VZCZCXRO0959
PP RUEHDE RUEHDIR
DE RUEHYN #1210/01 1831205
ZNY CCCCC ZZH
P 021205Z JUL 07
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC PRIORITY 7427
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 001210 
 
SIPDIS 
 
 
SIPDIS 
 
E.O. 12958: DECL: 07/02/2017 
TAGS: ECON EINV ENRG EPET PGOV YM
SUBJECT: OIL: ROYG MORE TRANSPARENT, BUT CHALLENGES REMAIN 
 
REF: A. A. 2006 SANAA 1127 
     ¶B. B. 2006 SANAA 916 
     ¶C. C. 2006 SANAA 3342 
 
Classified By: Ambassador Thomas C. Krajeski for reasons 1.4 (b) and (d 
) 
 
¶1.  (C)  SUMMARY:  Yemen's oil production, which constitutes 
75 percent of the national budget, continues to decline in 
2007, with high prices masking the effects of lower 
production.  In order to increase production, the ROYG has 
decided to double the number of exploration blocks, will 
launch a fourth international bid for offshore oil blocks in 
the summer, and continues construction of the Yemen Liquefied 
Natural Gas Project (YLNG) as an alternate source of income. 
Tensions between international oil companies and the ROYG 
persist despite a general improvement in relations, as 
demonstrated by the Hunt Oil court case over Ma'rib Block 18 
and challenges to the "Yemenization" of the workforce.  END 
SUMMARY 
 
-------------------------------- 
NUMBER OF OIL BLOCKS IS UP . . . 
-------------------------------- 
 
¶2.  (C)  Yemen is a non-OPEC oil producing country, with 
proven reserves of four billion barrels (reftel).  In 2007, 
the ROYG designated a total of 97 blocks, 12 of which are 
currently producing with exploration in 40 others.  The 
number of producing blocks remains unchanged since 2006, the 
number of exploration blocks has doubled (from 20 to 40), and 
the total number of blocks has increased by 13 (from 84 to 
97).  Thabet Ali Abbas, Deputy Chairman of the Petroleum 
Exploration and Production Authority (PEPA), told Econoffs on 
May 29 that the reason for the increase was the resolution of 
border disputes with Eritrea and Oman, representing a 
geographical area of 7,000 square km. 
 
---------------------------- 
. . . BUT PRODUCTION IS DOWN 
---------------------------- 
 
¶3.  (C)  Oil revenue comprises 70 percent of the national 
budget, but production continues to fall.  It peaked in 2001 
at 471,000 barrels per day (bpd), was 365,000 bpd in 2006 and 
is 330,000 barrels per day currently.  Ahmed Abdullah, 
Chairman of PEPA, attributed the decline to drops in oil 
production in Masila-Hadramawt Block 14 and Mar'ib Block 18 
(where Hunt Oil was located until its contract was cancelled 
in 2005).  Nevertheless, he expected high oil prices, which 
were three times higher in 2007 than in 2002, to compensate 
for the drop in oil production. The Central Bank of Yemen 
confirmed that official oil revenues were higher in 2006 than 
in 2002 despite lower production levels:  the value of oil 
exports was USD 1.6 billion dollars in 2002 compared to USD 4 
billion in 2006.  Abdullah also predicted new oil discoveries 
will be made during 2008 in Block 10 (operated by the French 
Total Company), Block 9 (operated by the Canadian Cavalley 
Petroluem Company) and Block S2 (operated by the Austrian 
OMV), which would boost oil production by at least 45,000 
bpd. 
 
¶4.  (C)  Oil company executives are skeptical about PEPA's 
optimistic outlook.  Canadian Nexen President and General 
Manager Alistair Mooney opined in a June 1 meeting that any 
new discoveries would be minimal and may not offset the 
decline in production, which is a univeral phenonomenon. 
Mooney said that Nexen's wells in Block 14 produce 94 percent 
water and only 6 percent oil.  He also remarked that Yemen 
currently has 55 exploration wells in the country and that 
"the real question to ask the ROYG is how many of these 
exploration wells have been drilled?" 
 
