P 011209Z DEC 08
FM AMEMBASSY SANAA
TO SECSTATE WASHDC PRIORITY 0709
INFO DEPT OF COMMERCE WASHINGTON DC PRIORITY
DEPT OF ENERGY WASHINGTON DC PRIORITY

C O N F I D E N T I A L SANAA 001923 
 
 
FOR NEA/ARP:AMACDONALD 
 
E.O. 12958: DECL: 11/30/2018 
TAGS: EAID ECON ENRG EPET PGOV YM
SUBJECT: YEMEN PUSHING FULL STEAM AHEAD ON GAS PRODUCTION 
 
REF: A. SANAA 1817 
     ¶B. SANAA 1461 
 
Classified By: Ambassador Stephen A. Seche, for reasons 1.4(b) and (d) 
 
¶1.  (C)  SUMMARY:  Construction of the Yemen Liquefied 
Natural Gas Project (YLNG) is near completion and YLNG 
expects to export natural gas in the second quarter of 2009. 
The ROYG Ministry of Oil and Minerals is also eyeing other 
oil production and exploration blocks for additional supplies 
of natural gas, and is pushing to amend some production 
sharing agreements.  Yemen is looking to diversify its 
economy away from consumption of diesel to other reliable 
alternate energy supplies, including Liquefied Propane Gas 
(LPG) and natural gas, but will first need to develop its 
market's infrastructure to consume LPG and natural gas.  In 
any case, LNG production will not be the palliative for the 
Yemeni economy that the ROYG hopes it will.  END SUMMARY 
 
ROUNDING THIRD AND HEADING FOR HOME 
----------------------------------- 
 
¶2.  (U)  Yemen Liquefied Natural Gas Company (YLNG) Deputy 
General Manager Karim Abuhamad informed Econoff on October 8 
that the YLNG Project is 85 percent complete, the oil 
pipeline between the Block 18 gas field and the Balhaf 
liquefaction plant is 95 percent complete, and that the 
Balhaf plant is 76 percent complete.  He said that YLNG will 
now begin construction of the upstream gas drilling 
facilities in Block 18.  Abuhamad told Econoff that the first 
14 cargoes of natural gas will be exported to South Korea 
during June-July 2009 and that another 18 cargoes will be 
exported to the United States in September 2009.  He expects 
the YLNG Project to generate revenues of USD 512 million by 
the end of 2009.  He optimistically remarked that the YLNG 
Project "is on third base and coming home." (Note:  Deputy 
Finance Minister Ali Shatter is less optimistic than 
Abuhamad, saying in an October 4 meeting that the YLNG 
Project would garner only USD 180 million in 2009, only 
partially offsetting the loss in oil revenues as a result of 
the decline in the value of a barrel of oil (ref A)  End 
note.) 
 
ROYG PUSHES TO INCREASE GAS PRODUCTION AND AMEND PSA'S 
--------------------------------------------- --------- 
 
¶3.  (C) The ROYG is very interested in drilling for gas in a 
number of oil production blocks.  In an October 13 meeting 
with Econoff, the Chair of the Petroleum Exporting and 
Production Authority (PEPA), Ahmed Abdillah, told Econoff 
that the governorates of Shabwa, Marib and al-Jawf have high 
potential for significant gas deposits.  He said that natural 
gas deposits have been found in Occidental Block 20 
(Marib-al-Jawf), Occidental Block S-1 (Shabwa) and Canadian 
Nexen Block 51 (Hadhramout).  He noted that the ROYG Ministry 
of Oil and Mineral Resources (MOM) has been communicating 
with Parliament's Oil Committee to insert 4 or 5 natural gas 
provisions/articles in the new production sharing agreements 
(PSAs) of these three oil blocks.  Abdillah also indicated 
that approximately 500 billion cubic feet of associated gas 
is located in Total Block 10 (Hadhramout).  Total General 
Manager Martin Deffontaines informed Econoff on November 5 
that Total is producing about 20 million cubic feet of 
natural gas per day in addition to its oil production. 
 
