VZCZCXRO3016
RR RUEHDE RUEHDH RUEHDIR
DE RUEHYN #1064/01 1591149
ZNY CCCCC ZZH
R 081149Z JUN 09
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 2079
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHFR/AMEMBASSY PARIS 0189
RUEHUL/AMEMBASSY SEOUL 0064
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEKJCS/JOINT STAFF WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 001064 
 
SIPDIS 
 
DEPT FOR NEA/ARP ANDREW MACDONALD 
NSC FOR AARON JOST 
DEPT OF TREASURY FOR JOANNA VELTRI AND SAMANTHA VINOGRAD 
DEPT OF COMMERCE FOR TYLER HOFFMAN AND JOSHUA REITZE 
USCG FOR IPSED MIKE BROWN 
 
E.O. 12958: DECL: 06/08/2019 
TAGS: ECON EPET ENGR EWWT FR KS YM
SUBJECT: YEMEN: NATURAL GAS EXPORT LAUNCH PLAGUED BY 
DELAYS, ROYG MISMANAGEMENT 
 
REF: A. 08 SANAA 1923 
     ¶B. MCKAY-BROWN E-MAILS 6/3/09 
     ¶C. SANAA 876 
     ¶D. SANAA 299 
 
Classified By: CDA Angie Bryan, for reasons 1.4(b) and (d). 
 
¶1. (C) SUMMARY.  Shipments of liquefied natural gas (LNG) 
from Yemen to South Korea and the U.S. originally intended to 
begin in December 2008 have been delayed until at least 
August 2009, resulting in costly penalties for the export 
company, Yemen LNG (YLNG), and more than USD 100 million in 
lost revenue for the ROYG.  Factors in the ongoing startup 
delay include the ROYG's lag in providing adequate coastal 
defense for the liquefaction plant at Belhaf, a dispute with 
the upstream ROYG gas provider, tribal unrest during the 
pipeline construction phase, and the Ministry of Oil's 
insistence that YLNG hire unqualified local tribesmen to 
operate advanced machinery.  These headaches may scare away 
much-needed foreign investment in the oil and gas sector. 
Criticism within the ROYG and in Parliament regarding the 
amount of Yemen's natural gas allocated to YLNG for export 
(54 per cent of total reserves) has been muted thus far, but 
could grow louder if ordinary Yemenis feel they aren't 
benefiting from the ROYG's gas revenues.  END SUMMARY. 
 
ROYG SLOW TO PROVIDE ADEQUATE COASTAL SECURITY AT BELHAF 
--------------------------------------------- ----------- 
 
¶2. (C) The launch of Yemen's natural gas exports through the 
Yemen Liquefied Natural Gas Company (YLNG) has been delayed 
five months and counting, due to inadequate ROYG-provided 
coastal security at the Belhaf LNG facility, ongoing disputes 
with the ROYG gas provider upstream and several contractors 
downstream, and tribal considerations along the pipeline 
route from Marib.  YLNG Deputy General Manager Karim Abuhamed 
told EconOff on June 5 that LNG shipments to South Korea 
slated to begin in December 2008 have been pushed back until 
August 2009 (REF A).  Shipments to the U.S., originally 
intended to start April 2009, will not begin until November 
2009 and are contingent upon a forthcoming U.S. Coast Guard 
foreign port security assessment (REF B).  As a result of 
these delays, YLNG has had to pay daily penalties to its 
buyers, totaling USD 2.4 million thus far, for failure to 
deliver gas on time under the terms of the its Sales and 
Purchase Agreements (SPA's).  The ROYG has also suffered from 
the startup delays, losing out on more than USD 100 million 
in potential export royalties. 
 
¶3. (C) The ROYG's numerous delays in providing robust coastal 
defense at the two-train, 6.7 million metric ton/year Belhaf 
liquefaction facility, with its two shoreline LNG storage 
tanks and 800 meter-long loading jetty, have contributed to 
the overall export launch delay.  YLNG Security Manager 
Gilles Chalancon told EconOff during a May 6 visit to Belhaf 
that YLNG was unhappy with the Yemen Coast Guard's (YCG) 
performance in early 2008 and decided to switch to the Yemeni 
Navy (YNAV), whose vessels currently patrol the waters 
outside the offshore restricted area.  In late 2008, YNAV 
repeatedly asked YLNG to purchase new patrol vessels for use 
at Belhaf and, when informed this was not feasible, 
instructed YLNG to finance the transportation, repair, and 
fueling of a YNAV vessel stationed at Hodeidah on Yemen's 
west coast, according to YLNG General Manager Joel Fort. 
Unconvinced with YNAV's capabilities, YLNG convinced the 
French Government to send a pair of French naval commandos to 
train YNAV personnel stationed at Belhaf in May 2009.  (Note: 
French company Total Oil is the majority shareholder in YLNG. 
 End Note.) 
 
