SCENESETTER FOR U.S. TRADE REPRESENTATIVE SCHWAB'S

C O N F I D E N T I A L SECTION 01 OF 03 MUSCAT 000738

SIPDIS

FOR ABU DHABI/DUBAI: PLEASE PASS TO USTR

E.O. 12958: DECL: 10/22/2018
TAGS: PREL ECON EFIN ETRD MU
SUBJECT: SCENESETTER FOR U.S. TRADE REPRESENTATIVE SCHWAB'S
VISIT TO OMAN (OCTOBER 24-26)

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Classified By: Ambassador Gary A. Grappo for Reasons 1.4 (b, d)

Introduction
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1. (C) Embassy Muscat and I warmly welcome you to Oman. As
one of our oldest friends in the region (the Omanis refer to
their relationship with us as "strategic"),the Sultanate
remains a trusted U.S. partner. This year marks the 175th
anniversary of the U.S.-Oman "Treaty of Amity and Commerce,"
second oldest in the Middle East and North Africa. Thanks in
part to the signing of the U.S.-Oman Free Trade Agreement in
2006, our economic relationship has grown deeper and
opportunities for bilateral investment both here and in the
U.S. have increased. All of your Omani interlocutors, who
speak excellent English, are looking forward to your visit.
Deputy Secretary of State John D. Negroponte recently visited
Oman and told Sultan Qaboos that implementation of the FTA is
a high priority for the Administration and explained that
your visit would seek to address all remaining issues so that
the agreement can enter into force before the end of the
year. As you prepare for your visit here, I continue to
strongly recommend that you provide clear redlines on the
outstanding issues and in those areas not resolved by your
departure, leave a comprehensive list of specific action
items the Omanis must complete. I also suggest you consider
proposing to Minister of Commerce and Industry Maqbool bin
Ali bin Sultan a specific date for completion of all FTA
issues and implementation. End Introduction.

Closing the Deal
--------------


2. (C) Thanks to some significant legal reforms, prompted in
part by the FTA, the "doing business climate" has improved
for all foreign companies in Oman. Although U.S. companies
still sometimes find it hard to compete with British and
other European counterparts in Oman, the government and
business community has become more interested in seeking
partnerships and business opportunities with U.S. firms. The
FTA, once implemented, should further this trend and provide
a real incentive to Omani companies to "Buy America" and
further their ties to the U.S. Accordingly, I and others in
the Embassy are constantly asked, "When will the FTA be
implemented?" This is one issue that neither Oman nor the
Embassy can dodge when speaking with Oman's business
community as many large and small businesses have been
waiting for the agreement's entry into force.


3. (C) As we mentioned in previous messages, the Omanis may
be seeking compromise on some outstanding FTA issues,
including telecommunications, transparency requirements, and
intellectual property and copyright regulation. I strongly
recommend that you come prepared to map out specific
limitations/redlines to present to Oman's negotiators on
these issues. In addition, before your departure, I
recommend that you provide a comprehensive list of action
items that the Omanis must complete before implementation,
along with a concrete timetable for action in order to help
ensure that we wrap everything up before the end of the year.


A Growing Economy
--------------


4. (C) Oman's economy is based primarily on revenues derived
from petroleum and natural gas, which accounted for 76.4% of
the government's income in 2007. The main oil producer is
Petroleum Development Oman (PDO),a majority government-owned
company that partners with Royal Dutch Shell. It controls
approximately 90 percent of the reserves and the lion's share
of total production. With average daily production falling
from 956,000 barrels per day (bpd) in 2001 to 710,000 bpd in
2007, the government has opened the sector to greater foreign
participation in a bid to increase output. U.S.-based
Occidental Petroleum, the second largest producer, is
investing $3 billion in enhanced oil recovery efforts for its
recently acquired concessions.


5. (SBU) Despite declining oil production, high oil prices
over the past several years have led to solid Omani budget
surpluses and GDP growth. Oman's economy grew 12.9% in 2007
according to the Central Bank and produced an estimated $4.5
billion surplus, which the government is using, in part, to
improve oil production capabilities and locate additional gas
reserves. In addition, the government is utilizing its
revenues to strengthen the economy in the long-run by shoring

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up its pension fund, reducing its debt, and augmenting a
number of reserve funds. Oil revenues also have allowed the
government to proceed with plans to diversify Oman's economy
through industrialization, port infrastructure expansion, and
tourism development.

Infrastructure Development
--------------


6. (SBU) The largest single industrial investment target is
the port city of Sohar, which has witnessed over $12 billion
in government investment alone. The Port of Sohar, a 50-50
joint venture between the Sultanate and the Port of
Rotterdam, anchors the industrial development planned for the
region. The Port of Salalah, located in the far south of
Oman, is a key container transshipment hub for Maersk and its
parent company, A.P. Moller (APM). The government is
promoting the free zone adjacent to the port in Salalah with
a package of incentives and is in partnership discussions
with the Jebel Ali Free Zone Authority in Dubai.


