On the edge

It is the poorest country in the Arabian Peninsula and relies heavily on oil production for its economic survival. But with output set to stop in 2017, what does the future hold for Yemen? O&G reports.

“There have been a number of AQAP arms caches recently discovered in Saudi Arabia and it is generally accepted that this group will follow up on its threats ”

As the world's 36th biggest oil producer Yemen lags far behind its MENA neighbours, having produced just 281,000 barrels per day in 2009. But while its output may represent a trickle not a flood in regional terms, this impoverished country relies entirely on the oil and gas sector for its future economic survival. Today, oil production accounts for between 70 and 75 percent of Yemen's revenue and over 90 percent of its export earnings. The figures are not dissimilar to the likes of Saudi Arabia, for which oil represents 54 percent of overall output. However unlike the latter, Yemen's economic circumstances are dire. It is the most impoverished country on the Arabian Peninsula with an unemployment rate of 35 percent, which is expected to double by 2035. Around 45 percent of the country's population is under the age of 15 and the nation is suffering crippling water shortages, with 90 percent of water currently used for agriculture.

The war on terror

While poverty and environmental concerns are the most immediate issues concerning Yemen's population, terrorism looms as the biggest potential threat to the country's economic future and to its fragile oil and gas industry. The high profile terrorist group Al Qaeda in the Arabian Peninsula (AQAP) has strongholds in the eastern Yemeni province of Hadramaut and in the towns of Marib and Shabwa which are home to the oil and gas fields of major international oil companies, including Total and Hunt Oil. Armed tribesmen in the Marib region have blown up pipelines and issued repeated threats to target new gas projects. The latest reported attempted attack by AQAP was on a pipeline the group threatened to blow up in January this year. Sara Hassan, a security analyst at IHS Global Insight told the Arabianbusiness.com website: "The situation is getting extremely tight where oil and gas installations are and for companies like Total."

Terrorist threats emanating from the country have become even more high profile in recent months, following the attempted bombing of a Christmas Day flight to Detroit by the Nigerian Islamist Umar Farouk Abdulmutallab. He is believed to have trained with Yemen's Al Qaeda branch, which has since claimed responsibility for the failed attack. Meanwhile a month earlier, the US launched a missile attack against two suspected Al Qaeda strongholds in Yemen. According to the business consultancy firm Control Risks' annual security report, terrorism emanating from Yemen is the most significant threat to the Gulf states in 2010. Control Risks analyst, Marie Bos, told Arabianbusiness.com: "Two significant events - the attempted assassination of Saudi Arabia's Prince Mohammed Bin Nayef and the Detroit airline plot - show increased boldness and innovative new techniques. There have been a number of AQAP arms caches recently discovered in Saudi Arabia and this group is generally accepted to follow up on its threats."

These security risks could spell disaster for the future of oil production in the country, which relies heavily on the support of private foreign oil companies. Over 20 foreign firms currently operate concessions in Yemen. Without the necessary resources to tap into Yemen's three billion barrels of oil reserves itself, the government depends on this foreign investment - particularly given the country's declining output. Analysts believe that the country's oil supplies could plummet to zero by 2017 and the cracks are already showing. Yemen's oil income fell by over half last year, according to Ibrahim Al Nahari, Sub Governor of the central bank's foreign banking operations. He told the Reuters news agency that the country's oil income had fallen to US$2 billion in 2009, compared to US$4.4 billion in 2008 - a year-on-year drop of 55.4 percent. He said however that he believed in 2010, oil incomes would recover.

A brighter outlook

Despite the gloomy outlook for Yemen's economy and security situation, Al Nahari, does have some reason for his optimism. Earlier this year, the Yemeni Oil Minister Ameer al-Aidroos, announced that the country intends to boost its daily oil production by ten to 15 percent, bringing the daily total to 300,000 barrels a day. With this aim in mind it has been in negotiations with several international oil companies, including the Chinese Sinopec Corporation, Gazprom and delegations from Chinese, Japanese, Indian, South Korean and Turkish companies. A top priority is to modernise the Aden Refinery which currently produces just 70 to 80 thousand barrels a day. The government aims to boost the refinery's operational capacity to produce its full potential of around 140,000 barrels a day. The most positive development for Yemen's flagging oil sector however was the signing of a deal earlier this year with Total which will see the French oil giant invest US$32 million in oil exploration in Yemen. This investment will focus on sector 85 of the Shabwa province and will involve the digging of four wells. Meanwhile the Austrian oil major OMV is developing the Habban field, which is believed to contain around up to 100 million barrels of crude oil.

As well as focusing on maximising existing oil resources and increasing the barrels produced every day, Yemen is also keen to tap into growing world demand for liquefied natural gas (LNG). It is believed that LNG could play a crucial part in cushioning the Yemeni economy against the blow of falling oil output. Yemen is believed to have an estimated US$17.3 trillion cubic feet of gas reserves and this year it will export an estimated 6.7 million tons of LNG to South Korea, Europe, Mexico and the United States. Total has already invested heavily in Yemen's LNG future, pumping US$45 billion into the Yemen LNG gas plant. The plant started production last October, with a pipeline linking gas fields in Marib to the Gulf of Aden port of Balhaf. The plant has a capacity to produce up to 6.7 million tonnes per year of LNG and could produce revenue of up to US$50 billion by 2028, boosting economic growth by eight percent this year alone. Total has a 39.6 percent stake in the plant while the US firm Hunt Oil holds a 17.2 percent stake. Equally lucrative could be the recent discovery by the international oil and gas developer Oil Search of high levels of gas at the Al Meashar-1 exploration well in which it holds a 34 percent stake. Previously, last November, the company announced that the Tubb'a 1 well in which it holds a 60 per cent stake had shown capacity to produce up to nine million cubic feet a day during tests.

The continued investment by foreign companies into Yemen's energy sector bodes well for its economic future, at least in the near term. However, some analysts warn that even the development of a thriving LNG export business from the country won't be enough to compensate for the gaping hole that will be left once oil supplies dry up.

Samuel Ciszuk, a Middle East energy analyst at IHS Global Insight, said in a report last year: "While LNG exports may offer a brief respite from a future without oil exports, even at full capacity, the country's potential gas exports will not sufficiently replace declining oil production." The most immediate threat to the sector however is terrorism and the extent to which it will deter international oil companies from investing in Yemen's precarious future.