SOHAR: BOOMTOWN OMAN

C O N F I D E N T I A L SECTION 01 OF 04 MUSCAT 000815

SIPDIS

STATE FOR EB/IFD, NEA/RA AND NEA/ARPI
STATE PLEASE PASS USTR/JBUNTIN
USDOC FOR 4520/ITA/MAC/AMESA/OME/MTALAAT

E.O. 12958: DECL: 05/18/2015
TAGS: EINV EWWT EIND ETRD EMIN MU
SUBJECT: SOHAR: BOOMTOWN OMAN

REF: A. MUSCAT 506

B. MUSCAT 480

C. MUSCAT 298

Classified By: Ambassador Richard L. Baltimore III.
Reasons: 1.4 (b) and (d).


1. (C) Summary: The city of Sohar on Oman's Batinah Coast
near the UAE border is poised for dramatic growth as billions
of investment dollars pour into a massive industrial port
project. Representing Oman's most visible diversification
effort, Sohar will be transformed over the next five years as
huge gas-based factories, supporting businesses, and
industrial infrastructure are developed. Looking into the
future, Sohar is projected to become a major import/export
hub and provide competition for regional ports, especially
Jebel Ali outside Dubai. Major impacts on the local
community are expected, and signs of a localized boom are
already evident. End Summary.

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The Setting
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2. (SBU) Occupying an ideal location about 260 km northwest
of Muscat near the UAE border, the city of Sohar is
undergoing a dramatic transformation from a sleepy fishing
town to an industrial powerhouse. According to government
and private sector sources, an estimated $10-12 billion of
investment has been committed to the gas-based
industrialization and development of the port over the next
five years. Major investment has come from all over the
world, including billions of American dollars. According to
Jan Meijer, the Dutch CEO of the Sohar Industrial Port
Company (SIPC) who delivered a speech to the Muscat American
Business Council (MABC) in late April, the master plan for
the port emphasizes three strategic clusters: Petrochemicals
and Liquids, Logistics and Maritime Transport, and Metals.


3. (SBU) Historically, Sohar was an ancient trading center
several times its current size, hosted a prosperous Jewish
community, was home to the founder of the ruling Al Bu Said
dynasty, and was also the last stronghold of Persian
occupation in the 18th century. In modern times, the
government of Sultan Qaboos has shown keenness to develop the
city given its midway location astride the highway linking
Muscat to the UAE population centers of Dubai and Abu Dhabi.
Sohar's importance to the government is underscored by the
fact that the Sohar region boasts its own development office
linked directly to the Diwan of Royal Court, a unique
structure found nowhere else in Oman. Moreover, Sohar's
strategic maritime location outside the Strait of Hormuz is
ideal for capturing shipping traffic, particularly given the
shorter transit time and lower insurance charges shippers pay
for avoiding the Gulf entirely. Port officials estimate that
23 percent of all traffic processed at Jebel Ali port in the
UAE is bound for Oman, which represents fertile grounds for
capturing container and export/import traffic in northern
Oman.

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The Players
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4. (C) The list of projects taking shape in the SIPC
concession area is impressive and lengthy. Many are already
well underway, while others have merely broken ground or
established leaseholder agreements with SIPC. According to
SIPC's Commercial Manager, plots are being sold faster than
expected, and local rumors indicate that SIPC will accelerate
phase two of the port's development to begin in 2005 instead
of 2010 as originally planned. Moreover, Jan Meijer
indicated to the American business community that a free zone
is likely to be developed (something confirmed in our
discussions at the port itself) beginning in late 2005. The
free zone will be launched at a major conference with Omani
and European governmental participation that will seek to
develop interest and ideas for downstream industries.


5. (SBU) Following is a brief summary of the projects
underway in Sohar along with some of the key investors and
rough values.

-- Sohar Industrial Port Company (SIPC): Port of Rotterdam,
Omani government; $250 million. (Note: U.S. firm Parsons is
a technical consultant for SIPC).

