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Fri 10 Aug 2007 12:00 AM

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Yemeni oil production is waning

Can declining oil production be reversed, or will alternative industries need to be found?

A key problem for Yemen, one of the world's poorer countries, with a population of over 22 million people, is that oil production is beginning to wane, and there are few immediate signs that the trend can be decisively reversed.

Last year the value of oil exports rose by 13.1% to US $6.7 billion, equivalent to 91% of the country's total exports. This increase, however, was achieved at a time when international oil prices, as measured by the OPEC basket, actually climbed 21.4%. In other words, although oil earnings went up, the volume of Yemeni crude shipped actually fell. Things are about to get tougher. Many analysts believe 2006 will prove to have been a peak year for oil prices, with a moderate decline setting in over the following two to three years. With both falling volume and prices, Yemen could therefore take a significant revenue hit.

Abdullah Saleh can be seen partly as an old-style strongman, partly as a future-focused reformer.

In fact, the early signs are already there. According to recently released figures, in the first four months of this year the value of total crude exports fell 45% to US $789 million, down from US $1.44 billion in 2006.

Driving this process is the steady depletion of reserves at the large Masila and Marib fields. Total production fell to around 350000 barrels per day (bpd) in the first quarter of 2007, compared to 413000 bpd for much of last year. Investment is going into the development of new fields but the likely output gains will not come quickly enough to offset the fall from the older fields. Although there is talk of reversing the trend, the government's own Development Plan for Poverty Reduction (DPPR) for the 2006-10 period acknowledges that oil output is likely to decline by around 27% between 2006 and 2010.

Oil and gas development continues to be encouraged, however. In May oil minister Khaled Mahfoudh Bahah said 10 offshore exploration blocks in the Gulf of Aden and the Red Sea would be put out to tender during the third quarter, and that Occidental of the US, Nexen of Canada, and Statoil of Norway were among international companies expressing interest. Officials are hoping that the auction could raise as much as US $600 million worth of investment. Bahah said that of 40 blocks already open to development, only 12 were producing. He estimated that new discoveries in untapped areas might yield another 150000 bpd of new production within the next five years. The minister is also looking at various projects to build new refineries in the country, reducing its dependence on the single existing 140000 bpd facility at Aden.

Yemeni President Ali Abdullah Saleh for his part has underlined his government's commitment to attracting new foreign investment. In April he stressed his desire to encourage local, Arab, and foreign investment, saying that ‘we are willing to re-evaluate all laws concerning investment, banking, taxes, customs and others to remove anything that would obstruct investment'.

Prospects for gas could be significant. The new development here is the US $3.7 billion Yemen LNG project, which is expected to begin production of 6.7 million tonnes per annum (tpa) of LNG from 2008. Two thirds of that will be shipped to the US, and one third to South Korea. The development consortium includes Total of France, Yemen Gas, and a group of South Korean companies including SK Corp, KOGAS, and Hyundai. The first LNG shipment is expected to leave the Arabian Sea port of Balhaf by the end of 2008.

Total, which apart from the LNG project is also exploring new crude discoveries in Block 10, is now the largest foreign investor in Yemen. General manager Jean-Michel Lavergne said earlier this year that ‘between 2006 and 2009 we will invest between US $1 billion and US $2 billion. We are drilling over 20 wells in Block 10 in 2007 and will start raising production at the end of 2008. Output will reach over 50000 bpd'.

Lean years

Whichever way you look at it, however, it is likely that oil and gas, which drives roughly 75% of the local economy, is heading for some lean years. To put this in context it is worth looking a little more widely at the country. Paradoxically, perhaps, Yemen is one of the poorest and most tribal societies in the region, but also, one that in relative terms is still among the more open and democratic.
Abdullah Saleh can be seen partly as an old-style strongman, partly as a future-focused reformer. Which of these two he will be remembered for is not clear. Emerging after a military coup as leader of the traditionalist North Yemen in 1978, he eventually negotiated an end to its conflict with Marxist South Yemen in 1990. He pressed on with the process of unifying the two, despite a new outbreak of the civil war in 1994.

Since then the government has allowed the development of opposition parties and an elected 301-seat House of Representatives, which shares legislative power with an appointed 111-seat Shura Council. It is clear that the ruling party, the General People's Congress (GPC) remains dominant, and controls the state and the media; but there is nevertheless some space for debate and discussion.

Saleh won the first direct presidential elections in 1999 with 96% of the vote, although the opposition dismissed them as a sham. He stood for another seven-year term in September last year, winning the contest with 77% of the vote versus just under 22% for the main opposition candidate, Faisal Bin Shamian of the JMP (Joint Meeting Parties) opposition coalition. This time the views expressed by international observers were mixed, with some suggesting that the polls were ‘generally free and fair'.

Despite this relative openness, Yemen suffers from a variety of political, tribal, regional, and religious tensions, and violence has never been far below the surface. The French oil tanker Hadhramaut was bombed in 2002. In 2006 the authorities foiled two attacks on oil and gas installations. More recently, tourists were targeted in a car bomb attack near the Queen of Sheba temple in Marib, 170 km east of Sana'a. This latest attack was particularly significant, as the development of tourism has been seen as an alternative to excessive reliance on oil and gas.

With its ancient culture and temples Yemen could be a major international tourist attraction, but the threat of violence has held investment and development back. Tourism currently accounts for 1.5% - 2.0% of GDP, a proportion that could rise. Tourist numbers rose by 15% last year to 382000.

Government officials suggest the struggle against terrorism will not be successful until living standards are raised. "For us in Yemen, we thing the biggest problem is unemployment and poverty" said interior minister Al Alimi recently.

Another threat to stability comes from a rebellion in the northern province of Saada, led by Shi'ite Muslim rebels under Abdul Malik al-Houthi. Fighting since 2004 has killed hundreds of people and displaced thousands. A truce with the central government was negotiated with Qatari mediation in June, but appeared to be close to breaking down in July.

The Carnegie Endowment of the US places Yemen in eighth position in its list of states most likely to disintegrate.

This year the US Fund for Peace, a lobby group, described Yemen as one of the top 25 states in the world facing failure. The Fund, which prepares ‘Failed State Index Scores' said these placed it 24th out of the 177 countries it had reviewed in its 2007 report. Not surprisingly, perhaps, Yemeni officials rejected the Fund's approach. Dr Jalal Yakob, a senior official at the Planning and International Cooperation ministry, said the country would have done better if researchers had taken into account the reforms of mid-2006, which included the creation of a more independent judiciary and a drive against corruption.

Mohammad Al Sabri, spokesman for the opposition JMP, however, blamed the poor ranking on the ‘fluctuations and ups and downs' of the reform process of the preceding two years. Dr Mohammad Al Dhahri, a political scientist at Sana'a University, said there had been reform, ‘but it was very little and without translation of the slogans of reform into action, Yemen will remain under the threat of failure and breakdown'.

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