VZCZCXYZ0000
RR RUEHWEB

DE RUEHMS #0099/01 0361323
ZNR UUUUU ZZH
R 051323Z FEB 08
FM AMEMBASSY MUSCAT
TO RUEHC/SECSTATE WASHDC 9218
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS MUSCAT 000099 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR NEA/ARP, EEB/IFD/OIA, EEB/CBA 
STATE PASS TO USTR 
COMMERCE FOR ITA THOFFMAN 
TREASURY FOR OTA VALVO 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC MU
SUBJECT: 2008 OMAN INVESTMENT CLIMATE STATEMENT: PART I 
 
REF: 07 STATE 158802 
 
The following message contains the first part of the 2008 
Oman Investment Climate Statement.  The second part will be 
transmitted septel. 
 
----------------- 
Economic Overview 
----------------- 
 
Oman's economy is based primarily on petroleum and natural 
gas, which are expected to account for 78% of the 
government's revenue in calendar year 2008.  Oman's proven 
recoverable oil reserves are estimated at 4.8 billion 
barrels, though the Ministry of Oil and Gas estimates that 
there are potentially 38 billion barrels of recoverable oil. 
Oman's oil production for the first ten months of 2007 
averaged 707,500 barrels per day (bpd), a 4.5% drop from the 
740,700 bpd over the same period in 2006.  The government has 
estimated, for budgetary purposes, production at 790,000 bpd 
over the course of 2008. 
 
The Oil and Gas Ministry projects that the current dip in 
production, which has fallen from close to 1 million bpd in 
2000, will reverse this year.  The government has committed 
to making significant investments in enhanced oil recovery 
techniques on behalf of majority state-owned Petroleum 
Development Oman (PDO) during the course of the current 
five-year economic plan (2006-2011).  In 2008, the government 
will invest $1.74 billion in petroleum production.  PDO, in 
partnership with Royal Dutch Shell, controls 90 percent of 
reserves and the lion's share of total production.  Over the 
course of 2007, PDO invested approximately $2 billion in its 
operations.  Further PDO exploration will result in 
production increases in smaller fields, rather than larger 
ones.  The company focuses on using more nimble foreign 
operators to obtain better production from its mature fields, 
such as the Harweel cluster, which is geographically 
difficult to produce, and the Daleel cluster, which produces 
only about 15,000 bpd. 
 
Complementing PDO's production is U.S.-owned Occidental 
Petroleum, which is investing over $3 billion in its 
Mukhaizna field.  The government expects the investment will 
result in an increase in the field's production from 10,000 
bpd to 150,000 bpd over the next several years.  Occidental 
is Oman's second largest producer, with a current production 
rate of 50,000 bpd.  The combined efforts by PDO and 
Occidental could potentially boost production numbers to 
approximately 900,000 bpd by 2011. 
 
Oman has developed its natural gas industry to the point 
where liquefied natural gas (LNG) will account for an 
estimated 11% of government revenues in 2008.  Oman LNG began 
operations in April 2000 with two 3.3 metric ton per annum 
(MTPA) LNG production trains.  The addition of a train has 
brought Oman's total production capacity to 10.3 MTPA, 
representing approximately 8% of LNG shipped worldwide 
annually.  Off-take of much of the production has been 
contracted to Japanese, Korean, and Spanish buyers on a 
long-term basis.  A September 2004 agreement guaranteed a 
long-term natural gas supply from the government to Qalhat 
LNG, which operates the third train, and outlined the terms 
of an investment partnership between Oman LNG, Qalhat LNG, 
and the Spanish firm Union Fenosa.  As a result of investment 
in this sector, gas production is up 2.6% over the first 10 
months of 2007 compared to the same period in 2006.  Six LNG 
transport vessels currently operate under Omani flag, with 
three other vessels expected to join the fleet by 2008. 
 
With a significant amount of its gas committed to long-term 
LNG export contracts, strong concerns have been raised about 
the availability of sufficient natural gas reserves to power 
Oman's industrialization plans.  Oman's gas reserves were 
revised downward from 30.3 trillion cubic feet (tcf) at the 
end of 2004, to 24.2 tcf in 2005, according to the Ministry 
of Oil and Gas.  Official estimates claim that potential gas 
reserves stand at 33.8 tcf, reflecting efforts to encourage 
international companies to actively explore for gas.  The 
government, which has allocated over $1 billion in the 2008 
budget to invest in gas production capabilities, awarded a 
tender to BP in December 2006 for the exploration of a deep 
gas field recently discovered by PDO that potentially holds 
10 tcf of recoverable gas.  BP will invest $650 million to 
develop the Khazan and Makaram gas fields over the next five 
years.  With the new fields being developed by British Gas 
along the Saudi border, the government is optimistic that 
indigenous reserves will increase by a sufficient amount to 
narrow the gap between projected supply and forecasted 
demand.  Oman, which exported gas to the United Arab 
Emirates, now will import gas in 2008 to support its own 
growing industrialization initiatives.  The government is 
also investigating the use of imported coal as an additional 
source of energy. 
 
