VZCZCXRO7557
RR RUEHDE RUEHDH RUEHDIR
DE RUEHYN #0876/01 1261123
ZNR UUUUU ZZH
R 061123Z MAY 09
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 1862
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 SANAA 000876 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR NEA/ARP ANDREW MACDONALD 
DEPT OF COMMERCE FOR JOSHUA REITZE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG EPET IR YM
SUBJECT: YEMEN: AMBITIOUS POWER GENERATION PLANS HAUNTED BY 
PAST FAILURES 
 
REF: A. 08 SANAA 1923 
     ¶B. 07 SANAA 2029 
 
¶1.  (SBU) SUMMARY.  Yemen's national electricity grid serves 
only a small fraction of the population and bypasses the 
industrial sector completely.  Realizing that maintaining oil 
product-powered plants is fiscally unsustainable, the ROYG 
plans to build three natural gas-fired power plants.  The 
tendering and project construction fiasco that defined 
Yemen's first such plant, the Iranian-contracted Marib 1 
power station, does not bode well for the ROYG's ability to 
competently expand the national grid and thus attract 
much-needed foreign direct investment (FDI).  END SUMMARY. 
 
POWER SECTOR WEAK AND INEFFICIENT 
--------------------------------- 
 
¶2.  (U) Yemen's power sector has long been a fiscal burden, 
an obstacle to large-scale investment, and a significant 
source of corruption in the tendering process.  The ROYG 
provides electricity for a mere 15 percent of rural 
residents, who account for two-thirds of the country's total 
population (23 million).  The 90 percent of urban residents 
in major cities who are connected to the national grid suffer 
from daily blackouts and uneven transmission to their home 
appliances.  The Ministry of Electricity's entire power 
capacity is only 1,000 Megawatts (MW), generated by a mix of 
heavy fuel oil (HFO), light fuel oil (LFO), and diesel plants 
spread across the country, according to ministry officials. 
(Note: In the U.S. 1,000 MW powers approximately 1 million 
homes.  In Yemen, by contrast, 1,000 MW is supposed to cover 
3.2 million homes, numerous industrial plants, and operations 
at three major ports.  End Note.) 
 
¶3. (U) According to Saad Sabrah, chairman of a new ROYG 
agency that buys land for foreign investors, the lack of 
access to electricity scares away potential investors who 
could build factories and other labor-intensive projects in 
which Yemen, a poor country with millions of unemployed 
youth, should have a comparative advantage over its GCC 
neighbors.  Wheat and sugar refineries, upstream oil and gas 
facilities, cement plants, and other large-scale industrial 
projects in Yemen all rely on their own diesel-powered 
generators for electricity, a significant capital cost that 
cuts into firms' profit margins, according to Khaled Mustafa, 
Chairman of the Sanaa Chamber of Commerce.  Future projects - 
desalination plants, cement plants, tourist resorts, and 
manufacturing facilities - will materialize only if the 
ROYG's power generation capacity is expanded significantly. 
 
SWITCHING TO NATURAL GAS 
------------------------ 
 
¶4. (U) The ROYG realized over a decade ago that natural 
gas-fired plants were more efficient than those running on 
HFO or diesel, but so far only one, the Marib 1 plant, is 
near completion, with three more plants in various stages of 
the tendering process.  The Public Electricity Corporation 
(PEC), Yemen's sole electricity provider and a perpetually 
unprofitable enterprise, spends approximately USD 700 million 
on HFO alone for power generation every year, a fiscal burden 
made worse by the opportunity cost of not using natural gas, 
which Yemen has in abundance and which would be provided free 
of charge to the PEC.  The World Bank estimates that the ROYG 
could save on the purchase of 800 million barrels of crude 
oil over the next 30 years by switching the power sector to 
natural gas.  The ROYG has largely recognized the fiscal and 
environmental benefits of conversion, despite having 
dedicated 9.7 trillion cubic feet (TCF) of Yemen's 11.8 TCF 
of certified natural gas reserves for export as Liquefied 
Natural Gas (LNG) (REF A) rather than domestic power sector 
use. 
 
¶5. (SBU) The ROYG has plans for three additional natural 
gas-fired plants -- Marib II (600 MW), Marib III (300 MW), 
and Mabar I (projected capacity not yet announced).  The 
financing for these projects has yet to be determined, but 
the Saudi Fund, the Islamic Development Bank, and the 
Government of Oman have all pledged support, according to 
Asaad al-Ashwal, a project director at the Ministry of 
Electricity.  The ministry has been unable to attract major 
companies to the tendering process, however, with Siemens 
having pulled out most recently.  Eight bidders, from Russia, 
South Korea, Spain, and India, have pre-qualified, but 
ministry officials privately fear a repeat of the 
oft-maligned Marib 1 plant tender that went to a technically 
 
SANAA 00000876  002 OF 002 
 
 
incompetent Iranian firm.  Dubai-based General Electric (GE) 
executives told Econoff that, based on GE's previous 
experience in Yemen, GE and other major international 
companies would steer clear of the ROYG tendering process, 
which they described as "corrupt at every step of the way." 
 
THE MARIB 1 PLANT FIASCO 
------------------------ 
 
¶6. (U) The tendering and execution of the 440 MW Marib 1 
power plant project, now in its seventh year, is an example 
of the ROYG's inability to attract technically competent 
bidders to major infrastructure projects (REF B).  In 2002, 
the Ministry of Electricity awarded the Marib 1 tender to an 
Iranian firm that later was found to have had little actual 
experience in power station construction or management, 
Deputy Minister of Electricity Ahmed al-Aini told Econoff. 
The Marib 1 project manager, Khaled Rashid, denied press 
reports that the Iranian company had paid a USD 60 million 
fine to the ROYG for violations of its contract for supplying 
substandard transformers to the plant.  "At this point, with 
all our problems with the Iranians, what's the purpose of 
punishing the company ) we just want them to finish and get 
out," Rashid told Econoff.  The technical delays at Marib 1 
caused by the Iranian firm have cost the ROYG hundreds of 
millions of USD in savings from switching from comparatively 
expensive diesel to natural gas, according to Deputy Finance 
Minister Jalal Yaqoub. 
 
COMMENT 
------- 
 
¶7. (SBU) Embassy contacts across the Yemeni energy sector say 
that the ROYG's management of the power sector has only 
worsened since the beginning of the Marib power plant fiasco. 
 Requests for kickbacks at every stage of the tendering 
process, nepotism in the Ministry of Electricity project 
management offices, and the lack of a strategic power sector 
plan still carry the day.  Yemen will not attract FDI into 
energy-intensive projects until it dramatically expands the 
national grid capacity.  The ROYG's plan to build three 
additional natural gas-fired plants would accomplish this 
goal, but its current operating style ensures that the road 
will be fraught with mismanagement, technical delays, and 
corruption at every turn.  END COMMENT. 
SECHE