-- Sohar Refinery Company: Oman Oil Company, Omani
government; $1.2 billion.

-- Oman Methanol Company: Omar Zawawi Establishment,
Ferrostaal (Germany); $600 million.

-- Oman Petrochemical Industries Company: Dow Chemical, Oman
Oil Company, Omani government; $3 billion.

-- Sohar Aluminum Company: Oman Oil Company, Abu Dhabi Water
and Electricity Authority (ADWEA),Alcan (Canada); $1.3
billion. (Note: U.S. firm Bechtel was selected as the
construction contractor; see ref C. End Note.)

-- PVAXX pallet factory: PVAXX Industries (Bermuda); $230
million.

-- Sohar International Urea & Chemical Industries (SIUCI):
Suhail Bahwan Group (Oman); $650 million.

-- Shadeed Iron and Steel: Al-Ghaith Holdings (UAE); $750
million. (Note: Midrex Technologies of the U.S. will be one
of the technology suppliers to the plant. End Note.)

-- Sohar Independent Water and Power Project: Tractebel
Electricity & Gas International (Belgium),local Omani
investors; $500 million.

-- Oman Polypropylene: Oman Oil Company, LG International
(Korea),Gulf Investment Corporation (Bahrain); $312 million.

-- Ethylene Dichloride plant: Oman Oil Company, National
Petrochemical Company (Iran),LG International (Korea); $300
million.

-- Aromatics (petrochemicals) complex: Oman Oil Company,
Axens (France),Oman Refinery Company; $956 million.

-- Oiltanking Odfjell Terminals Oman: Oman Oil Company,
Oiltanking (Germany),Odfjell (Norway); $200 million.

-- Industrial and Maritime College of Oman (IMCO): Rotterdam
Management and Maritime Affairs College (Holland),Omani
investors; $30 million.

-- Possible float glass factory: Guardian Industries (U.S.);
$120 million.

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Behind the Scenes
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6. (C) During a recent visit to the port, Econoff and
Econ/Commercial Assistant witnessed bustling construction
activity all over the 21 square kilometers of area under SIPC
control. Beyond the immediate vicinity of the port, however,
the city of Sohar appears little changed, apart from the
opening of a new "hypermarket" along the main highway. One
of the pressing concerns for the development of Sohar is the
quality and capacity of the local infrastructure. With the
influx of thousands of employees during the construction and
operation of SIPC's industrial base, numerous facilities will
need to be built from scratch: schools, housing, security and
emergency services, utilities, etc. Moreover, the peak of
construction will involve over 30,000 construction workers in
Sohar. Dow Chemical executives in Muscat have quietly
complained to the Ambassador that the government expects Dow
to provide funding for basic services, from security to
ambulances to firefighting. Such an approach by the
government will strain relations with large investors and
open the door to accusations of favoritism if Omani firms are
not similarly asked to ante up for service provision.


7. (C) Telecommunications and IT infrastructure will also
need to be developed in Sohar; in a meeting with USG
officials, a senior Omantel official May 16 indicated that
clients in the Sohar industrial port are already demanding
communications technologies equal to or surpassing the
excellent facilities in Jebel Ali in Dubai. Omantel is
working on the massive network construction in Sohar, but the
company is fully aware that the pressure to deliver a
world-class solution is daunting.

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The Competition
--------------


8. (C) SIPC's drive to include a container terminal and a
free trade zone (FTZ) as part of its business plan is
intriguing, as it reverses the order of development from the
Port of Salalah model. The southern Omani Port of Salalah
has achieved world-class rating as a container transshipment
port, and now the government is embarking upon a drive to
establish a FTZ to attract industry (ref A). In contrast,
the Port of Sohar aims to develop an industrial export base
and then establish a container handling capability.
According to a prominent member of the MABC, the Salalah FTZ
has already attracted $4.5 billion in investment, with a goal
of hitting $10 billion by the end of the year.

