YEMEN'S BLEAK OIL FUTURE: PRODUCTION DECLINE,

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 001596

SIPDIS

DEPT FOR NEA/ARP ANDREW MACDONALD
DEPT FOR S/CIEA MICHAEL SULLIVAN
DEPT FOR EEB/ESC/IEC/ENR JOEL KOPP
DEPT OF THE TREASURY FOR BRIAN MCCAULEY
NSC FOR AARON JOST

E.O. 12958: DECL: 08/26/2019
TAGS: ECON EPET EIND ENRG NL YM
SUBJECT: YEMEN'S BLEAK OIL FUTURE: PRODUCTION DECLINE,
LITTLE NEW EXPLORATION ACTIVITY

REF: A. SANAA 1549

B. SANAA 227

C. SANAA 1375

D. SANAA 1121

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


1. (C) SUMMARY: Yemen's crude oil production has declined
gradually and consistently since peaking in 2001, but it took
the past year's drop in oil prices, and the subsequent ROYG
budget crisis, to focus the country's economic leadership on
problems in the energy sector. A lack of security for new
exploration activities, inefficiencies at the national oil
company, and a natural decline in the productivity of mature
oilfields are all to blame for diminished production.
Yemen's economic leadership sees attracting major
international oil companies such as BP or Shell as a panacea
that would stave off further stagnation and delay the need
for politically difficult decisions in the energy and power
sectors. This focus on attracting only major companies, none
of which have expressed interest in coming to Yemen, serves
as a distraction from more feasible goals, such as better
maintaining equipment at the national oil company and
improving security in the most troubled oil-producing areas
(Shabwah, Jawf, and Ma'rib) to facilitate expanded
exploration in areas with known reserves. Given other, more
pressing threats to the government's stability, energy sector
reform will likely have to wait for the next fiscal crisis to
come along. END SUMMARY.

OIL WOES: WHAT, OR WHO, TO BLAME?
--------------


2. (SBU) Yemen's crude oil export revenues have declined
sharply over the past year, depriving the country of much
needed cash and sparking a new level of soul-searching within
the government regarding the lack of new investment in the
energy sector. Sharp fluctuations in the global price of oil
are more to blame than any dramatic change in Yemeni
production levels, which have declined gradually and
consistently since peaking in 2001. Yemen's two geological
basins, Ma'rib and Masila, suffered production declines of
18% and 30%, respectively, over the past year, according to
Ministry of Finance figures, while oil prices dropped by far
greater margins during the same period.


3. (C) Some factors driving Yemen's declining production are
within the government's ability to reform: a lack of security
in oil-producing governorates, corruption within the Ministry
of Oil, and insufficient equipment maintenance at Safer, the
national oil company. Other factors -- a decline in the
efficiency of maturing oilfields and a limited supply of
water needed to maintain well pressure -- will remain beyond
the ROYG's control. Safer's Block 18, historically Yemen's
most productive oil concession block, now produces less than
45,000 barrels per day (BPD),down from 200,000 BPD when U.S.
Hunt Oil was the operator throughout the 1990's and early
2000's. "Safer just doesn't do maintenance on its equipment
anymore, either out of laziness or lack of funds," Hunt Oil
General Manager Mike Graham told EconOff on August 20. Safer
General Manager Mohamed al-Hajj faults the natural exhaustion
of Yemen's resources, and a lack of new data for continued
exploration, for decreased production. ROYG Petroleum
Exploration and Production (PEPA) Deputy Chairman Nasr Ali
al-Humaidi blames oil companies for not conducting basement
drilling that would tap presumed resources held in traps
below existing finds. (Note: Oil company contacts are highly
skeptical that basement drilling would lead to additional
discoveries, given Yemen's known geological features. End
Note.)


4. (C) With the exception of the Ministry of Oil, which
remains ever optimistic about the prospects for a major new
discovery, Yemen's economic leadership seems largely to have
accepted Yemen's gloomy oil future. "Yemen's future is not
in oil, there's none left," Central Bank of Yemen
Sub-Governor and oil marketing committee member Ibrahim
al-Nahari told EconOff in March. Despite the rollout of a

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high-profile "Top 10 Economic Priorities" reform package that
mentions Yemen's "promising" oil sector future (REF A),the
official behind many of reforms on the list, Deputy Finance
Minister Jalal Yaqoub, told EconOff on August 18 that the
potential for new oil discoveries was "hopeless, and we know
it." Uncharacteristic by usually upbeat ROYG public
relations standards, a recent ROYG-sponsored investment
promotion advertisement in Foreign Affairs magazine states
that Yemeni oil reserves have already peaked and will be
depleted by 2020.