----------------------- 
BIDDING ON OIL IN YEMEN 
----------------------- 
 
¶5.  (U)  In order to attract international investment to 
boost oil production, on December 9, 2006, PEPA announced its 
decision in the third international bidding round for oil 
blocks.  PEPA awarded eight blocks to five international 
companies:  1) Block 19 (in al-Jawf) and Blocks 28 and 57 (in 
Shabwah) to the Indian JSPC Company; 2) Blocks 82 and 83 (in 
Hadramawt) to the Indonesian Medco Energy Company; 3) Block 
17 (in Aden-Abyan) to the British Burren Energy Company; 4) 
Block 29 (in al-Mahrah) to the Austrian OMV Company; and 5) 
Block 84 (in Hadramawt) to the Norwegian DNO Company. 
Economic obervers' overall opinion of the third bidding round 
was that the process was run transparently, a belief held 
even by companies that failed to win a concession. 
 
 
SANAA 00001210  002 OF 003 
 
 
¶6.  (U)  Abbas told Econoffs that the ROYG awarded Block 4 
(in the Shabwa province) and Block 39 (in the Mahra Province 
on the Gulf of Aden near the Oman border) to the Korean 
National Oil Company (KNOC) on May 30.  He said that KNOC 
would own a 50 percent share of Block 4 and the ROYG-owned 
Yemen Company for Investment in Oil and Minerals (YICOM) 
would own the remaining share.  KNOC would also own a 95 
percent share of Block 39, and YICOM would own the remaining 
5 percent. 
 
¶7.  (C)  Abbas informed Econoffs that PEPA will launch the 
fourth international bidding round for oil blocks in June or 
July 2007, covering at least three new offshore blocks in the 
Red Sea, Gulf of Aden and Socotra.  The fourth international 
bidding round is divided into six phases, which would last at 
least six months:  1) Advertising and Receipt of 
Applications; 2) Pre-Qualification Phase; 3) Accessibility 
Phase of pre-qualified companies to data and information 
about the oil blocks; 4) Distributing standard offering forms 
and draft contracts to the competitors; 5) Reception of bids 
in sealed envelopes; and 6) Advertising competition results. 
Eligibility critirea for companies submitting bids are:  1) 
that they have sufficient technical experience to operate and 
run oil blocks; 2) they have capital of at least USD 50 
million; and 3) they have a good environmental record. 
Decisions on the bid may be announced by the end of 2007. 
 
---------------------- 
YLNG PROJECT ON TRACK, 
DESPITE OBSTACLES 
---------------------- 
 
¶8.  (C)  Yemen at present does not produce or export any 
natural gas, but in order to combat lower oil production, the 
ROYG decided to construct the Yemen Liquefied Natural Gas 
Project in partnership with Total.  YLNG Deputy General 
Manager Karim Abu Hamad reported on May 21 that construction 
of the project is 55 percent complete and expects gas 
deliveries to begin at the end of 2008 or the beginning of 
¶2009. Projected LNG deliveries will be 6.7 million tons per 
year, two-thirds of which will be exported to the United 
States.  While construction of the 320 km pipeline between 
Balhaf and the Ma'rib Block 18 gas field is behind schedule, 
Abu Hamad believes that YLNG will be able to pump gas through 
the pipeline by December.  He added that construction is 
behind schedule at the upstream gas extraction facilities in 
Ma'rib Block 18 because of legal disputes between Hunt Oil 
and the ROYG over 1) ROYG's alleged violation of a five-year 
extension agreement with Hunt in 2005; and 2) who should be 
the operator of the upstream facilities-- the ROYG-owned 
Safir Company or the Marib Services Company (which is 
partially owned by Hunt).  The Safir Company is the current 
operator. (Reftel B) 
 
¶9.  (C)  Technical problems at the Ma'rib Block 18 gas field 
persist.  In a May 28 meeting with Econoff, Jannah Hunt Oil 
General Manager Michael Graham asserted that the Safir 
Company is cutting corners in its operations at the gas 
field.  In Graham's opinion, Safir Company does not maintain 
sufficient pressure in extracting gas and oil from the 
ground.  Lack of sufficient pressure will cause production to 
plummet.  Graham opined that "we will have to get in there to 
upgrade the gas plant." 
 
