Yemen Launches New Push For Investment In Oil/Gas, Power Sectors

VOL. XLV

No 27

8-July-2002

YEMEN

Yemen Launches New Push For Investment In Oil/Gas, Power Sectors

MEES Mediterranean Editor Bill Farren-Price reports from San'a.

Yemen has launched a new push to increase investments in its oil and gas sectors, including power and petrochemcals, by announcing a policy of flexibility in negotiation and through a commitment to amend existing legislation if necessary in order to ease the path for new investors seeking to establish operations in the country. Speaking at the inauguration of the IBC-sponsored 2^nd Yemen Oil & Gas Conference in San'a on 24 June, Yemen’s Oil Minister Dr Rashid Barba' said that the government was “ready and willing to give and take objectively on any new and pioneering proposals even if it leads to making any new agreement a legal framework in itself.” His comments echoed those of Prime Minister 'Abd al-Qadir Bajamal, who emphasized the strategic importance that the government was placing on energy sector investment. “Through legislative changes or through the amendment of existing laws, our aim is to serve and promote investment in general and investment in the oil and gas sector in particular,” he said in his opening address to delegates. He emphasized that this focus would apply not just to the oil upstream sector, but also to the “production and marketing of gas, as well as the further development of our refining and petrochemicals sector.”

The new impetus towards attracting new players into Yemen’s oil and gas sector is driven by the country’s economic reliance on oil export revenues, which at present represent some 70% of state revenues. Oil production is, however, expected to decline towards the end of 2002 and fall by 7% in 2003 unless new discoveries are made and brought on-stream, according to World Bank forecasts. In his presentation, World Bank country manager Robert Hindle said that while Yemen was one of the best macroeconomic performers in the region, the forecast decline in oil production represented a major challenge. “We see alternatives – the use of gas reserves, minerals, mining and services – but these depend on the government delivering on the need to improve the security situation,” he said. According to World Bank data, Yemen output is expected to decline by an average of 10% annually in the period to 2010. Government oil revenues are also vulnerable to oil price falls since the proportion of production treated as cost oil under production-sharing agreements will increase as prices fall.

Yemen Forecasts Average 470,000 B/D Oil Production In 2002

In his keynote address, Dr Barba' said that there were currently 24 companies operating in 37 exploration and production blocks in the country, of which seven were producing blocks (see map, MEES, 3 December 2001). He said that Yemen’s oil output stood at an average 439,000 b/d in 2001 and estimated average production for 2002 at 470,000 b/d after production start-up from Block 53 (MEES, 4 February). He estimated domestic demand at 90,000 b/d, growing at an annual rate of 6%.

With this strong growth rate in mind, Dr Barba' noted plans for the establishment of two new privately-owned refineries, which had already been agreed with Gulf investors, as well as the expansion of the existing Marib topping plant from 10,000 b/d to 25,000 b/d and the expansion of the Aden refinery (MEES, 17 June). The two new refineries will be located at Ras 'Isa (30,000 b/d) and al-Mukalla in Hadhramout (25,000 b/d expandable to 100,000 b/d – MEES, 17 December 2001 and 18 February). The Ras 'Isa refinery, which will be operated by Hood Oil, will meet the needs of the local market in Hodeidah, Mahweet and Haja governorates, while the al-Dhaba refinery will meet local requirements in Hadhramout, Shabwa and Mahra as well as offering petroleum products for exports after the expansion phase is complete.