¶4.  (C) Other significant gas blocks are located in Gallow 
Oil Block 13 and CCC Block 33 in the Mahara Governorate, 
according to Abdillah.  He said that the MOM is lobbying the 
Parliament and the international oil companies to amend the 
PSA for Blocks 10, 13 and 33, since it contains no natural 
gas production/provisions.  (Note:  PSAs in the past in Yemen 
contained no natural gas articles/provisions, since gas is 
normally a waste product of oil drilling. End note).  Yemen 
Gas Company Executive Managing Director Anwar Hassan told 
Econoff on October 21 that he expects the ROYG to complete 
negotiations with the international oil companies on amending 
the PSA's in two-to-three months time. 
 
¶5.  (C)  The ROYG's big push for amending PSA's has affected 
other oil producing blocks, including Jannah Hunt Oil Block 5 
(in Shabwa).  Jannah Hunt Oil General Manager Mike Graham 
complained to Econoff on October 8 that the MOM would not let 
Jannah Hunt Oil drill any new development wells in Block 5 
until it agrees to build a new LPG plant, which is "outside 
the terms of the current PSA."  Graham said that by producing 
LPG, Jannah Hunt oil would lose USD 19 million in revenues. 
One of the main reasons for the ROYG's interest in increased 
LPG production, according to Hassan, is to help alleviate 
shortages in LPG supplies.  Hassan said that current LPG 
demand is 740,000 metric tons per year and the ROYG plans to 
build a new LPG plant at the Marib refinery, which should 
increase LPG output by 800 metric tons per day by the end of 
¶2009. 
 
YEMEN PREPARES FOR DOMESTIC CONSUMPTION OF GAS 
--------------------------------------------- - 
 
¶6.  (C)  One speedbump in Yemen's quest to increase 
production of LPG and natural gas is that the domestic market 
is not fully set up for consumption of LPG and natural gas. 
For example, electricity generators, agricultural machinery 
and the transportation networks still run on diesel (ref B). 
Deffontaines commented that Yemen does not yet contain a gas 
network and that oil companies need to find a significant 
amount of natural gas in order for production to be 
economical and attract demand.  Abdillah admitted that PEPA's 
target is to develop the domestic Yemeni market for gas.  He 
said that PEPA has met with a number of businessmen involved 
in electricity generation, the petrochemical industry and 
transportation in order to encourage them to invest in gas 
consumption infrastructure in their respective companies. 
Abdillah noted that there was a lot of interest from 
investors both in Yemen and the Gulf. 
 
GAS AS AN ALTERNATE ENERGY SOURCE FOR YEMEN'S ECONOMY 
--------------------------------------------- -------- 
 
¶7.  (C)  One motive behind the ROYG's push to increase 
production of LPG and natural gas is to ensure a reliable and 
inexpensive source of energy for its domestic market and to 
diversify away from other sources of energy, like diesel. 
(Note:  Yemen experienced severe shortages of diesel fuel in 
2008 (ref B).  End note.)  One field where the ROYG is 
pursuing use of natural gas is electricity generation. 
Hassan said that the ROYG will complete a 340 megawatt Marib 
1 power station in April 2009, which will run on gas provided 
by the Yemen Gas Company.  Deputy Minister of Planning and 
International Cooperation Mutaher al-Abbasi added that the 
ROYG is working on another power station, Marib 2, and that 
once completed, both the Marib 1 and 2 power stations will 
generate about 800 MW of energy. A third smaller gas-run 30 
MW power station in Block 10 in Hadhramout will also be 
constructed in the near future. 
 
COMMENT 
------- 
 
¶8.  (C)  Along with its hopes that LPG will provide a 
domestic energy alternative, the ROYG is looking to natural 
gas production in 2009 as a palliative to Yemen's current 
economic ills, including declining oil revenues.  Production 
of natural gas and LPG may promote sustainable economic 
growth in Yemen in the short-term and reduce the costs of 
certain public expenditures, like electricity generation. 
However, it will not compensate for all the losses in the oil 
sector and its supplies, too, are limited.  Yemen will need 
to diversify its economy away from oil and gas to other 
sustainable sources of income, including agriculture, fishing 
and tourism.  END COMMENT. 
 
 
SECHE