Airport 
by 2011 and to construct new airports at Sohar, Ras al-Hadd, 
and Duqm. 
 
-------------- 
Port Expansion 
-------------- 
 
¶14. (U) Two of Oman's principal ports, Sohar and Salalah, are 
aggressively moving forward to expand their respective 
operations.  The Port of Sohar, a 50-50 joint venture between 
the Sultanate and the Ports of Rotterdam, will anchor the $12 
billion industrial development planned for the region.  Oman 
is confident that the Port's advantageous location outside 
the Strait of Hormuz and within 300km of three large gas 
reserves will lend to its success.  In addition to its berths 
for industrial liquids, Sohar is positioning itself as Oman's 
largest container port with over 7 square kilometers of land 
and a projected 10 dedicated shipping berths.  The port is 
already doing brisk business, with its operations handling 
volumes that were not expected until 2008. 
 
¶15. (U) The Port of Salalah has risen quickly to become a key 
transshipment hub for Maersk and its parent company A.P. 
Moller (APM).  Operated by Salalah Port Services (SPS), which 
is 30% owned by APM Terminals and 20% owned by the government 
(with the remaining 50% owned by pension funds, Omani 
corporations, and private investors), the port handled 2.23 
million 20-foot equivalent units (TEUs) in 2004, ranking it 
as the world's 31st busiest port.  Plans are ahead of 
schedule to expand the capacity of the port by adding two 
berths to the existing four that are in operation.  Once 
completed, the $234 million expansion, shared roughly evenly 
between SPS and the Omani government, will increase capacity 
by 1.8 million TEUs, bringing total capacity to 4.38 million 
TEUs. 
 
¶16. (U) The government is also finalizing plans to develop a 
port at Duqm, a lightly populated area located along the 
Arabian Sea, about half-way between Salalah and Sur.  Master 
plans call for the construction of a drydock facility, oil 
refinery, and fish processing center to compete with Dubai's 
Jebel Ali port complex.  The Duqm development plan also calls 
for the construction of an airport to facilitate passenger 
movements and cargo shipments. 
 
--------------- 
Salalah Rising? 
--------------- 
 
¶17. (U) The southern city of Salalah is banking on the growth 
of its port, free zone, and tourism industries in on-going 
efforts to develop its economy.  Government and private 
sector officials have expressed confidence that proposed 
investments in these sectors will remake Salalah by 2010 and 
position the region for sustained economic growth. 
 
¶18. (U) Salalah's free zone is taking shape, as the Salalah 
Free Zone Company (SFZC) is working with the government to 
finish the first phase of the project, which includes the 
establishment of roads and utility lines, as well as the 
leveling of industrial plots.  A proposed incentive package, 
which has yet to be officially approved by the Omani 
government, would include a 30-year tax holiday, duty-free 
 
treatment of imports and exports, permission for 100% foreign 
ownership, and tax-free repatriation of profits.  Additional 
benefits include a one-stop shop for business registration 
and a low 10 percent Omanization requirement.  U.S.-based 
Octal Petrochemicals, India-based TVS Group, and 
government-supported Salalah Methanol are the anchor tenants. 
 The government recently oversaw the signing of a memorandum 
of understanding between the Salalah Free Zone Corporation 
and the Jebel Ali Free Zone Authority in Dubai to explore 
areas of cooperation. 
 
¶19. (U) Salalah officials are also depending on the growth of 
tourism for further economic development.  The construction 
of a new $60 million passenger airline terminal capable of 
handling 2 million passengers per year will complement four 
new tourism projects by the time everything comes on-line in 
¶2010.  Swedish charter flight service over the winter months 
has proven popular, filling hotels to near capacity. 
 
--------------- 
SME Development 
--------------- 
 
¶20. (SBU) Top government officials agree that small and 
medium-sized enterprise (SME) development is a key component 
in promoting economic diversification in Oman.  SME training 
and development in Oman is largely facilitated through the 
"Intilaaqah" (take-off) program, sponsored by Shell.  The 
program has graduated over 3,000 participants in such courses 
as "Bright Ideas," "Become a Successful Owner/Manager," "Beat 
the Business Blues," and "Business Planning and Ownership." 
A paternalistic government culture and a mercantilist 
business structure that crowds out small enterprise are 
obstacles to SME development.  Officials from Bank Muscat, 
which offers a full-service department for SME financing 
under the "al-Wathbah" banner, also noted that potential 
clients often do not have the financial expertise to develop 
credible financial forecasts and are hesitant to put up their 
own cash in the business.  We are looking to work with Shell 
to refresh Intilaaqah's SME training program.  We are also 
looking to work with the government to create a credit bureau 
and possibly a loan guarantee agency for SME lending. 
 
