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...
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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
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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