SEARCH FOR BLOCK 18 SOLUTION: HUNT ASKS AMBASSADOR

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 001511

SIPDIS

E.O. 12958: DECL: 06/01/2015
TAGS: EPET ECON EINV YM ECON COM ENERGY
SUBJECT: SEARCH FOR BLOCK 18 SOLUTION: HUNT ASKS AMBASSADOR
TO INTERVENE

REF: A. SANAA 1281

B. SANAA 1352

Classified By: Ambassador Thomas C. Krajeski for reasons 1.5 b and d.


1. (U) This is an action request. See para. 3


2. (C) Summary and Action Request. Tensions continue to
mount over Block 18 and Yemen Hunt's future in Yemen. On May
24 Ambassador met a group of Hunt executives preparing to
litigate in international court for ROYG breach of contract
(ref A). Although still looking to strike a deal, Hunt is
increasingly pessimistic about its ability to influence
President Saleh. Hunt's legal advisors believe they have a
strong case and an international reputation to maintain.
Parliamentary sources contend that the legislature is flexing
its muscle in a legitimate attempt to crack down on
corruption and that following last year's oil scandals, Saleh
is not in a position to impose his will on Parliament. Saleh
is reportedly willing to sign a new contract with Hunt for a
higher ROYG profit share, but the parameters of such
agreement are still unknown. On June 3, Hunt formally
requested Ambassador to weigh in with President Saleh to find
a solution. Post seeks guidance from NEA/ARPI on Hunt's
request and has provided suggested talking points below. See
para. 3. End summary and action request.

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Hunt asks Ambassador to Intervene with Saleh
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3. (C) On June 3 Hunt formally requested the Ambassador to
weigh in with President Saleh to "defend the sanctity of the
five-year extension of the Maarib PSA" granted in late 2003.
Post requests guidance on Hunt's request for the Ambassador
to meet with Saleh in support of Hunt.

Suggested talking points:

-- We are very concerned that Hunt, the major American
company in Yemen, will be forced to leave at a time when the
ROYG has made improving its investment climate a major tenet
of economic reform.
-- Understand the legal issues are complex but Hunt's claim
appears valid.
-- Hunt has stated its intention to take this issue to the
Public International Court in Paris. Litigation promises to
be a costly and lengthy legal battle, with negative
implications for Yemen's image among international investors.
-- Block 18 is critical to Yemen's revenue, both for oil and
LNG. It is important that reputable international companies
such as Hunt manage these projects.

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Hunt Prepares for Battle
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4. (C) Ambassador met May 24 with Yemen Hunt representatives
for continued discussion regarding the American oil company's
Block 18 extension. Hunt executives included Vice President
and General Manager Wendell Caviness, post's regular
interlocutor, joined by Senior VP Tom Meurer, Senior VP and
General Counsel Dennis Grindinger, and Karim Abu Hamad,
General Manager of Yemen Hunt LNG Co. Hunt maintains it
intends to take Yemen to the Paris Public International
Court, as outlined in the Production Sharing Agreement (PSA).
Company lawyers are confident they can prevail in court by
charging that the ROYG violated the sanctity of Hunt's
contract with the Ministry of Oil (MOO). In Hunt's view,
Parliament did not have the authority to reject the PSA
extension, only to ratify or reject specific terms of the
agreement. Meurer explained that Hunt will not seek
injunctive relief for Block 18 revenues if it goes to court,
but will claim for damages based on a price of USD 50 per
barrel. The Government will have to find someone else to
operate Block 18, said Meurer. "Once it goes to court, we're
out."

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"Stop the Train Wreck"
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5. (C) Hunt is looking for assistance to "stop the train
wreck," said Meurer. Hunt's usual ROYG contacts, Minister of
Oil Baraba and Presidential Advisor al-Iryani, appear no
longer to have the President's ear (ref B). During April
talks with al-Iryani, confided Meurer, both sides reached a
compromise in which Hunt would keep the existing production
area and return the remainder of Block 18 to the ROYG. The
ROYG would then reimburse Hunt for exploration and investment
costs. The President, however, was reportedly unmoved by
this proposal. Nevertheless, this week a contact close to
Saleh maintained that the President is indeed ready to deal,
reporting that Saleh wants to draw up an entirely new
contract with a higher profit share for the ROYG. Ambassador
offered to engage Saleh directly on the matter, and on June 3
Hunt accepted the offer.
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Block 18 Debated in the Media
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6. (C) The Hunt negotiations have recently received extensive
and varied coverage in the press. Caviness acknowledged that
Hunt leaked its letter to MOO protesting the Block 18
decision (ref A). Government newspaper al-Thawra reported
that Prime Minister Bajammal made overtures to Hunt in a May
25 meeting. Bajammal stated that the ROYG would shift from a
PSA arrangement to an operations contract, but that Hunt
would be given priority in the selection process. (Note:
Hunt indicated that it would only accept a PSA agreement,
which provides more extensive guarantees for foreign
investors. With an operating contract, the Government
retains full ownership over the Block, and has greater
freedom to alter terms in the agreement. End note.) In
contrast, the English language newspaper Yemen Observer
blasted Hunt, saying the company was suing Yemen for USD 7
billion (denied by Hunt) and leveling multiple accusations at
Hunt relating to the extension agreement.