------------------- 
Textiles in Decline 
------------------- 
 
¶21. (SBU) Oman's textile industry continues to whither away 
in terms of value and employment, as government statistics 
confirm a steep drop in production over the past year.  In 
2005, textile and apparel exports shrank approximately 44% 
from the $137.1 million figure reported in 2004.  Oman, which 
used to have 32 garment factories before the removal of the 
quota system, now only has four.  Employment in the textile 
and apparel industry likewise continued its steady decline. 
Minister Maqbool has noted that the FTA holds out hope in 
reviving an industry decimated by the abolition of the quota 
system, given that almost all of Oman's garments were 
exported to the United States.  Omani textile manufacturers 
are not as optimistic, however, that the upcoming 
implementation of the FTA will stop the decline. 
 
---------- 
IPR Update 
---------- 
 
¶22. (U) The government is taking steps to enhance IPR 
protections in advance of the FTA's implementation.  In 
addition to the regulatory changes previously mentioned, the 
government recently concluded a three-year, five million USD 
per year agreement with Microsoft for the use of the 
company's licensed products.  The contract includes a 
commitment by Microsoft to invest two million USD per year in 
training programs for government employees and the general 
community.  Microsoft's country manager noted that the 
government's approval of the partnership agreement signified 
its commitment to protecting intellectual property.  While 
recognizing that software piracy remains a concern in Oman, 
the country manager remarked that it's now generally more 
difficult to purchase pirated software in Oman. 
 
¶23. (U) Regarding pharmaceuticals, once the U.S.-Oman Free 
Trade Agreement (FTA) comes into effect, the Ministry of 
Health will recognize all U.S. pharmaceutical product patent 
expiration dates.  The Ministry will ask U.S. pharmaceutical 
companies, through their representatives in Oman, to submit a 
 
master list of the products they produce. 
 
------------------------------ 
Current U.S. Business Activity 
------------------------------ 
 
¶24. (U) As the Omani government moves forward on its plans to 
diversify its economy, U.S. corporations are actively 
involved.  As previously mentioned, Dow Chemicals is teaming 
with the Sultanate to build a petrochemicals complex that 
will serve as a key component of Sohar's development. 
Bechtel Corporation is constructing the first Greenfield 
smelter in the region in over 25 years for the Sohar Aluminum 
Company, part of an overall $2.2 billion project.  In 
addition, Occidental Petroleum will continue to invest in its 
Oman operations over the next five years. 
 
¶25. (U) Arlington-based AES Corporation and New Jersey-based 
PSEG have participated in the Sultanate's privatization of 
its power and water generation services.  AES currently 
operates a natural gas-fired plant in Oman, which produces 
427 MW of power and 20 million gallons (MIGD) of desalinated 
water per day.  While the company recently lost a tender for 
the construction of a power and water desalination plant in 
Barka, it is expected to bid on additional power and water 
desalination projects in Sohar and Salalah, respectively. 
PSEG recently divested itself from Salalah Port Holdings, the 
holding company for Dhofar Power Company.  PSEG led a 
consortium in March 2001 in creating Dhofar Power, which 
began producing power through its 240 megawatt generation 
facility in May 2003.  GE is also interested in the 
privatization of Oman's production facilities, but recently 
lost a tender for a project in Sur. 
 
¶26. (SBU) Boeing is in discussions with Gulf Air to renew the 
airline's fleet with up to 47 medium and long-range aircraft. 
 Questions about the future direction of Gulf Air linger, 
which has resulted in the delayed decision.  National carrier 
Oman Air, which flies an all-Boeing jet fleet, waits in the 
wings with its own expansion plans. 
 
 
 
 
 
 
 
 
GRAPPO