VZCZCXYZ0000
RR RUEHWEB

DE RUEHMS #0038/01 0141425
ZNR UUUUU ZZH
R 141425Z JAN 07
FM AMEMBASSY MUSCAT
TO RUEHC/SECSTATE WASHDC 7649
INFO RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS MUSCAT 000038 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ARP 
COMMERCE FOR ITA COBERG 
FOR DEPUTY SECRETARY SAMPSON FROM THE AMBASSADOR 
 
E.O. 12958: N/A 
TAGS: BEXP ECON ETRD EAIR EIND PGOV PREL OTRA MU
SUBJECT: SCENESETTER: VISIT OF DEPUTY SECRETARY OF COMMERCE 
DAVID A. SAMPSON 
 
REF: USDOC 178 
 
¶1. (U) Greetings and welcome to Oman.  The Embassy staff and 
I look forward to your arrival on February 5 to promote the 
U.S.-Oman Free Trade Agreement in the context of our overall 
bilateral relationship.  In addition to your planned 
participation as the keynote speaker at an Oman Chamber of 
Commerce/Muscat American Business Council luncheon, we will 
seek meetings with the Deputy Prime Minister for the Council 
of Ministers, Minister of National Economy, Minister of 
Commerce and Industry, Executive President of the Omani 
Center for Investment Promotion and Export Development 
(OCIPED), and Chairman of the Oman Chamber of Commerce and 
Industry (OCCI). 
 
----------------- 
Economic Overview 
----------------- 
 
¶2. (U) Oman's economy is based primarily on petroleum and 
natural gas, which is expected to account for 79% of the 
government's revenue in calendar year 2007.  Oman's proven 
recoverable oil reserves are estimated at 4.8 billion 
barrels, though Ministry of Oil and Gas officials are 
optimistic that over 35 billion barrels remain to be 
recovered.  The main oil producer 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.-owned 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 2006 led to a projected Omani 
budget surplus of $6.4 billion and GDP growth of 16.8 
percent, despite declining oil production since 2001.  The 
2007 budget, announced on January 7, projects continued 
significant government spending on industrial and tourism 
projects.  The government intends to spend $ 3.74 billion 
more than in the past year on investment-related 
expenditures, with $1.53 billion allocated to enhancing oil 
production capabilities, $1.1 billion on gas production 
capabilities, and $1.3 billion for various ministerial 
initiatives.  The hefty investment budget reflects continued 
government emphasis on reversing declining oil production 
rates, locating additional pockets of gas reserves, and 
promoting diversification of the economy.  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 programs, 
including power generation projects in Salalah, Barka, 
Rusayl, and the Sharqiyah region. 
 
-------------------- 
Free Trade Agreement 
-------------------- 
 
¶5. (SBU) With the FTA ratification process complete, we are 
engaged with relevant Omani government agencies to ensure 
that all pertinent regulations pertaining to labor, 
intellectual property, telecommunications, customs, 
transparency, and environment are FTA-compliant in order for 
the Agreement to take effect.  We are also planning to offer 
technical assistance programs for labor and customs 
administration, in addition to the intellectual property and 
environment programs already underway.  We are hopeful for 
the FTA's implementation by March. 
 
¶6. (U) The Omani government is now promoting the FTA 
 
domestically.  On December 6, the Embassy, in coordination 
with the Ministry of Commerce and Industry, Omani Center for 
Investment Promotion and Export Development (OCIPED), and the 
Oman Chamber of Commerce and Industry (OCCI), sponsored a 
successful "2006 FTA Awareness Conference."  The one-day 
event, which drew approximately 300 attendees from the public 
and private sector, provided Oman's business community with 
the opportunity to learn more about the expected benefits of 
the FTA in promoting economic growth, creating employment, 
benefiting consumers, and fostering transparency. 
 
¶7. (U) During the conference, Commerce and Industry Minister 
Maqbool bin Ali Sultan, OCCI Chairman Salem al-Ghattami, the 
Ambassador, and Assistant USTR for Europe and the Middle East 
Shaun Donnelly offered perspectives on how the FTA could spur 
greater trade and investment through new opportunities made 
possible by revised regulations under the FTA. 
Representatives from GE, Pfizer, Parsons, Lucent, Microsoft, 
and Booz Allen Hamilton, among others, also discussed how the 
FTA could encourage increased sales and investment 
opportunities by reducing tariffs, promoting competition, 
securing intellectual property, and ensuring a predictable, 
legal framework for trade and investment. 
 
¶8. (U) Minister Maqbool, in addressing the local audiences, 
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. 
 
