YEMEN: NATURAL GAS EXPORT LAUNCH PLAGUED BY

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 001064

SIPDIS

DEPT FOR NEA/ARP ANDREW MACDONALD
NSC FOR AARON JOST
DEPT OF TREASURY FOR JOANNA VELTRI AND SAMANTHA VINOGRAD
DEPT OF COMMERCE FOR TYLER HOFFMAN AND JOSHUA REITZE
USCG FOR IPSED MIKE BROWN

E.O. 12958: DECL: 06/08/2019
TAGS: ECON EPET ENGR EWWT FR KS YM
SUBJECT: YEMEN: NATURAL GAS EXPORT LAUNCH PLAGUED BY
DELAYS, ROYG MISMANAGEMENT

REF: A. 08 SANAA 1923

B. MCKAY-BROWN E-MAILS 6/3/09

C. SANAA 876

D. SANAA 299

Classified By: CDA Angie Bryan, for reasons 1.4(b) and (d).


1. (C) SUMMARY. Shipments of liquefied natural gas (LNG)
from Yemen to South Korea and the U.S. originally intended to
begin in December 2008 have been delayed until at least
August 2009, resulting in costly penalties for the export
company, Yemen LNG (YLNG),and more than USD 100 million in
lost revenue for the ROYG. Factors in the ongoing startup
delay include the ROYG's lag in providing adequate coastal
defense for the liquefaction plant at Belhaf, a dispute with
the upstream ROYG gas provider, tribal unrest during the
pipeline construction phase, and the Ministry of Oil's
insistence that YLNG hire unqualified local tribesmen to
operate advanced machinery. These headaches may scare away
much-needed foreign investment in the oil and gas sector.
Criticism within the ROYG and in Parliament regarding the
amount of Yemen's natural gas allocated to YLNG for export
(54 per cent of total reserves) has been muted thus far, but
could grow louder if ordinary Yemenis feel they aren't
benefiting from the ROYG's gas revenues. END SUMMARY.

ROYG SLOW TO PROVIDE ADEQUATE COASTAL SECURITY AT BELHAF
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2. (C) The launch of Yemen's natural gas exports through the
Yemen Liquefied Natural Gas Company (YLNG) has been delayed
five months and counting, due to inadequate ROYG-provided
coastal security at the Belhaf LNG facility, ongoing disputes
with the ROYG gas provider upstream and several contractors
downstream, and tribal considerations along the pipeline
route from Marib. YLNG Deputy General Manager Karim Abuhamed
told EconOff on June 5 that LNG shipments to South Korea
slated to begin in December 2008 have been pushed back until
August 2009 (REF A). Shipments to the U.S., originally
intended to start April 2009, will not begin until November
2009 and are contingent upon a forthcoming U.S. Coast Guard
foreign port security assessment (REF B). As a result of
these delays, YLNG has had to pay daily penalties to its
buyers, totaling USD 2.4 million thus far, for failure to
deliver gas on time under the terms of the its Sales and
Purchase Agreements (SPA's). The ROYG has also suffered from
the startup delays, losing out on more than USD 100 million
in potential export royalties.


3. (C) The ROYG's numerous delays in providing robust coastal
defense at the two-train, 6.7 million metric ton/year Belhaf
liquefaction facility, with its two shoreline LNG storage
tanks and 800 meter-long loading jetty, have contributed to
the overall export launch delay. YLNG Security Manager
Gilles Chalancon told EconOff during a May 6 visit to Belhaf
that YLNG was unhappy with the Yemen Coast Guard's (YCG)
performance in early 2008 and decided to switch to the Yemeni
Navy (YNAV),whose vessels currently patrol the waters
outside the offshore restricted area. In late 2008, YNAV
repeatedly asked YLNG to purchase new patrol vessels for use
at Belhaf and, when informed this was not feasible,
instructed YLNG to finance the transportation, repair, and
fueling of a YNAV vessel stationed at Hodeidah on Yemen's
west coast, according to YLNG General Manager Joel Fort.
Unconvinced with YNAV's capabilities, YLNG convinced the
French Government to send a pair of French naval commandos to
train YNAV personnel stationed at Belhaf in May 2009. (Note:
French company Total Oil is the majority shareholder in YLNG.
End Note.)

