Identifier
Created
Classification
Origin
05SANAA966
2005-04-18 07:41:00
CONFIDENTIAL
Embassy Sanaa
Cable title:  

ROYG REJECTS BLOCK 18 EXTENSION: HUNT CONTEMPLATES

Tags:  EPET ECON YM COM ENERGY 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 SANAA 000966 

SIPDIS

E.O. 12958: DECL: 04/16/2015
TAGS: EPET ECON YM ECON COM ENERGY
SUBJECT: ROYG REJECTS BLOCK 18 EXTENSION: HUNT CONTEMPLATES
"NUCLEAR OPTION"

REF: A. SANAA 326

B. SANAA 04 1537

C. SANAA 106

D. SANAA 196

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

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 000966

SIPDIS

E.O. 12958: DECL: 04/16/2015
TAGS: EPET ECON YM ECON COM ENERGY
SUBJECT: ROYG REJECTS BLOCK 18 EXTENSION: HUNT CONTEMPLATES
"NUCLEAR OPTION"

REF: A. SANAA 326

B. SANAA 04 1537

C. SANAA 106

D. SANAA 196

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


1. (C) Summary. On April 13, Ambassador met with Wyndell
Caviness, Vice President and General Manager of Yemen Hunt
Oil to discuss the ROYG's rejection of the Block 18
extension. It appears certain that there are no further
negotiating options for Hunt and that they have decided to
pursue litigation as their only course of action. Caviness
was explicit that he did not want Post to advocate on Hunt's
behalf. Ambassador made clear that litigation could have a
negative effect on bilateral relations and Yemen's often
stated intention to attract U.S. and foreign investment.
Without the extension, Hunt's future investments in Yemen are
in doubt, specifically in liquid natural gas. Protracted
litigation could have a disastrous effect on Yemen's economy,
and the ROYG's true motives for rejecting the deal remain
unclear. End summary.

--------------
The End of the Pipeline for Hunt
--------------


2. (C) Ambassador met April 13 with Yemen Hunt Vice President
and General Manager Wyndell Caviness to discuss deteriorating
relations between Hunt Oil and the ROYG. Caviness reviewed
Hunt's history in Yemen, which dates back uninterrupted to

1981. The meeting followed an April 5 Cabinet Decree
supporting Parliament's decision to reject an extension of
Hunt's drilling rights in Block 18. Caviness said the move
was politically motivated and violated Hunt's legitimate
agreement with the Ministry of Oil (MOO),signed in January

2004. He added that there was no legal obligation for the
ROYG to refer the extension to Parliament, and that Minister
of Oil Rasheed Baraba repeatedly claimed authority to ink the
deal.


3. (C) There is as yet no official letter from the ROYG to
Hunt, but several ROYG insiders stated explicitly that the
decision is final and ruled out any intervention from
President Saleh. Caviness said that Hunt is left with no

choice but litigation. The oil company will likely sue the
ROYG in Paris, on the grounds that the agreement with MOO is
a legal document signed in good faith. Caviness explained
that Hunt cannot afford to set a precedent of capitulation,
considering its business interests around the world.

--------------
Hunt: "Don't Advocate on our Behalf"
--------------


4. (C) Senior ROYG officials, said Caviness, including the
MOO and Presidential Advisor Dr. al-Iryani, suggested that
USG intervene with Saleh on behalf of Hunt. Caviness
rejected this option, and explained that Hunt Oil wanted to
avoid any suggestion of improper conduct. Ambassador said
this was clear, but that a high profile conflict between the
ROYG and a U.S. company could complicate bilateral relations
at a critical time. Post will explore this issue from a
foreign policy perspective, said Ambassador, as it would have
an adverse effect on the ROYG's stated commitment to
improving the investment climate as part of the MCC Threshold
Program.