¶9. (SBU) The Embassy is continuing its collaboration with the 
government on FTA promotional activities.  Both Minister 
Maqbool and National Economy Minister Ahmed bin Abdul Nabi 
Macki will participate in a multi-state promotional tour of 
the United States during some time in 2007, with proposed 
stops in New York, Chicago, Houston, Los Angeles, and 
Washington.  In formulating such a tour, the Embassy has 
stressed the importance of the Omani delegation bringing a 
clearly defined message for the American business community 
and the broader American public.  To this end, we are in 
contact with the Business Council for International 
Understanding (BCIU) and other U.S.-based organizations to 
assist Oman in developing a framework for the tour, as well 
as a public relations strategy. 
 
¶10. (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 
------------------- 
 
¶11. (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 
regional and international consortia seeking to capitalize on 
the region's annual 6.5 percent growth in tourism.  Investors 
hope to lure 3 million visitors annually with resorts like 
the $160 million Barr al-Jissah Resort and Spa (already fully 
operational), the $800 million Wave project, and the massive 
$15 billion Blue City development just north of Muscat. 
 
¶12. (U) In 2004, Oman welcomed 1.5 million tourists, 
generating revenues of $284 million.  Through aggressive 
marketing campaigns and improved infrastructure, Oman hopes 
to triple the industry's one percent contribution to GDP. 
The Omani government estimates that the tourism sector could 
 
eventually create over 114,000 jobs.  To achieve these 
ambitious figures, the Ministry of Tourism has spent $30 
million to market the country internationally through 2005. 
 
¶13. (U) The Ministry of Tourism and government-owned Oman 
Tourism Development Company, now called OMRAN, are moving 
forward on plans to construct 16 hotels and a convention 
center within the next five years, which will alleviate the 
chronic hotel room shortages in Muscat that will worsen in 
2007 with the closure of two five-star hotels for remodeling. 
 OMRAN 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 near the towns of Yiti and Sifah are also in final 
planning stages, and the government is planning to finish a 
three-hotel convention center complex by 2010.  U.S.-based 
investor Frank Drohan of Contact Sports.net is interested in 
leasing land from the Ministry of Tourism to develop a theme 
park complex along the beach north of Muscat, entitled 
"Omagine." 
 
¶14. (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 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 
-------------- 
 
¶15. (U) Two of Oman's principal ports, Sohar and Salalah, are 
aggressively moving forward on expansion of their respective 
operations.  The Port of Sohar, a 50-50 joint venture between 
the Sultanate and the Port 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. 
 
¶16. (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 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. 
The government, which is considering a package of incentives 
to promote a proposed free zone adjacent to the port, 
recently oversaw the signing of a memorandum of understanding 
between the Salalah Free Zone Corporation and the Jebel Ali 
Free Zone Authority in Dubai. 
 
¶17. (U) The Omani government is also finalizing plans to 
develop a port at Duqm, a lightly populated area along the 
Arabian Sea.  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? 
--------------- 
 
¶18. (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 reshape Salalah by 2010 and 
position the region for sustained economic growth. 
 
¶19. (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 10% Omanization requirement.  U.S.-based Octal 
Petrochemicals, India-based TVS Group, and 
government-supported Salalah Methanol are the anchor tenants. 
 
¶20. (U) Salalah officials are depending on the growth of 
tourism for further economic growth.  The construction of a 
new $60 million airline passenger terminal capable of 
handling 2 million passengers per year will complement four 
new tourism projects by the time developments come on-line in 
¶2010.  Swedish charter flight service over the winter months 
has proven popular, filling hotels to near occupancy. 
 
--------------- 
SME Development 
--------------- 
 
¶21. (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 small, 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, have noted that potential 
clients 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 
hope to work with the Middle East Partnership Initiative 
(MEPI) and the Financial Services Volunteer Corps (FSVC) to 
promote the development of a small business association and a 
seminar on financing alternatives for SMEs. 
 
------------------- 
Textiles in Decline 
------------------- 
 
¶22. (U) 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.  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. 
 Oman, which used to have 32 garment factories before the 
removal of the quota system, now has only four.  As the FTA 
nears implementation, there is interest from the textile 
sector in taking advantage of the FTA's provisions. 
 
---------- 
IPR Update 
---------- 
 
¶23. (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. 
 
¶24. (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 
------------------------------ 
 
¶25. (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 an anchor for the development of Sohar. 
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. 
 
¶26. (U) Arlington-based AES Corporation and New Jersey-based 
PSEG have participated in the Sultanate's privatization of 
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 water production facilities, but 
recently lost a tender for a project in Sur. 
 
¶27. (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 decision-making delays.  National 
carrier Oman Air, which flies an all-Boeing jet fleet, waits 
in the wings with its own expansion plans.  Oman Air will 
complement its fleet in 2007 and 2008 with the addition of 
Boeing 737-800 aircraft. 
GRAPPO