POST SUPPORTS OPIC INVESTMENT IN YLNG

UNCLAS SANAA 000916

SIPDIS

SENSITIVE

SIPDIS

PLEASE PASS TO OPIC FOR SENIOR INVESTMENT OFFICER, MARK
SPROLES.

E.O. 12958: N/A
TAGS: PREL EINV EPET ECON YM
SUBJECT: POST SUPPORTS OPIC INVESTMENT IN YLNG

REF: A. SECSTATE 45831

B. SANAA 843


1. SUMMARY: In this cable, Post provides comments on the
Overseas Private Investment Corporation,s (OPIC) support for
the Yemen Liquefied Natural Gas (YLNG) project, as requested
in Ref A. YLNG is crucial for Yemen's economy, with
considerable benefits for American companies. The ROYG has
generally honored contracts with foreign companies, with the
possible exception of an ongoing dispute with Hunt Oil over
Block 18. Post does not believe this will affect the future
of YLNG, but strongly encourages an OPIC project team to
evaluate the current legal and management status of Block 18
and its gas reserves. Security remains a major concern in
Yemen, but Post does not anticipate specific problems that
will derail YLNG. END SUMMARY.


2. YLNG is critical to Yemen's economy, especially in the
face of declining oil reserves. With expected government
profit of approximately USD 1 billion per year for twenty
years, YLNG is the largest available source of new revenue
for the ROYG. It is also an important project for American
jobs and companies, with an estimated total of USD 400
million of the initial investment paid to contractors in the
United States. In addition, over fifty percent of the gas is
intended for U.S. markets. (Ref B)


3. Post recognizes the critical role played by OPIC in
financing the deal, and strongly backs OPIC's support for the
project. The ROYG has a strong track record in honoring
contracts with U.S. and foreign investors in the oil and gas
sector, and can be expected to do the same in YLNG.
Considering the importance of the project to Yemen's future,
the ROYG cannot afford to lose the confidence of
international investors.


4. The one significant exception to Yemen's positive history
in the sector is the dispute with Hunt Oil over Block 18.
Hunt contends that the ROYG violated its five-year extension
agreement with Hunt, and the case is currently under
arbitration in Paris. Post expects that the ROYG will
respect the court's ruling, no matter what the outcome. This
case is unlikely to be resolved before the OPIC board of
directors makes its decision on financing YLNG, but continues
to affect the project in several ways.


5. The current operator in Block 18, the major source of gas
for YLNG, is the government-owned Safir Company. Several
observers have expressed doubts about Safir's competence in
this role. There is also a secondary legal dispute involving
Hunt and the ROYG, in which the American company contends
that the Marib Services Company -- and not Safir -- is the
legal caretaker of the upstream gas facilities. Post hopes
that the OPIC mission can help clarify the overall situation
in Block 18, and reassure investors in the feasibility of the
YLNG project.


6. The security of YLNG facilities is, and will remain, a
major concern. The planned pipeline traverses some of
Yemen's most remote tribal regions, which have been the
target of violent attacks in the past. The ROYG is working
closely with the YLNG company, however, to ensure maximum
security, as it has on other major oil and gas facilities. A
project of this magnitude will require constant vigilance,
but post does not anticipate that security concerns will
disrupt the operation of YLNG at this time.
Khoury