¶10.  (C) YLNG Deputy GM Hamad disagreed with Graham's 
analysis, arguing that "the only difference between the Safir 
Company and Hunt Oil is 41 Americans."  He believed that gas 
production would be the same under either company, at 
60-70,000 bpd.  The root of the problem, according to Hamad, 
is that the Gas Development Agreement Law # 2 of 1997, which 
governs Ma'rib Block 18, did not foresee the involvement of 
Safir Company. 
 
---------------------- 
HUNT OIL GOES TO COURT 
---------------------- 
 
¶11.  (C) Regarding the first legal dispute mentioned in 
paragraph 6, Graham claimed that both the ROYG and Hunt Oil 
Company signed a 5-year extension of the production sharing 
agreement (PSA) in 2005, and that the Minister of Oil 
endorsed the agreement.  However, the Yemeni Parliament "did 
not like the agreement and wanted Hunt Oil out of Block 18," 
he said.  (Note:  All PSAs in Yemen legally require 
Parliamentary approval.  End note).  The cabinet of then-PM 
Bajammal terminated the new PSA on October 18, 2005 and 
handed Block 18 over to the ROYG-owned Safir Company.  Graham 
said that Hunt Oil is suing the ROYG for lost revenues and 
that hearings will take place in September 2007 at the 
International Commercial Court in Paris.  He expects Hunt Oil 
to win the lawsuit and that the ROYG may even settle before 
 
SANAA 00001210  003 OF 003 
 
 
the court's ruling.  If the ICC rules in Hunt Oil's favor and 
the ROYG ignores its ruling and exports Block 18 oil, the 
oil/profits could be confiscated at the importing countries' 
ports and turned over to Hunt Oil, according to Graham. 
 
------------------------ 
OILY RELATIONS WITH ROYG 
------------------------ 
 
¶12.  (C)  Despite the ROYG's treatment of Hunt, overall 
relations between international oil companies and the ROYG 
are cordial, according to local company representatives. 
Graham said that he generally meets with MOM officials every 
two weeks.  Canadian Nexen President Alistair Mooney, who has 
been operating in Yemen since 1992, told Econoff that the 
ROYG is "a lot more transparent than in the past in its 
dealings with the oil companies," especially since Yemen 
expressed its intention to join the Extractive Industries 
Transparency Initiative (EITI) in March 2007.  Oil Minister 
Khaled Bahah reassured the CDA in a December 24, 2006 meeting 
that MOM personnel are more fully engaged than in the past 
with oil companies. (Note: The Minister is also a former 
employee of Canadian Nexen (Reftel C).  End note) 
 
¶13.  (C)  Despite these positive developments, basic tensions 
remain.  For example, the ROYG requires at least 90 percent 
of the oil companies' workforce to be Yemeni.  Mooney said 
that in May 2007, Canadian Nexen's workforce was only 83 
percent Yemeni, due to the challenge of finding skilled 
Yemeni labor.  Companies also face pressure to hire family 
members for subcontracts.  The Jannah Hunt Oil Contract 
Manager, an Amcit, said that one Yemeni tried to force her to 
hire another Yemeni for a contract and that if he had his 
way, "she would be replaced by a Yemeni." 
 
------- 
COMMENT 
------- 
 
¶14.  (C)  International experts predict that Yemen will run 
out of oil in 15-to-20 years, a slow decline that is already 
underway.  The ROYG has decided to battle this trend on a 
number of fronts:  by increasing the number of exploration 
blocks, trying to attract foreign direct investment through 
international bidding rounds on oil blocks, and diversifying 
to natural gas production.  The ROYG has made strides in 
becoming more transparent, but more progress needs to be 
made, a fact made plain when the ROYG released its FY 2007 
budget in February, which the media attacked for allegedly 
underreporting oil revenues by 25 million barrels (i.e. USD 
1.36 billion).  For "Yemenization" to succeed, the ROYG also 
needs to do a better job ensuring that there are enough 
Yemenis who are well-trained to carry out oil exploration and 
production activities.  Even with these fixes, there is 
little doubt among observers that the slow decline of the 
Yemeni oil sector is inexorable, barring a major new 
discovery. 
 
KRAJESKI