RUMORED OIL FIND NOT ENOUGH TO SUSTAIN ROYG ECONOMY

C O N F I D E N T I A L SANAA 001589

SIPDIS

E.O. 12958: DECL: 06/30/2013
TAGS: EPET ECON YM ENERGY ECON COM
SUBJECT: RUMORED OIL FIND NOT ENOUGH TO SUSTAIN ROYG ECONOMY

Classified By: Classified by Ambassador E.J. Hull for reasons 1.5. (B.)
and (D).


1. (C) Summary: Rumors are circulating in Sanaa that an oil
discovery by Canadian Nexen could contain over a billion
barrels of oil. Earlier, Ministry of Oil officials expressed
optimism that new oil finds in Yemen could maintain current
production levels indefinitely, in spite of their own
Ministry's predictions that oil output could decline as much
as one third by 2010. Nevertheless, even with Yemen's oil
production at an all time high and last year's inflated oil
prices, the economy for 2002 did not expand as fast as
population growth. End Summary.

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Rumors of Big Oil Find
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2. (C) AbdulGhani Al-Iryani, Chairman of Rayman Trading
Company and member of the prominent al-Iryani family in
Yemen, told Pol/econoff on June 25th that there were several
rumors that Canadian Nexen has discovered a huge oil field,
perhaps in the billions of barrels of oil. Al-Iryani cited as
evidence two news stories on Al-Jazeera and in the daily
newspaper Al-Ayyam announcing new finds in Canadian Nexen's
Block 14 in the Hadramawt governorate. (Note: According to
the Petroleum Exploration and Production Authority, Yemen's
proven oil reserves are just over 4 billion barrels. End
Note.) Canadian Nexen officials are reluctant to comment on
the find, but have confirmed to Embassy officials that there
have been new discoveries.

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Ministry of Oil and Minerals Sanguine about Future
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4. (U) In an earlier courtesy call with Nabil al-Gawsi on
June 10, Chairman of the Petroleum Exploration and Production
Authority (PEPA) of the Ministry of Oil and Minerals,
al-Gawsi expressed optimism that present high production
rates of 450,000 barrels a day could be maintained, possibly
slipping slightly to 400,000 barrels per day in the future.
When asked to respond to most experts' prediction that oil
production will decline significantly in the next ten years,
Al-Gawsi countered that he believed there was still a great
deal of oil to be found. He confirmed that Canadian Nexen had
found oil in concession area 14, near in Hadramawt. Al-Gawsi
did not comment on the size of the discovery. (Note: The
Ministry of Oil has publicly estimated in 2001 that by 2010
production would drop to 1/3 of today's levels, around
145,000 barrels a day. End Note.) Al-Gawsi also promoted
recently opened oil concessions along the border with Saudi
Arabia, which have recently opened for exploration after the
conclusion of the 2000 border agreement with Saudi Arabia.


5. (U) Expressing some frustration with Hunt Oil, al-Gawsi
said that there was likely more oil in Hunt's concession near
Marib than Hunt would extract. The concession might be opened
to other companies if Hunt leaves after their PSA expires in

2005. Closing by promising a bright future for oil in Yemen,
al-Gawsi said only 3% of all the oil concessions have been
explored, and was positive there were still more reserves to
be discovered.

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New Finds Aside,
Oil Not the Solution to Yemen's Economic Woes
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5. (C) Comment: The rumored oil find explains the optimism
of al-Gawsi and his coworkers at PEPA and will likely delay
the ROYG's having to compensate for revenue losses due to
diminished oil production. The rumored size of the find is
undoubtedly exaggerated. Most likely, al-Gawsi is more on
target with his expectation that new finds will maintain
current oil production levels. While new oil finds are good
news for government revenue, oil is not a panacea for the
ROYG economy. Last year's high oil prices and record oil
production levels only accounted for 2.9% GDP growth (World
Bank Statistic) for Yemen in 2002, which did not match the
ROYG's published population growth estimate of 3.5%. Keeping
in mind that oil prices are expected to fall next year,
simply maintaining current production levels will translate
into even slower GDP growth, and most likely a budget deficit
for the ROYG in 2004. End Comment.
HULL