FOCUS ON MAJOR OIL COMPANIES AS A PANACEA
--------------


5. (C) Ministry of Oil officials (REF B) and National
Investment Committee members (REF C) view attracting major
international oil companies (IOCs) to explore in open blocks
as the country's only hope, a strategy that U.S. and local
energy analysts uniformly consider a fool's errand. With the
exception of French Total, the oil companies operating in
Yemen are small- and medium-sized, independent oil companies,
most of which do not have access to the capital necessary to
properly maintain oilfield services equipment, build
expensive pipelines, or exploit advanced technologies that
could enhance oil recovery rates. ROYG officials are
convinced that attracting even one of a small handful of top
IOCs -- companies such as BP, Shell, and ExxonMobil -- would
yield dramatically higher production rates at existing wells,
significant new discoveries onshore, and big investment in
offshore research. According to a 2008 ROYG policy, major
oil companies are allowed to negotiate directly with the
government rather than compete against smaller firms for
concession block tenders. Some ROYG officials seem mystified
as to why IOCs have not shown more interest in Yemen's 34
remaining open blocks. "We don't understand. Our PSA
(Production-Sharing Agreement) terms are generous, and we're
confident the oil is there," Mohamed Thabet, Chairman of the
Oil Committee in Parliament, told EconOff. Dismissing the
security concerns that have plagued the companies already
operating in Yemen, Deputy PEPA Chairman Humaidi said that
major companies will be able to pay the local tribes more
money to "keep them quiet" and improve security.


6. (C) Major oil companies are unlikely to come to Yemen
anytime soon, owing to the rapidly deteriorating security
situation and the absence of any compelling geological data
hinting at the possibility of major new reserves.
Houston-based exploration and production experts from
Marathon, ConocoPhillips, and Anadarko all told EconOff in
early August that, given current security conditions, their
firms are not interested in coming to Yemen. The
considerable risks above the ground are simply not balanced
out by any signs of something promising below the ground,
according to the IOC representatives. Hunt Oil GM Mike
Graham, whose company shares Block 5 production with
ExxonMobil, says that Exxon long ago ruled out offshore
exploration in Yemen: "they did a bit of seismic imagery off
the southwest coast and saw nothing persuasive." Shell Oil
came to much the same conclusion in 2008, according to
internal Shell analyses shared with EconOff by Ministry of
Oil consultant Ibrahim Abulohoum (please protect). The Shell
report, written by staff geologists after numerous visits to
Yemen, states that Block 18 in Ma'rib is the only area with
any potential for expanded production and that neither the
Yemeni-Omani border region nor any of Yemen's offshore blocks
hold much promise. Major IOCs have much higher overhead
costs than smaller companies, meaning that much larger
discoveries are required to justify exploration and
production costs, further adding to the challenges Yemen
faces in attracting top firms, according to Graham.

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


7. (C) Neither the ROYG's myopic approach to PSA negotiations
with existing companies (REF D) nor its dismissive attitude
towards security threats in the field bode wel for Yemen's
ability to change the course of it energy future. The

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government's single-minded focus on attracting major IOCs,
none of which have advanced beyond preliminary talks with the
Ministry of Oil, is a distraction from more achievable goals:
improving performance at Safer, increasing security in parts
of the most troubled oil-producing governorates (Shabwah,
Jawf, and Ma'rib),or merely making internal seismological
imagery publicly available to potential investors. While the
sharp decline in oil revenues has unnerved ROYG economic
decision-makers, Ministry of Oil officials see little cause
for concern. According to these officials, the next big
discovery is always around the corner and decreased
production rates portend little more than a temporary setback.


8. (C) COMMENT (CONTINUED): From the standpoint of economic
reform, the worst thing that could happen to Yemen would be a
new oil discovery that would dampen the voices of reformers
who argue for a more diversified revenue stream and stave off
desperately-needed change in the various ROYG oil agencies.
The ROYG's Top 10 Priorities platform, which acknowledges the
urgency of oil sector reform, offers the U.S. something with
which to hold the government's feet to the fire. Getting the
country's leadership to focus on the energy sector at a time
when the ROYG is fighting more urgent threats to its
stability, however, may be too much to hope for. END COMMENT.
SECHE