Marketing Still Holding Back Yemen LNG

Meanwhile, progress on establishing firm marketing contracts for the proposed Yemen LNG (YLNG) project, which was launched after six years of intense and complex negotiations in 1997, still appear to be far from achieving tangible results. Marketing efforts currently underway by YLNG are not expected to yield final results for at least a year due to the current weak market conditions, YLNG General Manager Christian Pech told MEES. Mr Pech said, however, that according to the project development plan, YLNG was expected to deliver first LNG 43 months after project sanction, which would be announced shortly after markets were secured. Mr Pech said that with the front-end engineering and design (FEED) work completed by Technip and the engineering procurement and construction (EPC) tender complete, progress would be swift once buyers were signed up. In his project update on YLNG, Mr Pech said that India, Korea and Europe represented the major marketing prospects for the project. He said that India was a natural market for Yemen LNG given the short shipping distance, although he conceded that following the bankruptcy of the Dhabol power project, the likelihood of a deal with an Indian buyer in the near term was limited. In terms of Korean buying interest, Mr Pech noted that YLNG already incorporated Korean shareholders in the form of Hyundai and SK Corporation. YLNG plans to make company equity available to buyers.

Mr Pech said that the project had certified proven gas reserves of 10.2 TCF dedicated to the project. The $2.5bn venture will involve the laying of three pipelines; including a 320km/36in line which will carry a maximum of 900mn cfd from the Marib block to the liquefaction plant at Balhaf; a 175km/14in spur pipeline to carry 100mn cfd of gas to San'a for power generation and a 26km/20in transfer line within the Marib block. Flow rates at both the Balhaf and the San'a lines will be upgradeable through the installation of intermediate booster compression stations. The 50 hectare Balhaf site will incorporate two LNG production trains with a combined capacity of 6.2mn t/y (expandable to 6.9mn t/y), using the APCI optimized compression process.

According to Mr Pech, YLNG’s competitive advantage lies in the fact that future upstream development will be done at very marginal costs since the upstream segment of the project is already operating. Associated gas production from the Block 18 Marib fields is running in excess of 2bn cfd, all of which is reinjected. Block 18 is operated under a production-sharing agreement with Yemen Exploration & Production Company (the Hunt-led consortium), which is due to expire in 2005.

Mr Pech said that project advisors Credit Suisse First Boston had prepared preliminary financing documents and would be ready to launch financing upon project sanction. The Yemeni Government, after a meeting with YLNG shareholders on 18 June, agreed to grant the venture an extension of three years, with the option of a fourth (MEES, 24 June). There had earlier been suggestions that the proposed LNG project might be suspended or scrapped because of the consortium’s failure to secure a customer for the gas (MEES, 27 May). The shareholders are TotalFinaElf (leader, with 36% stake), Yemen Gas Company (21%), Hunt Oil of the US (15.11%), ExxonMobil (14.51%), a South Korean consortium led by SK Corp (8.38%) and Hyundai (5%).

Yemen Mulls Other Gas Options As Power Expansion Becomes Urgent

Aside from YLNG, the government is also promoting the use of its estimated 16 TCF gas reserves in place in other industries. The government has developed framework proposals for the use of gas in power, fertilizer, petrochemical, transport and domestic sectors. However, with power generation expected to fall sharply behind consumption in the coming years, the use of gas in power generation presents the strongest economic case. With just 34% of the population supplied with electricity in 2001 and consumption at a globally and regionally low level of 108kWh/capita, demand is expected to rise by 7-10% annually. According to a paper presented to the conference by Minister of Electricty and Water Yahya al-Abyad, Yemen’s present available generation capacity is 885mw, compared with present demand of 1,080mw. Power losses are known to be high due to an ageing distribution network. The government is in the process of upgrading the power network through a five-year program to run until 2005, which will invest $354mn in new generation capacity, $100mn in transmission lines and $200mn in upgrading the distribution network. The government has also undertaken to improve metering, billing and revenue collection.

To counter the power generation deficit, the government has opted to encourage private sector participation in the generation sector through the use of the independent power production (IPP); build, operate, transfer (BOT) or built, own, operate, transfer (BOOT) investment models. The government is already in talks with investors for the construction of a new gas-fired 400mw plant in Marib, with the power purchase agreement for the project initialed in May. The first stage of this plant envisages four 100mw turbines, with an additional 100mw turbine added annually from 2004 to bring the plant to 800mw in 2008. The Electricity and Water Ministry is also in talks with the Saudi Fund for Development for an additional 300mw gas-fired plant planned to enter service in mid-2007.