2008 OMAN INVESTMENT CLIMATE STATEMENT: PART I

UNCLAS MUSCAT 000099

SIPDIS

SIPDIS

STATE FOR NEA/ARP, EEB/IFD/OIA, EEB/CBA
STATE PASS TO USTR
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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.

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Economic Overview
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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.

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Openness to Foreign Investment
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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.

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Conversion and Transfer Policies
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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.

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Expropriation and Compensation
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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.

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Dispute Settlement
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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.

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Performance Requirements and Incentives
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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.

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Right to Private Ownership and Establishment
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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