--------------
Will Oil and Gas Flow From Block 18?
--------------


5. (C) The Cabinet decision stated that Block 18 will no
longer be operated as a profit sharing operation, but instead
be directly owned by the ROYG, which will hire the services
of an operator. There are few details on how the government
plans to implement this, or who the prospective operators may
be. Caviness said ROYG projections of an additional USD one
billion income are "a joke." If there is no extension, Hunt
will freeze developments in the field, contended Caviness,
and many current employees will be forced to seek employment
elsewhere. If the case were tied up in court, Caviness
continued, both ROYG and Hunt revenue would be locked in
escrow pending a decision. Even if the ROYG wins in court, a
public dispute with Hunt may deter legitimate companies from
doing business in Yemen.


6. (C) Failure to honor Hunt's Block 18 extension agreement
will likely have a negative impact on the ROYG's recent USD
2.5 billion liquid natural gas (LNG) agreements (ref A).
Initial LNG production is expected to come from Block 18, and
Caviness suggested that extended litigation would delay
output. He also hinted that the ROYG is not satisfied with
the deal it signed with Kogas (the Korean Gas Company),and
may subject the LNG deal to Parliamentary approval as well.
In combination with Parliament's rejection of the Block 18
extension, Caviness believes such actions would cause other
foreign companies to rethink LNG investments. (Note: Hunt
owns 18 percent of the Yemen LNG company. End note.)

--------------
Hunt Caught up in the Corruption Debate
--------------


7. (C) In an earlier meeting with econoff, former
parliamentarian Dr. Saadaldeen Talib shared his view that
Parliament acted appropriately in blocking the Hunt
extension. According to Talib, the legislature has the legal
responsibility to review ROYG contracts with foreign
investors, and in the wake of last year's oil scandal would
have been negligent not to do so (ref B). The fault did not
lie with Hunt, said Talib, but with the MOO for signing an
insider deal that would have cost the Yemeni people revenue.
The extension agreement included 15 percent profits for
CREST, a little known company with ties to corrupt officials.
In Talib's view, it was Parliament's role to stamp out
corruption and the Cabinet had a moral obligation to comply.
Caviness argued that in rejecting the extension Parliament
was "throwing the baby out with the bathwater," as Hunt's
experience and expertise would result in greater profits from
Block 18. He added that Parliament's hasty deliberation on
the matter proves that the ROYG was using the GPC-controlled
legislature as a convenient excuse for canceling the deal.

-------------- --------------
Hunt's Departure Bad for Yemen, Bad for US-ROYG Relations
-------------- --------------


8. (C) Comment: A protracted dispute with Hunt would have a
direct negative effect on Yemen's economy. Eighty percent of
Yemen's budget is derived from oil profits and, according to
Caviness, the Hunt concession accounts for thirty percent of
the country's total oil production. Following on the heels
of Proctor and Gamble's litigation and withdrawal from Yemen
due to IPR disputes, Hunt's departure would cast a large
shadow over any future U.S. private investment. Coupled with
doubt over the legitimacy of the Aden Port tender, it would
be even more difficult for the ROYG to attract much needed
foreign direct investment (ref C),a major milestone in
Yemen's MCC threshold proposal bid for MCC country status.


9. (C) Comment continued: Understanding the ROYG's motives on
the Block 18 extension is an exercise in divination. If
Parliament is indeed flexing its muscles in combating
corruption, this could be viewed as a positive sign for
democratic reform in Yemen. A pattern appears to be
emerging, however, in which the ROYG uses the GPC-controlled
Parliament to block unpopular decisions (such as economic
reforms),blaming democracy for the setback. The decision on
Block 18 follows another developing pattern of backdoor
nationalization and reverse privatization (ref D). Close
advisors to the President, keen on immediate profits and
personal gain, are winning the day over reformers who favor
an improved investment climate and long-term growth.
Considering Hunt's central role in U.S. investment in Yemen,
each of these possibilities poses significant challenges to
future bilateral relations. Post will keep its eyes and ears
open as the case progresses, but will not advocate for Hunt
unless specifically asked to intervene. End comment.
Krajeski