Yemen is important to world energy markets because of its oil and natural gas resources as well as its strategic location at the Bab el-Mandab strait linking the Red Sea and the Gulf of Aden, one of the world's most active shipping lanes.
GENERAL BACKGROUND:
Yemen's government continues to implement an economic reform program which it agreed to in 1995 as a condition for lending from the International Monetary Fund (IMF). The program includes banking reform, privatization of state-run industries, major infrastructure investment, and reduction or elimination of government subsidies (down 71 percent from 1998 to 1999), including wheat, flour, gasoline, and electricity.
Yemen's economic situation has been improving along with the sharp increase in world oil prices over the past year, after low oil prices in 1998 and early 1999 forced the government to cut consumer subsidies more deeply and more rapidly than had been planned.
The push for the IMF reform package was led by former Prime Minister Faraj Bin Ghanem, who became prime minister after President Saleh's ruling party, the General People's Congress, posted an overwhelming victory in April 1997's parliamentary elections. Ghanem resigned in April 1998 amid differences with President Salih over political reforms.
Abdul-Karim al-Iryani took over as prime minister in May 1998, vowing to continue with the three-year-old economic reforms. In September 1999, Yemen held direct presidential elections in which President Saleh was overwhelmingly reelected for a second five-year term.
Yemen's current economic reforms follow a period of political instability and civil war. In May 1990, the former independent states of North and South Yemen reached a unification agreement, creating a new united Republic of Yemen.
However, political disputes between President Ali Abdallah Saleh and Vice President Ali Salim al-Baidh led to armed clashes between northern and southern forces in April 1994, plunging the four-year-old country into a full scale civil war by May 1994. The war ended in July 1994 after the fall of Aden, the former capital of South Yemen and the stronghold for forces loyal to Vice President al-Baidh.
Current instability mainly centers on periodic kidnappings of foreigners, including oil workers (and in early March 2000, the Polish ambassador), usually by Yemeni tribesmen. Kidnappings have hurt the country's important tourism sector. Besides kidnapping, there have been numerous attacks on an oil pipeline in the Marib region of eastern Yemen over the past year or so. The pipeline is operated by U.S.-based Hunt Oil.
In 1999, Yemen's real gross domestic product (GDP) growth was 2.0 percent , and is expected to climb to 2.5 percent in 2000, based mainly on the recovery in oil prices. Meanwhile, inflation has been been reduced, but not completely brought under control. After reaching a high of 71 percent in 1995, inflation is projected at 9 percent for 2000.
Income from oil sales account for approximately 40 percent of Yemen's total government revenues and is the country's main source of foreign currency. Besides oil revenues, another bright spot in Yemen's economy is the Aden Container Terminal (ACT), where business is growing, and which is part of Yemen's plans for a Port of Aden Free Zone.
One of the main provisions in the IMF reform package calls for the Yemeni government to reduce subsidies. The first two phases of reforms reduced subsidies on oil and electricity. Transportation fuel prices were doubled in March 1995, sparking violent protests, especially in Aden. Prices for fuel, electricity and water were increased again in January 1996. Diesel prices increased 200 percent, electricity rates rose between 50 percent and 100 percent, and water fees increased between 40 percent and 60 percent.
Farmers protested these price hikes by blocking the main Sanaa-Aden highway. The third phase of the reform program began in July 1997, with additional increases to electricity rates, water fees and fuel prices.
Transportation fuel prices rose by more than 30 percent and kerosene prices by more than 85 percent, sparking protests form farmers in the tribal region of Ma'rib, which is the primary oil producing region. In June 1998, the Yemeni government once again raised prices on gasoline, kerosene, and cooking gas by around 40 percent.
In addition, subsidies on wheat and flour were cut. This latest round of price hikes aroused more protests as demonstrators took to the streets, calling on the government to rescind the price hikes.
Under terms of its agreements with the IMF and World Bank, Yemen is required to initiate a privatization program. The government has said that it will encourage private investment in the agriculture, fisheries, oil, and tourism sectors, and sell off its stake in companies throughout the Yemeni economy. Some companies will be offered for tender or auction, while others will be sold by private subscription.
The government also stresses that it is seeking both foreign and local investors. State-owned businesses cited as candidates for privatization include farm and agricultural cooperatives, construction companies, power stations, public housing facilities, refineries, the state's petroleum retail network, shipping companies, and the state telecommunications company.
Yemen has a border dispute with Saudi Arabia dating back over 60 years. Over the years, fighting has occasionally erupted along their 1,300-mile frontier, which is not defined in large stretches of the Empty Quarter of the Arabian Peninsula. A group of islands in the Red Sea also is in dispute.
OIL:
Yemen's oil output, which stood at 409,000 barrels per day (bbl/d) for 1999, provides the country's main source of income. The country contains proven oil reserves of 4 billion barrels. Proven recoverable reserves of 1.7 billion barrels are concentrated in five areas: Marib-Jawf Block 18 (490 million barrels) in the north, East Shabwa Block 10A (180 million barrels) and Masila Block 14 (500+ million barrels) in the south, and the Jannah Block 5 (345 million barrels) and Iyad Block 4 (135 million barrels) in central Yemen.
The Masila block is the country's most productive oil field at around 210,000 bbl/d, followed by Marib-Jawf at 160,000 bbl/d. Smaller fields include Jannah, Haliwah, East Shabwa (where output has increased since production began at Block 10 in January 2000), and Iyad.