9. (C) Sohar likely will provide more long-term competition
to Port Sultan Qaboos (PSQ) in Muscat (and the UAE ports in
Fujeirah, Dubai, and Jebel Ali) than to the Port of Salalah.
While PSQ has announced its own multi-billion expansion plan,
it is physically constrained by mountains and rugged
coastline; Sohar suffers no such constraints, and the sheer
size of Sohar's port area dwarfs the available space at PSQ.
The internecine turf battles between PSQ and SIPC likely
caused the government to ask the Japanese aid agency (JICA)
to redo its long-term port development study; according to
SIPC's Commercial Manager, the original study is faulty and
lacks vision. The SIPC official went on to state that Muscat
should focus more on tourism and cruise ship traffic, with
the implication being that Sohar would displace PSQ as the
primary import/export hub in northern Oman. In the meantime,
limited bulk shipments and equipment for the industries
adjacent to the port are already arriving in Sohar.

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The Critics
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10. (C) During a lunch with prominent members of the local
branch of the Oman Chamber of Commerce & Industry in Sohar,
Econoff noted that few existing businesspeople in Sohar
possessed a vision for how to maximize the benefits of this
massive investment influx. The chamber itself did not even
have a plan for recruiting new members, and the only major
real estate investment appeared to be coming from UAE
nationals buying up plots. Clearly these developments have
been imposed from outside the local community, and the huge
sums of money involved fall well beyond the limited scope of
existing industrialists in Oman. More problematic for the
government is the resentment brewing in other parts of Oman.
We have heard subtle complaints from Omanis in the interior
and southern regions of the Sultanate who are envious of the
developments in the north. Their basic question: why Sohar
at the expense of the rest of the country?


11. (C) In the follow-up to the recent U.S.-Oman free trade
agreement talks in Muscat, Econoff heard Environment Ministry
officials express deep concern about the environmental impact
of rampant industrialization in Sohar. Despite these
worries, their voices are being drowned in the chorus of
praise and encouragement for the government's bold vision.
SIPC's senior management is going out of its way to commend
the government for its strict environmental laws (and SIPC's
compliance with the same),but the very ministry charged with
developing those laws harbors many doubts. Relatedly, the
rapid and staggered development of heavy industries in Sohar
has created a situation where at least three separate power
plants are being envisioned (one for residential and
commercial use, one for the aluminum smelter, and one for the
Dow petrochemical facility). Economies of scale, security,
and environmental considerations seem to argue for a single
power plant to accommodate all needs in Sohar, yet such
coordination has not been possible to date.


12. (C) One final area of concern is the long-term supply of
gas to the various industries that are cropping up in Sohar.
The government is moving swiftly to address these concerns
through international agreements. Oman is now linked to the
UAE through a cross-border gas pipeline, which will assure
Oman a supply of gas from Qatar once the ballyhooed Dolphin
project comes on-line. Oman is also looking across the Gulf
to Iran (ref B) for gas imports, most of which would be
funneled through Sohar via submerged pipelines that have yet
to move from theory to actual construction.

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Comment
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13. (C) Sohar represents the most tangible evidence that
diversification could succeed in Oman. While many of the
projects currently underway have been discussed for the
better part of a decade, the current industrialization drive
in Sohar stems from a pragmatic realization that oil prices
are high and the time is right. Managed well and rationally,
Sohar could put Oman on the map as a major shipping and
industrial hub in the Middle East. From our perspective, the
massive amounts of additional American investment in Sohar
will likely translate into an increase in the local American
community, perhaps by several hundred families, potentially
benefiting both the fledgling MABC and The American
International School. Far less certain are the long-term
environmental and social impacts of this massive and rapid
industrialization in the heart of Oman's Batinah coast.


14. (U) More information on SIPC can be found at
www.portofsohar.com.
BALTIMORE