7. (SBU) The Omani government is also developing a port at
Duqm, a lightly populated area along the Arabian Sea. Master
plans call for the construction of a dry-dock facility, oil
refinery, petrochemicals complex, and a fish processing
center. The Duqm development plan also calls for the
construction of an airport to facilitate cargo shipments and
tourism. In April 2008, the government awarded a $440
million contract to Korean-based Daewoo and local contractor
Galfar for the construction of Duqm's dry-dock. In
consideration of plans to build 16 new luxury hotels in Oman
over the next five years, the government is moving ahead on
an ambitious plan to develop its airport infrastructure to
accommodate increased tourist arrivals.

A Pressing Need for Gas
--------------


8. (C) With a major share of its domestic gas production
committed to long-term liquefied natural gas (LNG) export
contracts, Oman urgently needs large quantities of gas to
fuel its industrial development and port expansion plans.
The government accordingly considers the acquisition of new
gas supplies to be a vital national security issue and, after
extensive review of alternatives, sees Iran as the only
realistic supplier. Negotiations between Oman and Iran on
the development of Iran's off-shore Kish gas field are
ongoing, but the Omanis are growing increasingly frustrated
with unreasonable Iranian demands on gas pricing and other
issues. Oman also continues to look for alternative sources
of energy. Recent reports have indicated that Oman plans to
build at least two coal-fired power plants and is currently
brokering a few experimental small-scale wind and solar power
projects.

SMEs and Omanization
--------------


9. (U) Another avenue the government is pursuing to promote
economic growth is the creation and support of small and
medium enterprises (SMEs). The Ministry of Commerce and
Industry formed a government directorate in 2007 devoted to
the servicing of SMEs; the Oman Chamber of Commerce and
Industry similarly created a committee to support SME
activities. Moreover, several government entities, financial
institutions, and large businesses offer financial assistance
and training to aspiring entrepreneurs. Such activities have
directly impacted the private sector, resulting in SMEs
occupying a larger, though still limited, share of the
market. However, due to differing definitions and cumbersome
registration processes, it is difficult to obtain exact data
on how much or how fast the SMEs are expanding.


10. (SBU) Another key aspect of the government's economic
development plans is replacing expatriate workers with Omanis
-- a process known as "Omanization." Under Omanization, the
government requires businesses to meet employment quotas,
which differ by sector and type of firm, for Omani nationals
in hopes of securing future jobs for its growing youth
population and preventing capital from leaving the country in
the form of remittances and external investments. As a
result, many firms that once relied almost exclusively on
expatriate labor must now rely on Omani labor and expertise.
This has posed challenges for many international and some
local businesses as the Omani educational system is not tuned
into the needs of the labor market. Many of Oman's
educational and training centers accordingly have had to

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revamp their curriculum to better match the needs of
businesses. Omanis constitute no more than 20% of employees
in the private sector due to a traditional preference for the
security and relaxed pace of public sector jobs; however, the
Sultanate recorded a 15.3% increase in employment of Omanis
in the private sector in 2007. At the same time, economic
growth, increased foreign investment, and more international
partnerships have contributed to a 4.1% increase in the
number of expatriates in Oman over the last three years,
according to government figures. By some estimates there are
approximately 900,000 expatriate residents in Oman,
accounting for roughly 30% of the total population.

Record High Inflation
--------------


11. (C) High inflation, recently peaking at an annual rate of
nearly 14%, and the rising cost of living are significant
concerns in Oman, evoking much public grumbling. Prices for
many consumer goods, including basic staples, have risen
sharply. Booming real estate values have led to skyrocketing
rents and made home ownership much less affordable.
Significant government spending on various construction
projects, and the currency peg to the declining dollar,
contributed to rapid increases in the prices of building
materials and consumables. In response, the Sultan announced
a number of stabilization measures, including an increase in
public sector salaries in February with the largest wage
hikes (43%) for those at the bottom of the pay scale. The
recent fall in global commodity prices should help alleviate
inflationary pressures in Oman.

Weathering the Global Financial Crisis
--------------


12. (C) Despite public assurances from officials that Oman's
economy has not been affected by the global financial crisis,
the Sultanate's stock market dropped by almost 40% over the
last five months while its banking system, formerly flush
with cash, now suffers from a lack of liquidity as its access
to financing from external sources becomes more restricted.
Local business contacts have expressed concern over weakness
in the financial sector, as well as the potential negative
impact on the economy if a major business failure were to
occur in Dubai. The Omani press generally applauded the
financial rescue package adopted by the U.S. Congress,
although some here allege the crisis shows that Oman should
reject Western capitalism in favor of Islamic principles.
(Note: Islamic banking is not permitted in Oman. End Note.)
Even with much tighter credit, a sharp market downturn and
lower oil prices, Oman's economic growth should continue
thanks to government spending on big infrastructure and
development projects.
GRAPPO