TRIBAL CONFRONTATIONS, ROYG HEADACHES CAUSE

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 001121

SIPDIS

DEPT FOR NEA/ARP ANDREW MACDONALD AND
INR/NESA SEAN MOFFATT
DEPT OF THE TREASURY FOR SAMANTHA VINOGRAD AND JOANNA VELTRI
NSC FOR AARON JOST

E.O. 12958: DECL: 06/17/2019
TAGS: ECON EINV EPET ENRG YM
SUBJECT: TRIBAL CONFRONTATIONS, ROYG HEADACHES CAUSE
OCCIDENTAL PETROLEUM TO MULL YEMEN PULL-OUT

REF: A. SANAA 1064

B. SANAA 227

Classified By: Ambassador Stephen A. Seche for reasons 1.4(b) and (d).


1. (C) SUMMARY: Occidental Petroleum (Oxy),whose exploration
and production operations in Shebwa and Jawf governorates are
under siege by increasingly brazen tribal attacks, is
considering pulling out of Yemen. The two factors that will
influence Oxy's final decision to stay or leave are relations
with local tribes and the fate of stalled negotiations with
the ROYG over a Gas-Sharing Agreement that would allow Oxy to
exploit natural gas reserves in its oil concession blocks.
Absent an improvement in the security situation in the tribal
areas and more generous gas-sharing terms from the ROYG, Oxy
will leave Yemen, according to General Manager Donald
Lipinski. Oxy's threatened departure highlights the ROYG's
lack of authority over the tribes in the oil-producing
governorates, making exploration activities not merely risky,
but sometimes impossible. END SUMMARY.

TRIBAL CONFRONTATIONS HINDER OIL EXPLORATION
--------------


2. (C) Occidental Petroleum is considering ending its oil
exploration and production operations in Yemen due to
increasingly violent confrontations with local tribesmen and
stalled negotiations with the ROYG over a Gas-Sharing
Agreement (GSA),Oxy General Manager Donald Lipinski told
EconOff on June 15. Oxy, one of the two remaining U.S. oil
companies in Yemen (the other is Hunt Oil),began operating
in Yemen in 1989 and currently produces 28 MMBL (thousand
barrels per day) in oil concession blocks S-1 and 75, roughly
10 per cent of Yemen's total daily production. As production
rates in Oxy's blocks dwindle, the company has sought to
undertake expensive 3-D seismic imaging of unexplored
territory to pave the way for future exploration activities.
Tribesmen in the Shebwa and Jawf governorates, however, have
repeatedly prevented Oxy-contracted teams from conducting
such geological survey work on their land, by blocking roads,
firing weapons at team members, and seizing Oxy vehicles.
Three Oxy-contracted seismic imagery team members were killed
in 2007 and three more were injured in February 2009, despite
a ROYG security escort and a Ministry of Oil permit to
operate in the area.


3. (C) The ROYG has only exacerbated the problem by lavishing
tribal leaders in Shebwa and Jawf with new SUV's and cash
payments in exchange for granting Oxy contractors brief
access to their land for seismic shoots, according to Oxy
Deputy GM Aruna Ratnayake. The ROYG attempt to appease the
tribes has only emboldened them in the past year, resulting
in small groups of armed tribesmen approaching the main gate
of Oxy's facility in Shebwa and demanding jobs. In the
majority of cases, Oxy has given in to the tribes' demands,
offering them "ghost worker" positions that list local
residents on the payroll but do not require them to actually
show up to work. "What are we going to do? They'll just
shoot one of our guys if they don't get what they want,"
Lipinski told EconOff. (Note: The Yemen Liquefied Natural
Gas Company (YLNG) has also had to adopt the "ghost worker"
practice in tribal areas along its 320-km natural gas
pipeline route from Marib to the coast. End Note.)

GAS AGREEMENT NEGOTIATIONS WITH ROYG DRAG ON
--------------


4. (C) Finding a profitable way to exploit the natural gas in
Oxy's two concession blocks, totaling one TCF (trillion cubic
feet),is the only way Oxy will stay in Yemen, according to
Lipinski. The natural gas in block S-1 and 75, some of which
is currently re-injected into oil wells to enhance crude oil
recovery (REF A),does not fall under Oxy's existing
Production-Sharing Agreement with the ROYG. In order to
monetize the gas, Oxy must negotiate a GSA with the ROYG. So
far, however, the ROYG's proposed GSA terms, which include 40
per cent royalties and a USD 20 million signing bonus, would
prevent any gas recovery from being commercially viable,
according to Lipinski. Criticism of the ROYG's unbending GSA
negotiating stance extends to members of the ROYG itself.
Ministry of Oil Gas Division Manager Ibrahim Abulohoum
criticized his own Ministry regarding the Oxy GSA, telling
EconOff on June 5 that the Ministry's terms would scare off
Oxy and other potential natural gas investors. Deputy

SANAA 00001121 002 OF 002


Finance Minister Jalal Yaqoub, rumored to be in the running
for the Oil Minister slot in the event of a cabinet
reshuffle, derided the Oil Ministry as corrupt, incompetent,
and unable to appreciate the longer-term benefits of
maintaining good relations with the major oil and gas
companies in Yemen, during a June 4 meeting with EconOff.

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


5. (C) Any net oil production loss resulting from the
departure of Occidental Petroleum from Yemen might be
fiscally inconsequential, but would send a strong negative
signal to the very oil companies that the ROYG is trying to
woo with promises of favorable Production- and Gas-Sharing
Agreement terms (REF B). Other oil companies in Yemen,
including Hunt, echo Oxy's claims of being unable to expand
operations beyond existing sites because of tribal
confrontations. Increasingly, the lack of ROYG authority
over the tribes in the oil-producing governorates of Marib,
Jawf, and Shebwa is making new exploration not merely risky,
but sometimes impossible. By its own admission, the ROYG's
only hope for monetizing its modest oil and gas reserves is
to attract major companies with the resources to undertake
expensive geological surveys, drill offshore and in remote
areas onshore, and build pipelines across treacherous tribal
territory. The departure of Oxy, the U.S.'s fourth largest
oil exploration and production company, would make this goal
even more distant. END COMMENT.
SECHE