With limited energy reserves, Oman is focused on diversifying 
its economy away from oil and gas production.  The long-term 
'Oman Vision 2020' development plan highlighted the need for 
the Omani economy to diversify through a process of 
Omanization, industrialization and privatization.  The 
largest single industrial investment target is the port city 
of Sohar, near the UAE border.  It has witnessed 
approximately $14 billion in government investment alone in 
the financing of several industrial projects, including a 
refinery, polypropylene plant, steel rolling mill, a 
fertilizer plant, and an aluminum smelter. 
 
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, Sohar, Barka, Rusayl, and the Sharqiyah region, 
and a water production plant in Sur.  Other power and water 
generation projects are scheduled for Salalah, Barka, and 
Duqm, and is proceeding with plans to privatize its 
wastewater and solid waste management operations. 
 
Oman is developing its light manufacturing sector through 
industrial estates managed by the Public Establishment for 
Industrial Estates (PEIE).  More than 235 factories operate 
in the industrial estates, with a total investment of $1.3 
billion.  The most developed is Rusayl Industrial Estate, 
located on the outskirts of the capital.  The government is 
looking to further promote small and medium-sized enterprise 
development through the establishment of a SME Directorate 
General in the Ministry of Commerce and Industry and its 
association with the Sanad and Intilaaqah ("take-off") 
programs.  These initiatives provide counseling and training 
assistance for microbusiness formation. 
 
In addition to industrialization efforts, Oman is 
aggressively marketing itself as an upscale, environmentally 
conscious tourist destination.  Through aggressive marketing 
campaigns and improved infrastructure, Oman hopes to triple 
the industry's one percent contribution to GDP and eventually 
create over 114,000 tourism-related jobs.  International 
investors are taking advantage of significant improvements in 
local infrastructure to develop ambitious new tourist 
projects.  Investors hope to lure 3 million visitors annually 
with multi-faceted resort complexes located in Muscat, 
Sawadi, Yiti, Sifah, and Salalah. 
 
The Ministry of Tourism, through OMRAN, the government's 
tourism investment company, is moving forward on plans to 
construct 16 hotels and a convention center within the next 
several years, which will alleviate the chronic hotel room 
shortages in Muscat.  OMRAN primarily serves as the 
government's investor in tourism projects, either as the sole 
investor or in partnership with the private sector.  The 
Wave, which represents the first opportunity for non-GCC 
residents to purchase freehold property, is under 
construction, as are multi-hotel complexes near the towns of 
Yiti and Sifah, just south of the capital.  Blue City 
recently initiated construction, and the government is 
planning to finish a three-hotel convention center complex by 
¶2010. 
 
Complementing Oman's development as a tourist destination is 
the government's commitment to fund the expansion plans of 
Oman Air.  To support the expected increases in air traffic, 
the government will build a second runway and much-needed new 
terminal at Muscat International Airport by 2011, a new 
terminal and taxiway at Salalah Airport by 2010, and new 
airports at Sohar, Ras al-Hadd, and Duqm. 
 
Oman is focusing on its port infrastructure as well.  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, anchors the $14 billion 
industrial development planned for the region.  Oman is 
confident that the Port's advantageous location outside the 
Strait of Hormuz, approximately 160 kilometers by road east 
of Dubai, 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 of Salalah is a key container 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 approximately 2.5 million 
20-foot equivalent units (TEUs) in 2007.  The port is 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 is promoting the free zone adjacent to 
the port with a package of incentives and is in partnership 
discussions with the Jebel Ali Free Zone Authority in Dubai. 
Gas availability, however, may hinder the pace of the zone's 
expansion. 
 
The Omani government is developing a port at Duqm, a lightly 
populated area along the Arabian Sea.  Master plans call for 
the construction of a drydock facility, oil refinery, 
petrochemicals complex 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 cargo shipments and tourism. 
 
