NEW CRUDE OIL SALES MECHANISM SPARKS TRIBAL RIVALRY

C O N F I D E N T I A L SANAA 001782 SIPDIS DEPT FOR NEA/ARP ANDREW MACDONALD DEPT OF TREASURY FOR BRIAN MCCAULEY E.O. 12958: DECL: 09/30/2019 TAGS: ECON ENRG EPET PGOV PREL UK CH KS FR SZ YM SUBJECT: NEW CRUDE OIL SALES MECHANISM SPARKS TRIBAL RIVALRY REF: A. SANAA 1549 ¶B. SANAA 1617 ¶C. SANAA 1375 Classified By: Ambassador Stephen A. Seche for reasons 1.4(b) and (d) ¶1. (C) SUMMARY: The ROYG, led by presidential son Ahmed Ali Saleh, has shifted responsibility for selling Yemen's crude oil production share away from the Ministry of Oil and towards an interagency committee, sparking a behind-the-scenes business rivalry between tribal leaders and government officials who serve as local agents for international oil trading companies. The new oil marketing policy has attracted additional bidders to the monthly oil tenders, eroding tribal leader Hamid al-Ahmar's longstanding monopoly over the process and increasing the ROYG's oil revenues due to more competitive pricing. Despite these gains, the story of Yemen's latest reform effort illustrates the challenges posed by Yemen's web of tribal rivalries and presidential patronage networks. END SUMMARY. MORE EFFICIENT, TRANSPARENT MARKETING SCHEME... -------------- -- ¶2. (C) The ROYG, under the direction of presidential son and Yemeni Special Operations Force Commander Ahmed Ali Saleh, has shifted responsibility for selling the ROYG's share of crude oil production away from Ministry of Oil officials and toward an ad hoc, interagency technical committee of Ahmed Ali loyalists. (Note: Many of the oil sales technical committee members also sit on the Ahmed Ali-chaired National Investment Committee responsible for the ROYG's recent Top 10 Economic Reform Priorities package described in REF A. End Note.) Oil committee members claim that this shift in decision-making, which began in March 2009, has increased transparency in the oil sales tendering process, attracted new and more qualified bidders, and generated millions of dollars in additional government revenue stemming from more competitive pricing. According to post energy contacts, the widened pool of international bidders is challenging the crude oil sales monopoly long held by London-based Arcadia Petroleum Limited and its local agent, Hashid tribal leader and businessman Hamid al-Ahmar (REF B),setting off a behind-the-scenes business rivalry between tribal leaders and government officials jockeying for a cut of the additional profit opportunities. ¶3. (C) Since cutting Ministry of Oil officials out of the oil sales decision-making process, the ROYG has attracted new companies to the monthly bidding rounds, including BP and Unipec, a subsidiary of Chinese oil company Sinopec, according to Central Bank of Yemen sub-governor and oil marketing committee member Ibrahim al-Nahari. Under the terms of the ROYG's Production-Sharing Agreements (PSA) with the private companies that operate Yemen's oilfields, the ROYG sells its 65% share of the country's total production from two coastal oil export terminals. The ROYG offers international commodity trading firms, most of which employ local agents to influence ROYG decision-makers and sniff out competitors' offers, the chance to bid on approximately 3.3 million barrels of crude oil every month, Deputy Minister of Oil Abdulmalik Alama told EconOff in early September. (Note: The entirety of the ROYG's share of production from the Masila basin is sold for export, while only 600,000 barrels from the Marib basin is sold for export. The rest is purchased by the ROYG-owned Aden Refinery Company for the domestic market. End Note.) ...OR TRIBAL POWER PLAY? -------------- ¶4. (C) Oil marketing committee leader and Deputy Finance Minister Jalal Yaqoub claims that the new crude oil sales mechanism has ended an era in which Arcadia Petroleum and Hamid al-Ahmar bought Yemeni crude at below-market value and scared away potentially more competitive bidders by threatening to kidnap their representatives (REF C). Tribal figure Ibrahim Abulahoum, the local agent for the Swiss-registered company Trafigura and a close friend of Yaqoub, paints the new committee in a somewhat different light. Laughing heartily, Abulahoum told EconOff in September that "Jalal doesn't know it, but I put him on the oil committee so that Trafigura could displace Hamid al-Ahmar and Arcadia." (Note: The Abulahoum family leads a significant contingent of the Bakil, one of the country's two largest tribal confederations. Hamid al-Ahmar is the de facto leader of Hashid, the other confederation. It is unclear how Abulahoum "put" Yaqoub on the oil committee, but this possibility cannot be discounted, given Abulahoum's personal relationship with Saleh and his extensive investments in the energy sector. End Note.) ¶5. (C) Two other players round out the competition: Sheikh Mohamed Naji al-Shaif, a rival to the Abulahoums for leadership of the Bakil, who is the local agent for the commodity division of the Korean conglomerate Daewoo, a regular bidder for Yemeni oil tenders, and presidential nephew and Central Security Forces Chief of Staff BG Yahya Saleh, who represents a French commodity trading company (NFI). Yahya Saleh's business interests will be adversely affected by the work of the new oil committee, according to Yaqoub (strictly protect). "If we're just going to select the highest bid each month, why does the French company need Yahya? He's essentially useless to them now. They can simply conduct their business from Paris, cutting Yahya out of the process." ¶6. (C) Hamid al-Ahmar and Arcadia Petroleum have not sat by quietly since March, when new market entrants began to cut into their profits by raising the average bid price of Yemeni oil, compared to the average Brent Crude index prices, the industry standard. In July 2009, according to oil committee members, Arcadia sought to wipe out its competition by buying Yemeni oil at an artificially high price designed to temporarily scare away competitors from the Yemeni market, only to return the next month with a much lower offer, less competition, and thus less revenue for the ROYG. Arcadia bid 102 cents above Brent Crude, when it had previously bid 2-3 cents below Brent, a market-distorting gamble that netted the ROYG an extra USD 3.4 million in July. Both Hamid al-Ahmar and committee members themselves describe the committee's work as a struggle to wrest power from Hamid and his longstanding monopoly over the country's crude oil shipments. "Hamid is not a good man. Oil trading is where he really gets his money from," Yaqoub told EconOff in mid-August. For his part, Ahmar discounts the threat to his business interests. "The USD 50,000 I get from Arcadia each month is an infinitesimally marginal part of my income," he told EconOff in late August. "They (Ahmed Ali and his advisors) are fools if they think they're going to target me this way. If I lose the Arcadia contract, I'll just go on to represent another company. Either way, I win." COMMENT -------------- ¶7. (C) The tribal and other rivalries caused by changes in the way the ROYG sells crude oil illustrate the challenges posed by even seemingly benign reforms. Every change in the way contracts are tendered, decided, and implemented will inevitably challenge entrenched commercial interests and shift centers of decision-making power within the government. Few individuals inside or outside the government are likely to view future economic reforms, many of which also target the contracting prerogatives of line ministries, as anything nobler than self-interested power grabs. This criticism is invariably targeted at Ahmed Ali, whose business interests many local businessmen predict will benefit from the expanded powers given to members of the National Investment Committee he chairs. No economic reform, no matter how fiscally compelling or well-intentioned, is likely to escape the morass of Yemen's tribal rivalries, often played out in the business arena, and competing presidential patronage schemes. END COMMENT. SECHE