DISPUTE OVER GAS QUALITY MEANS MORE DELAYS, PENALTIES 
--------------------------------------------- -------- 
 
¶4. (C) Another costly delay has resulted from YLNG's ongoing 
dispute with SAFER Exploration and Production Operations 
Company, the national oil company that extracts the natural 
gas in Marib, over the quality of the feedstock gas.  The 
Gas-Sharing Agreement (GSA) between YLNG and the ROYG calls 
 
SANAA 00001064  002 OF 002 
 
 
for a certain percentage of energy-rich Liquefied Petroleum 
Gas (LPG) to be included in the content of the natural gas it 
sends via pipeline to Belhaf, but SAFER has not yet upheld 
its end of the bargain, preferring to direct the LPG to 
Yemen's domestic market to be used as cooking gas.  If SAFER 
does not soon increase the percentage of LPG in the 
feedstock, YLNG will be forced to pay additional fines to its 
clients under the SPA terms, further cutting into YLNG's 
profits, according to Deputy GM Abuhamed. 
 
¶5. (C) A number of Post energy sector contacts told EconOff 
that the SAFER management has long been working at 
cross-purposes with YLNG, determined to keep as much natural 
gas underground as possible in order to bolster flagging oil 
production levels.  (Note: Some natural gas in Marib is 
currently re-injected into oil wells to enhance crude oil 
extraction rates by increasing pressure underground.  End 
Note.)  SAFER is not the only ROYG agency unhappy with YLNG's 
progress: Ministry of Electricity officials hinted to EconOff 
their displeasure with the ROYG's generous allocation of 
natural gas to YLNG for export rather to power plants for 
domestic use (REF C).  Ministry of Trade and Industry 
officials complain that Yemen should have created a domestic 
petrochemicals sector using feedstock gas. 
 
TRIBAL CLAIMS AFFECT PIPELINE SITING, BELHAF OPERATIONS 
--------------------------------------------- ---------- 
 
¶6. (C) YLNG and the ROYG chose the Marib-Belhaf pipeline 
route, hardly the shortest (and thus most efficient) distance 
to a coast, in order to traverse the least number of tribal 
areas possible, according to Ibrahim Abulohoum (strictly 
protect), GM of the Ministry of Oil's Gas Division.  Despite 
this attempt, the 320-km pipeline runs through areas 
controlled by 22 different tribes, grouped into four main 
confederations: the al-Jeda'an, the Jahm, the Murad, and the 
Abeida.  Abulohoum told EconOff on June 5 that kidnappings of 
YLNG personnel, vehicle seizures, and outright access denial 
to certain areas were responsible for delays in laying the 
pipeline.  YLNG officials also complain that the Ministry of 
Oil's plan to increase the percentage of Yemeni employees to 
90 per cent has forced them to hire unqualified Yemenis based 
on tribal considerations.  The Ministry of Oil repeatedly 
requested that YLNG hire local tribesmen with little or no 
formal education as operators of multi-million USD control 
panels and other advanced equipment. 
 
COMMENT 
------- 
 
¶7. (C) The ROYG's mismanagement of aspects of the Yemen LNG 
project -- coastal security, upstream gas operations, and an 
overly aggressive Yemenization policy -- illustrates the 
disconnect between the ROYG's oft-repeated desire to attract 
major international oil and gas companies to Yemen and its 
abysmal relations with existing firms.  The ROYG-caused 
headaches associated with the YLNG startup will likely serve 
as a cautionary tale for companies considering bringing 
much-needed investment in the oil and gas sectors.  So far, 
there has been only limited grumbling from members of 
parliament (REF D) and within the ROYG regarding the quantity 
of gas reserves allocated for export rather than domestic use 
(9.15 of Yemen's 17 trillion cubic feet total reserves). 
Such resource nationalism could grow more pronounced, 
however, if ordinary Yemenis perceive they aren't benefiting 
from the ROYG's gas royalties.  YLNG's success will hinge 
upon the USG's foreign port security assessment of Belhaf, 
natural gas prices, and security along the pipeline route and 
coast.  END COMMENT. 
BRYAN