In moving forward on these initiatives, the government 
encourages job-related training for Omanis as a means to spur 
employment, and the Ministry of Manpower increasingly uses 
its authority to enforce Omanization efforts, particularly at 
the lower end of the wage scale.  According to the 
government's Human Development Report, Oman's population is 
growing at an estimated 3.3% annual rate, with 45.2 percent 
of the national population younger than 20 years old and 56 
percent younger than 24 years.  (Note: This growth rate is 
considerably higher than the 1.9% annual rate reported in the 
2003 national census. End Note.)  More than 50,000 Omanis 
graduate from secondary school each year; most are unable to 
find immediate work or continue with higher education. 
 
The number of expatriates working in Oman's private sector at 
the end of October 2007 was around 615,000, roughly 
one-quarter of the population.  The Ministry of National 
Economy reported a 20.4% increase in the number of 
expatriates working in the private sector over the same 
period in 2006.  Most heavily affected were the construction, 
automotive, and tourism sectors.  By contrast, the Ministry 
of Manpower reported that only around 123,300 Omanis are 
formally working in the private sector.  Despite government 
efforts to replace expatriate workers with Omanis, Oman still 
depends heavily on South Asian and other foreign labor to 
fill jobs that require physical labor, clerical work, or 
certain technical skills. 
 
Public companies are traded on the Muscat Securities Market 
(MSM).  A dramatic downturn in the MSM, which lost nearly 70 
percent of its value between 1998 and 2001, hurt many small 
and first-time investors deeply and undermined confidence in 
the economy.  Observers attributed the sell-off to 
overzealous speculation, combined with abnormally high equity 
valuations, uninformed investors, and a lack of transparency. 
 The market has since rebounded to close at an all-time high 
of 9658 in January 2008, close to double its January 2007 
value.  During this time, the MSM witnessed several 
high-profile offerings.  AES Barka Power Company, a 
subsidiary of the AES Corporation of Virginia, mobilized 
capital equal to seventeen times the amount of shares offered 
through its IPO.  Similarly, strong investor interest 
propelled the IPOs of Omantel, Dhofar Power Company, Taageer 
Finance Company, Bank Sohar, Galfar Engineering, Oman Oil, 
and Talamul. 
 
The strong performance of the MSM is partly reflective of the 
government's efforts to revive the market and regain 
investors' confidence.  The government announced a $260 
million bailout in November 2000, offering to aid "small 
investors" and creating a national investment fund made up of 
contributions from government pension funds and the State 
General Reserve Fund, as well as offering incentives for 
investment companies to merge in the interest of enhancing 
efficiency and service offerings.  In 2007, the government's 
regulatory agency, the Capital Market Authority (CMA), moved 
to encourage additional foreign investment in the market with 
the complete lifting of the 49% cap on foreign holdings in 
mutual funds.  The CMA took steps to improve transparency in 
the market, including the enforcement of the International 
Accounting Standard (IAS) 39 and the establishment of new 
corporate governance standards.  The CMA also held seminars 
emphasizing the importance of accurate media reporting for 
market confidence and growth. 
 
------------------------------ 
Openness to Foreign Investment 
------------------------------ 
 
Oman actively seeks private foreign investors, especially in 
the industrial, information technology, tourism, and higher 
education fields.  The government hopes to attract over $12 
billion in new foreign investment over the next 25 years. 
Investors transferring technology and management expertise, 
and providing employment and training for Omanis, are 
particularly welcome.  Omani law relating to foreign 
investment is contained in the Foreign Business Investment 
Law of 1974, as amended.  A Commerce Ministry spin-off, the 
Omani Center for Investment Promotion and Export Development 
(OCIPED), opened in 1997 to attract foreign investors and 
smooth the path for business formation and private sector 
project development. OCIPED also provides prospective foreign 
investors with information on government regulations, which 
are not always transparent and sometimes contradictory. 
Nevertheless, despite OCIPED's efforts to assist new business 
development, and the Ministry of Commerce and Industry's 
efforts to establish a 'one-stop shop' for government 
clearances, the approval process for establishing a business 
can be tedious, particularly with respect to land acquisition 
and labor requirements. 
 
With Oman's accession to the World Trade Organization in 
October 2000, automatic approval of majority foreign 
ownership (up to 70 percent) is available.  Registration of 
these joint ventures is treated in the same manner as that 
common to all registrants, though foreigners must meet a 
capital adequacy requirement of 150,000 Omani rials (USD 
389,610).  The foreign firm must supply documentary evidence 
of its registration in its home country, its headquarters 
location, its capital holdings, and its principal activities. 
 If a subsidiary, it must demonstrate its authority to enter 
the joint venture.  Except in the petroleum sector, where 
concession agreements with the Ministry of Oil and Gas 
determine the terms of investment, new entities with greater 
than 70 percent foreign ownership are subject to the approval 
of the Minister of Commerce and Industry. 
 