Yemen's oil production is expected to climb in 2000 due to infrastructure investment the East Shabwa and Jannah fields totalling $250 million. Yemen's oil ministry has said it expects overall national production to increase to 500,000 bbl/d by the end of 2000.
Yemen's oil production is split between five operators: Hunt Oil, Hunt/Jannah, Total, Nimir Petroleum, and Canadian Occidental Petroleum (CanOxy). CanOxy, which owns 52 percent of the Masila block, and Hunt Oil (operator of Ma'rib) are the largest producers, accounting for around 210,000 and 160,000 bbl/d, respectively.
Exploration for additional reserves and new investments from foreign companies began to decline in 1994, due mainly to the civil war between north and south Yemen, unattractive exploration and production contractual conditions, and the low success rate of new hydrocarbon discoveries.
However, exploration activity picked up again in 1997 after the civil war ended and the government started to offer more attractive contract terms. Yemen's government plans to continue offering incentives for oil sector investment as part of its goal of reaching production of 500,000 bbl/d by the end of 2000. On October 1, 1999, Yemen opened its first petroleum licensing round, offering PSAs on Blocks 6, 7, and 28 in the central Shabwa province, Blocks 25-27 in the Red Sea province of al-Hodidah, and Block 38 offshore Socotra Island in the Gulf of Aden.
Terms of the PSAs provide for two, 3-year exploration phases and a 20-year production period with an optional 5-year extension. Royalties are on a sliding scale (3 percent -10 percent), and the contractor's share of oil output has been increased from 20 percent to 30 percent -35 percent.
CanOxy received four contiguous blocks in November 1998 near the border with Saudi Arabia, which cover a total of 12 million acres. In September 1997, Canada's TransGlobe Energy signed a Memorandum of Understanding (MoU) with Yemen's ministry of oil and mineral resources followed by a production sharing agreement (PSA) in December 1997 for the Damis Block S1, located near existing pipelines and also adjacent to Hunt Oil's Marib al-Jawf production area..
As of mid-1999, 3D seismic data for this block had been received and were being analyzed. In October 1999, Yemen's Vice Chairman for Exploration Affairs, Nabil al-Gawsi, said that U.S. independent oil company Vintage Petroleum was expected to start drilling in Block S-1 Damis in December 1999. TransGlobe also holds the concession for Block 32, and has been drilling test wells.
The first well is to test the An-Naeem structure, an extension of the Haliwah field. As of late November 1999, DNO of Norway, which operates Block 32, reportedly was set to proceed with early development of the Tasour discovery, with startup scheduled for late 2000 at an initial output of 5,000-7,000 bbl/d.
In April 1998, CanOxy entered an agreement with Kerr-McGee Yemen, acquiring interests in two exploration blocks near the CanOxy-operated Masila Block. Each company obtained a 47.5 percent interest in Block 50 and a 43.75 percent interest in Block 51, with the Yemen Ministry of Oil holding the balance for both blocks. Block 51 is adjacent to the Masila Block and consists of two million acres. Block 50 covers more than 8 million acres and is located northwest of the Masila Block.
In October 1999, Algeria's Sonatrach signed an agreement with Italy's ENI on sharing exploration and production in southern Yemen. In December 1999, ENI, which has been operating in Yemen since 1995, signed a PSA with Yemen's oil ministry on Block 2 al-Maber, located onshore in the Shabwah basin.
In September 1999, Yemen's government also signed a MoU with Australia's Oil Search Ltd and the UAE's Mohammed al-Otaibi Group to explore for oil in Yemen's offshore Block 15. Another MoU was signed in November 1999, between Yemen and Adair International Oil and Gas of Houston, on Block 20 near the Marib block.
REFINING:
Yemen currently has a crude refining capacity of 120,000 bbl/d from two small, aging, deteriorating refineries. The refinery in Aden, operated by Aden Refinery Company (ARC), has a capacity of 110,000 bbl/d, while capacity at the Marib refinery, operated by Yemen Hunt Oil Company, is 10,000 bbl/d. The Aden refinery, which had a design capacity of 170,000 bbl/d, sustained significant damage during the country's 1994 civil war.
Its current production is approximately 90,000 bbl/d, with 30,000 bbl/d going to Petronas, Malaysia's state oil company, and the rest to the domestic market. In 1996, ARC awarded a contract to Britain's Tarmac and ABB Lummus Global of the U.S. to upgrade and restore capacity to the aging refinery. However, progress on the renovation has been plagued with problems including disagreements over how much capacity to restore.
A feasibility study, funded in part by a $300,000 grant from the U.S. Trade Development Agency, was conducted for a new 120,000-bbl/d refinery at Ras Issa, located on the Red Sea.
Ras Issa handles oil exports from the Marib Block. A local Yemeni company, al-Hashidi, is developing the project. The company has plans for producing a full range of petroleum products to supply Yemen's domestic market and Africa. In March 2000, a Canadian engineer, Monem Khair, reportedly was awarded a $1.4-billion contract to build a refinery at Ras Issa. The deal also would involve building a chain of gasoline stations in Yemen.
Note: The information contained in this report is the best available as of March 2000 and can change.
Source: United States Energy Information Administration.
© 2000 Mena Report (www.menareport.com)