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Hunt Rubs Parliament the Wrong Way
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7. (C) According to MP Mohamed Al-Shaddi and former MP Dr.
Saadaldeen Talib, Hunt's letter was a tactical mistake (ref
A). Parliament believed that because the extension included
amendments to the original PSA, MPs have a constitutional
right to vote on the matter. By denying this, Hunt aroused
the ire of independent-minded MPs who believed that Hunt was
violating Yemen's sovereignty. Following last year's scandal
surrounding Block 53, contended Talib, oil is the one area
where Parliament seems to have some real leverage over the
executive. Al-Shaddi agreed, saying the scandal tarnished
the President's reputation and he is loath to repeat the
experience. Talib feels that Hunt tragically misread Yemeni
politics and the role of Parliament in this affair. Because
Hunt's letter mentions Parliament by name, it was formally
presented to MPs by Bajammal, thereby forcing the legislature
to respond to the allegations and making any potential deal
more difficult.


8. (C) Hunt executives believe that much of Parliament's
opposition is due to personal vendettas against the American
company. For example, said Meurer, Abdul Khader Thabet,
Chairman of the Economic and Petroleum Affairs Committee and
one of the extension's main opponents, recently lost a
trucking contract with Hunt. Meurer also accused Hamid
al-Ahmar, powerful MP and son of Parliamentary Speaker Sheikh
Abdullah al-Ahmar, of attempting to squeeze out Hunt so he
could operate Block 18 in partnership with a Saudi company.
Talib disagreed, saying the issue is much too sensitive for
Thabet to exert such influence. It is more likely, he said,
that Saleh himself was not satisfied with the deal negotiated
by the MOO and gave Parliament the green light to shoot it
down. Al-Shaddi said that all MPs believe the MOO to be a
sacrificial lamb in this struggle, offered up so that Saleh
can appear tough on oil corruption.


9. (C) The corruption is real, argued Talib, pointing out
that Parliament's report issued before the extension vote was
based on MOO numbers that showed Hunt would receive 15 USD
per barrel while a fresh operator could do the job for only 2
USD per barrel. At a low estimate of 40 USD per barrel, said
Talib, the ROYG stood to lose 1 billion USD. The inclusion
of the shady Crest Company as a third partner, continued
Talib, smacked of corruption similar to that in the Block 53
scandal. In that case, ROYG officials and oil companies
agreed to undersell crude to a third party and then
distribute profits derived from the market prices to unnamed
partners.

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Oil Spills Over to Gas
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10. (C) Adding fuel to the fire, the Block 18 debate is
influencing the still pending Liquid Natural Gas (LNG)
agreement. Grindinger said that with LNG Yemen has the
opportunity to move investment to a new level. The ROYG
stands to benefit from equity, taxes, and royalties derived
from 6.7 million tons of natural gas extracted per year,
"This could be a twenty year cash machine for the
Government," said Grindinger. However, the project depends
on USD 3 billion up front, half of which will need to be
borrowed, and capital could prove hard to secure if the Block
18 extension ends up in international court. Hunt is
preparing its case, "to drive a stake in the heart of the
Government's ability to contract," said the Hunt council.
AbuHamad contended that a high profile case would damage the
ROYG's international commercial reputation. Coupled with
ongoing security concerns, this would level a crushing blow
to financing efforts for the LNG deal.


11. (C) As the LNG agreement reaches the finish line, rumors
abound that the LNG deal is going the way of Block 18.
Parliament recently raised objections similar to those in the
Hunt debate, saying that French company Total was issued
three "unconstitutional" extensions without review by
Parliament, and that prices were fixed below market value in
collusion with Total and the South Korean Kogas Company.
According to AbuHamad, Deputy Prime Minister Ahmed Sofan
wants to reserve natural gas for domestic use in order to
meet Yemen's domestic energy deficit, a sentiment echoed by
Parliament's Petroleum Committee. The Committee ordered
further study and recommended halting any further measures
pending a full review.

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Saleh Between Hunt and a Hard Place
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12. (C) Comment: Hunt takes great pains to advance its image
as an honest dealer in Yemen, contrasting itself with other
foreign companies who regularly pay bribes to ROYG officials
and private parties. In the case of the Block 18 expansion,
however, Hunt may have been caught with its pants down. It
seems clear that Hunt got a sweetheart deal from MOO, and in
exchange agreed to give the little-known Crest a healthy
share of profits. Having just drawn blood from the executive
in the Block 53 scandal, Parliament set its sights on the
Hunt extension. By revealing price fixing schemes,
Parliament identified an oft-used means of embezzlement among
Yemen's elite. MPs have essentially accused foreign
companies of colluding with their own corrupt government
officials.


13. (C) Comment Continued. By repeatedly dismissing
Parliament's authority, Hunt angered MPs, increasing their
resolve to attack the PSA extension. This is not to imply
that Hunt's legal case is invalid, but rather that litigation
could be a disaster for all parties. Without a deal, Hunt
will be forced to abandon Block 18 and Yemen's investment
climate will be seriously damaged. As joint investors in the
LNG venture, both sides stand to lose considerable profits.
Despite tough words, Hunt is still willing to negotiate, but
time is running for all sides. President Saleh, as always
the deciding factor, is currently caught between Parliament's
anti-corruption fervor and the expediency of a deal with
Hunt. It is likely that he will push for a new deal, but it
remains unclear by what mechanism both Hunt and Parliament
can be appeased. End comment.
Krajeski