In early 1999, the government amended its corporate tax 
policy and lifted the requirement that foreign-owned joint 
ventures include a publicly traded joint stock company listed 
on the MSM in order to enjoy national tax treatment.  In 
2003, Oman extended national tax treatment to all registered 
companies regardless of percentage of foreign ownership, i.e. 
a maximum rate of 12% tax on net profit.  Omani branches of 
foreign companies are treated as foreign companies and 
therefore taxed at a maximum of 30%.  Since Omani labor and 
tax laws are complex, investors should consider engaging 
local counsel. 
 
New majority foreign-owned entrants are barred from most 
professional service areas, including engineering, 
architecture, law, or accountancy.  In 1996, existing 
foreign-owned professional service firms were given 
timeframes within which to obtain Omani partners (e.g., five 
years for accounting firms).  An exception exists for 
professional service firms with subspecialties of critical 
importance to Oman.  Wholly U.S.-owned service firms present 
in Oman include KPMG and the law firm Curtiss, Mallett, Colt, 
Mosle, and Prevost.  Under Omani commercial law, wholly 
foreign-owned branches of foreign banks are allowed to enter 
the market. 
 
The permitted level of foreign ownership in privatization 
projects increased to 100 percent in July 2004, based on a 
Royal Decree providing an updated privatization framework. 
By privatization, Oman refers not only to the conversion of a 
state-owned or mixed enterprise into a private sector firm, 
but also to the establishment of any new firm providing a 
commercial service that had previously been provided by the 
state.  For example, the government completed a tender in 
2006 that included the privatization of an existing power 
plant in Rusayl in addition to the construction of a new 
power plant in Barka.  One approach to partial conversion was 
applied to the state-run telephone company, Omantel, in which 
the government floated 30 percent of its stake in the 
company, while retaining the remaining 70 percent.  The 
government is currently seeking foreign strategic partners to 
purchase approximately 20% of Omantel, with tender documents 
due to be released in April 2008. 
 
Industrial establishments must be licensed by the Ministry of 
Commerce and Industry.  In addition, a foreign firm 
interested in establishing a company in Oman must obtain 
relevant approvals from other ministries, such as the 
Ministry of Environment and Climate Affairs.  Foreign workers 
must obtain work permits and residency permits from the 
Ministry of Manpower and the Royal Oman Police's Immigration 
Office. Oman's investment incentives focus on industrial 
development and include the following: 
 
- Five year tax holiday, renewable once for an additional 
five years; 
- Low-interest loans from the Oman Development Bank (now 
available on a very limited basis, and only for small firms); 
- Low-interest loans from the Ministry of Commerce and 
Industry; 
- Subsidized plant facilities and utilities at industrial 
estates; 
- Feasibility studies supplied by the Ministry of Commerce 
and Industry; and 
- Exemption from customs duties on equipment and raw 
materials during the first ten years of a project, with 
packaging materials exempted for five years. 
 
-------------------------------- 
Conversion and Transfer Policies 
-------------------------------- 
 
Oman has no restrictions or reporting requirements on private 
capital movements into or out of the country, and there have 
been no reports of difficulty in obtaining foreign exchange. 
The Omani Rial is pegged to the dollar at a rate of 0.3849 
Omani Rials to the U.S. dollar.  The rial was devalued 
slightly in 1986 due to the collapse in oil prices, although 
the government did not find the devaluation productive.  In 
spite of recent speculation, the government has firmly and 
publicly stated that it is committed to maintaining the 
current peg. 
 
Oman maintains a strong and effective regulatory regime with 
respect to its formal financial institutions, and local banks 
are subject to Central Bank regulations on lending practices 
to individuals and corporations outside the Sultanate.  The 
government reinforced its anti-money laundering regulations 
through the March 2002 ratification of the "Law of Money 
Laundering" and the July 2004 promulgation of implementing 
regulations.  Under these provisions, the commercial banks 
work closely with the Central Bank and the Royal Oman Police 
to identify suspicious transactions.  Individuals have to be 
resident in Oman to open a bank account and transfer funds. 
For foreign bank transfers, Omani banks require complete 
documentation of the source of funds before approving the 
transaction.  Omani banks, which maintain a strict "know your 
customer" policy, will not process transfer requests from 
unknown or suspicious foreign financial institutions.  The 
government is also in the process of further strengthening 
its regulatory regime by incorporating several Financial 
Action Task Force recommendations into law. 
 