DISPUTE OVER GAS QUALITY MEANS MORE DELAYS, PENALTIES
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4. (C) Another costly delay has resulted from YLNG's ongoing
dispute with SAFER Exploration and Production Operations
Company, the national oil company that extracts the natural
gas in Marib, over the quality of the feedstock gas. The
Gas-Sharing Agreement (GSA) between YLNG and the ROYG calls

SANAA 00001064 002 OF 002


for a certain percentage of energy-rich Liquefied Petroleum
Gas (LPG) to be included in the content of the natural gas it
sends via pipeline to Belhaf, but SAFER has not yet upheld
its end of the bargain, preferring to direct the LPG to
Yemen's domestic market to be used as cooking gas. If SAFER
does not soon increase the percentage of LPG in the
feedstock, YLNG will be forced to pay additional fines to its
clients under the SPA terms, further cutting into YLNG's
profits, according to Deputy GM Abuhamed.


5. (C) A number of Post energy sector contacts told EconOff
that the SAFER management has long been working at
cross-purposes with YLNG, determined to keep as much natural
gas underground as possible in order to bolster flagging oil
production levels. (Note: Some natural gas in Marib is
currently re-injected into oil wells to enhance crude oil
extraction rates by increasing pressure underground. End
Note.) SAFER is not the only ROYG agency unhappy with YLNG's
progress: Ministry of Electricity officials hinted to EconOff
their displeasure with the ROYG's generous allocation of
natural gas to YLNG for export rather to power plants for
domestic use (REF C). Ministry of Trade and Industry
officials complain that Yemen should have created a domestic
petrochemicals sector using feedstock gas.

TRIBAL CLAIMS AFFECT PIPELINE SITING, BELHAF OPERATIONS
-------------- --------------


6. (C) YLNG and the ROYG chose the Marib-Belhaf pipeline
route, hardly the shortest (and thus most efficient) distance
to a coast, in order to traverse the least number of tribal
areas possible, according to Ibrahim Abulohoum (strictly
protect),GM of the Ministry of Oil's Gas Division. Despite
this attempt, the 320-km pipeline runs through areas
controlled by 22 different tribes, grouped into four main
confederations: the al-Jeda'an, the Jahm, the Murad, and the
Abeida. Abulohoum told EconOff on June 5 that kidnappings of
YLNG personnel, vehicle seizures, and outright access denial
to certain areas were responsible for delays in laying the
pipeline. YLNG officials also complain that the Ministry of
Oil's plan to increase the percentage of Yemeni employees to
90 per cent has forced them to hire unqualified Yemenis based
on tribal considerations. The Ministry of Oil repeatedly
requested that YLNG hire local tribesmen with little or no
formal education as operators of multi-million USD control
panels and other advanced equipment.

COMMENT
--------------


7. (C) The ROYG's mismanagement of aspects of the Yemen LNG
project -- coastal security, upstream gas operations, and an
overly aggressive Yemenization policy -- illustrates the
disconnect between the ROYG's oft-repeated desire to attract
major international oil and gas companies to Yemen and its
abysmal relations with existing firms. The ROYG-caused
headaches associated with the YLNG startup will likely serve
as a cautionary tale for companies considering bringing
much-needed investment in the oil and gas sectors. So far,
there has been only limited grumbling from members of
parliament (REF D) and within the ROYG regarding the quantity
of gas reserves allocated for export rather than domestic use
(9.15 of Yemen's 17 trillion cubic feet total reserves).
Such resource nationalism could grow more pronounced,
however, if ordinary Yemenis perceive they aren't benefiting
from the ROYG's gas royalties. YLNG's success will hinge
upon the USG's foreign port security assessment of Belhaf,
natural gas prices, and security along the pipeline route and
coast. END COMMENT.
BRYAN