US embassy cable - 05MUSCAT815

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, Domestic Politics 
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 
----------- 
 
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 
----------- 
 
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 
----------------- 
 
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 
----------- 
 
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 
------- 
 
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