------------------------------ 
Expropriation and Compensation 
------------------------------ 
 
Oman's belief in a free market economy and desire for 
increased foreign investment and technology transfer make 
expropriation or nationalization extremely unlikely.  In the 
event that a property must be nationalized, Article 11 of the 
Basic Law of the State stipulates that the Government of Oman 
provide prompt and fair compensation.  Furthermore, under the 
U.S.-Oman Free Trade Agreement, Oman will follow 
international law standards for expropriation and 
compensation cases, including access to international 
arbitration. 
 
------------------ 
Dispute Settlement 
------------------ 
 
Oman is a party to the International Center for the 
Settlement of Investment Disputes (ICSID).  However, the 
ultimate adjudicator of business disputes within Oman is the 
Commercial Court, which was reorganized in mid-1997 from the 
former Authority for Settlement of Commercial Disputes 
(ASCD).  The Commercial Court has jurisdiction over most tax 
and labor cases, and can issue orders of enforcement of 
decisions (the ASCD was limited to issuing orders of 
recognition of decisions).  The Commercial Court can also 
accept cases against governmental bodies, which the ASCD was 
unable to do.  In such cases, however, the Commercial Court 
can issue, but not enforce, rulings against the government. 
Many practical details remain to be clarified, however. 
 
Decisions of the Commercial Court are final if the value of 
the case does not exceed $26,000.  A Court of Appeals exists 
for cases in which the sum disputed is greater than $26,000. 
A Supreme Court was established in mid-2001, and decisions of 
the Supreme Court are final.  However, a case may be 
re-opened after a judgment has been issued if new documents 
are discovered or irregularities (e.g., forgery, perjury) are 
found.  There is no provision for the publication of 
decisions. 
 
Oman maintains other judicial bodies to adjudicate various 
disputes.  The Labor Welfare Board under the Ministry of 
Manpower hears disputes regarding severance pay, wages, 
benefits, etc.  The Real Estate Committee hears 
tenant-landlord disputes, the Police Committee deals with 
traffic matters, and the Magistrate Court handles 
misdemeanors and criminal matters.  All litigation and 
hearings are conducted in Arabic. 
 
The Oman Chamber of Commerce and Industry has an arbitration 
committee to which parties to a dispute may refer their case 
when the amounts in question are small.  Local authorities, 
including 'walis' (district governors appointed by the 
central government), also handle minor disputes.  While Oman 
is a member of the GCC Arbitration Center, located in 
Bahrain, that center has yet to establish a track record. 
 
--------------------------------------- 
Performance Requirements and Incentives 
--------------------------------------- 
 
Since Oman's accession to the WTO in November 2000, it has 
been subject to TRIMs obligations. 
 
Under the Industry Organization and Encouragement Law of 
1978, incentives are available to licensed industrial 
installations on the recommendation of the Industrial 
Development Committee. 'Industrial installations' include not 
only those for the conversion of raw materials and 
semi-finished parts into manufactured products, but also 
mechanized assembly and packaging operations.  Firms involved 
in agriculture and fishing may also be included.  Companies 
must have at least 35 percent Omani employees, distributed 
evenly among different administrative levels, to qualify for 
these incentives. 
 
In addition, companies selling locally produced goods are 
given priority for government purchases, provided that the 
local products meet standard quality specifications and their 
prices do not exceed those of similar imported goods by more 
than 10 percent.  This incentive is available to Omani-owned 
commercial enterprises, as well as foreign industrial 
producers in joint ventures with local concerns.  The 
government offers subsidies to offset the cost of feasibility 
and other studies if the proposed project is considered 
sufficiently important to the national economy.  Only in the 
most general sense of business plan objectives does 
proprietary information have to be provided to qualify for 
incentives. 
 
------------------------------------------- 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
Under Oman's foreign capital investment law, non-Omanis are 
not allowed to conduct commercial, industrial, or 
tourist-related businesses, or participate in any Omani 
company without a license issued by the Ministry of Commerce 
and Industry. 
 
According to Oman's commercial companies law, all actions by 
private entities to establish, acquire, and dispose of 
interests in business enterprises must be announced in the 
commercial register, and may be subject to the approval of 
the Ministry of Commerce and Industry.  Subject to the 
licensing and taxation previously noted, foreign and domestic 
entities can engage in all legal forms of remunerative 
activity.  Government entities do not compete with the 
private sector, and public policy favors the privatization of 
public utilities. 
GRAPPO