Dark days loom ahead for
Yemen oil and gas
Long waits at gas stations in Yemen’s capital. Saudi fuel donations have been the only source of fuel for the Yemeni market since 2011.
By Haykal Bafana
May 28, 2012
Hisham Sharaf Abdullah has what must be the toughest job in the Yemeni cabinet.
As the new Minister of Oil and Minerals, he is in charge of resolving the worst crisis ever faced by the oil and gas industry of Yemen.
With oil revenue forming 90 percent of total exports and 75 percent of government revenue, it is no exaggeration to say that Yemen faces a national fiscal disaster if the ailing oil and gas sector does not recover soon.
A fundamental problem is the widening insecurity in Yemen since 2011. In the main oil-producing region of Hadramaut, the prolific Seiyun-Masila basin contains 84percent of known oil reserves.
Despite extensive military and security presence, more than a dozen policemen have been killed in attacks by gunmen in the last six months. In December 2011, a British employee of Calvalley Oil was shot dead by gunmen near the city of Seiyun. In March 2012, a roadside bomb in Al-Qatn killed three Yemeni children.
The following month, two France Total employees were killed when their car was sprayed with gunfire by gunmen in Seiyun city. In all these incidents, the authorities blamed the militant Islamic group Al-Qaeda.
This month, Hadramaut witnessed the first US drone attack on Al-Qaeda militants. The strike took place within 20 km of major oil fields.
In the neighboring province of Shabwa, the $4.5 billion Yemen LNG natural gas plant has been attacked by Al-Qaeda militants three times in the last seven months.
The latest attack on April 26th was a mere two days after the damage from the previous attack was repaired, and gas exports have since stopped. Ominously, Al-Qaeda announced the establishment of an Islamic Emirate in Azzan in 2011, just 90 km away from the Yemen LNG gas export terminal at Balhaf.
Recently, local press reported an Al-Qaeda checkpoint on a road only two kilometers from the Balhaf terminal. As the US and Yemeni military campaign against Al-Qaeda increases its tempo in Abyan and Shabwa governorates, the future of Yemen’s largest-ever industrial project appears grim.
Oil export infrastructure has also come under continual attack since 2011. The Marib-Red Sea oil pipeline network was bombed over a dozen times in 2011 by restive tribesmen, and has remained closed since October 2011, precipitating a complete cessation of production in all Marib oil fields.
Further, since Marib crude oil is normally refined at the Aden Refinery to cater to the local market, fuel shortages escalated sharply throughout Yemen in 2011. So far in 2012, multiple Saudi donations of fuel have been the only fuel supply for the Yemeni market.
In Hadramaut, which normally produces 70 percent of Yemen’s oil exports, disgruntled tribesmen seized and set ablaze seven tankers carrying crude oil. Several producing oil fields were also subjected to lengthy sieges by armed tribesmen demanding employment and local development projects.
Indeed, due to the closure of the Marib pipeline, Hadramaut oil exports are the sole remaining oil revenue source for the Yemeni government. Nevertheless, the crude oil export terminal near Al-Mukalla is now threatened with closure, due to increasing local discontent with the government.
It is clear that Hadramaut oil production and export facilities are a key target for Al-Qaeda militants active in the region.
These multiple loci of insecurity have had harmful effects on the oil and gas industry of Yemen. Since the middle of 2011, all oil exploration activities have essentially ceased. A substantial number of companies have declared “force majeure” on their exploration and production operations in Yemen, with no indication as to when their operations will restart.
Most foreign oil companies operating in Yemen have moved their management operations offshore, mostly to Dubai. Industry sources say that an increasing number of companies are now looking to offload their Yemen oil assets entirely, or to farm them out in order to reduce their potential exposure in Yemen.
Aside from the insecurity, the legal and compliance issues facing any new entrant to Yemen are complex. Amidst the ongoing political chaos, it is unlikely that the Minister of Oil will be able to obtain the mandatory approval required from Parliament for any new production sharing agreements.
The Gulf of Aden offshore blocks remain unattractive and highly risky due to the Somali piracy threat. And while 88 percent of Yemen’s oil and gas blocks remain unexplored, the situation faced by current operators in Yemen stand out as grave warnings to any potential entrant. New Yemen oil and gas concessions are unlikely in the near future.
Further upheavals are expected for current oil and gas operators in Yemen. The massive corruption and patronage which permeated Yemen’s oil and gas industry is under the new government’s spotlight.
The patronage network fostered under ex-president Saleh had monopolized every stage of the oil and gas sector in Yemen, including award of oil concessions, crude oil export sales and oil and gas services contracts.
Lack of transparency and corruption
Despite its membership in the Extractive Industries Transparency Initiative, the oil and gas industry of Yemen still displays a systemic lack of transparency and poor governance policies.
Public allegations of corruption have already been leveled at two of the largest foreign oil companies operating in Yemen. An American oil services company is still under a US Department of Justice probe for suspected bribery in Yemen.
Industry players in Yemen are justifiably concerned about the prospects of a robust anti-corruption initiative by the new Yemen government.
Hazy future political landscape
The political landscape of Yemen in the immediate future is entirely hazy. The “transition” government of November 2011 remains split along partisan lines. A referendum for a new draft Constitution as well as presidential and parliamentary elections are all due to be held by early 2014.
In comparison, a new Production Sharing Agreement in Yemen will take up to four years to come into effect, from the initial negotiations to final approval by Parliament, before exploration can even proceed.
Further, there are growing calls for a federation system, and even total separation, from the oil and gas rich southern regions, which may fundamentally change the structure of the oil and gas industry in Yemen.
The intensive military campaign that President Hadi is waging with American support against Al-Qaeda militants in Abyan and Shabwa governorates looks likely to be a protracted one.
So far in 2012, the cash-strapped Yemeni government has depended on Saudi largesse to supply fuel products for local consumption. The stated aim of Yemen’s Minister of Oil to increase oil production significantly in 2012 may end up as a quixotic footnote - dark days loom ahead for the oil and gas industry in Yemen.
Source: Yemen Times
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