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Oil

Although Yemen is not a major hydrocarbon producer relative to several other countries in the Middle East, the country has sufficient oil and natural gas resources for both domestic demand and exports. However, Yemen's difficult security environment hinders the production and transport of those resources. Yemen's oil production has decreased significantly since peaking in 2001 because of natural decline in the country's aging fields and frequent attacks on its oil infrastructure. Yemen's oil production declined after 2001 as a result of the country's maturing fields, and attacks on the country's oil infrastructure since 2011 have led to significant short-term disruptions.

In September 2014, the Shia Houthi rebel group seized the Yemeni capital of Sanaa. In January 2015, the Houthis captured the presidential palace and other strategic buildings, forcing President Hadi and his ministers to resign and to dissolve parliament. In March 2015, a coalition led by Saudi Arabia began airstrikes on Houthi targets.

As Houthi control spread across the country and the political situation became more precarious, the energy sector was drastically affected. Foreign firms operating in Yemen were forced to abandon operations and evacuate staff. Nearly all production in Yemeni oil and natural gas fields was shut in; petroleum production declined from an average of 127,000 barrels per day (b/d) in 2014 to approximately 44,000 b/d through July 2015. Pipelines and port facilities were repeatedly attacked and disrupted. The Aden Refinery is the largest in the country, accounting for almost all of Yemen's total refining capacity of 140,000 bbl/d. The Aden refinery had been shut down since force majeure was declared in April 2015 and subsequently attacked in July. The Yemen liquid natural gas plant had also been shut down since April 2015.

Generalized fuel subsidies reached over 7 percent of GDP in 2013 and consumed more than half the countrys hydrocarbon revenue. Furthermore, they disproportionately benefitted the rich and encouraged smuggling. To reduce these subsidies, the authorities increased the prices of diesel, gasoline, and kerosene by 50 percent, 20 percent, and 100 percent, respectively, in mid-2014. The de facto retail prices did not increase as these products were only available at parallel market prices. At the same time, the authorities increased the Social Welfare Fund transfers to the poor by 50 percent.

The main factors that impeded progress on transparency and participation have been dependence on oil revenues, which have granted the State autonomy from the local economy, a power nexus which gives substantial power to tribal leaders, army officers and other socially influential characters, and prevalence of patron-client relations and centrist tendencies that have delayed the implementation of meaningful decentralization of power and authority to elected local governments. This has led to a situation where despite some positive moves, respect for and protection of human rights in general and womens's rights in particular, is yet to be institutionalized.

Following a minor discovery in the south in 1982, an American company found an oil basin near Marib in 1984. A total of 170,000 barrels per day were produced there in 1995. A small oil refinery began operations near Marib in 1986. A Soviet discovery in the southern governorate of Shabwa proved only marginally successful even when taken over by a different group. A Western consortium began exporting oil from Masila in the Hadramaut in 1993, and production there reached 420,000 barrels per day in 1999. More than a dozen other companies have been unsuccessful in finding commercial quantities of oil. There are new finds in the Jannah (formerly known as the Joint Oil Exploration Area) and east Shabwah blocks.

In November 2005, Hunt Oil's 20-year contract for the management of Block 18 fields ended. Despite agreement with the Government of Yemen on a 5-year extension, the Republic of Yemen Government abrogated the agreement via a parliamentary vote (not called for in the contract). The company formally requested arbitration proceedings at the International Chamber of Commerce in Paris in November. No decision has been rendered.

The share of crude oil production in GDP having risen from 5.5% in 1995 to 35.7% in 2000, fell to 30.3% in 2003. Production in 2005 was running at about 400 thousand barrels per day, compared to over 430 thousand in 2002. The negative impact of lower oil production was more than offset by higher oil prices since 2003. While oil accounted for around 30% of GDP, and over 70 percent of Government revenue, it does not provide much employment. A major share of revenue generated by oil accrues to the Government, which has used it to support an expanding public sector. The foreign oil companies that extract the oil and reap the balance of revenues have, by and large, not reinvested this income to further expand their activities in Yemen.

The economic development path of Yemen is marked by over dependence on oil, with little attention to creating the conditions for the growth of a well integrated national economy based on agriculture, fisheries, manufacturing and tourism. The capital-intensive nature of the oil industry has meant that the growth of per capita GDP has not been led to the creation of a commensurate number of jobs.

Yemen's oil exports in 1995 earned about $1 billion. By 2005, exports had grown to approximately $3.1 billion and by one estimate comprised roughly 70% of government revenue. Oil production declined in 2007 due to dwindling reserves, but at that time revenue was expected to be stable as long as oil prices remained high. Production declined from the peak of nearly 450,000 barrels per day in 2002 [at which time oil was selling for about $30 per barrel] to 300,000 barrels per day by 2008 [at which time oil was selling for about $70 per barrel] . In 2009 production declined to 180,000 barrels per day, less than half that of five years earlier.

Based on the rapid decline in oil production, it is plausible to expect Yemen oil production, and oil revenue, to decline to negligible levels around 2015, barring the discovery of new oil fields.

liquid natural gas (LNG)

The export of liquid natural gas (LNG) may be a promising source of income in the future. Oil located near Marib contains associated natural gas. Proven reserves of 10-13 trillion cubic feet could sustain a liquefied natural gas (LNG) export project. A long-term prospect for the petroleum industry in Yemen is a proposed liquefied natural gas project (Yemen LNG), which plans to process and export Yemen's 17 trillion cubic feet of proven associated and natural gas reserves. In September 1995, the Yemeni Government signed an agreement that designated Total of France to be the lead company for an LNG project, and, in January 1997, agreed to include Hunt Oil, Exxon, and Yukong of South Korea as partners in the Yemeni Exploration and Production Company. The project envisions a $3.5 billion investment over 25 years, producing approximately 3.1 million tons of LNG annually. A Bechtel-Technip joint venture also conducted a preliminary engineering study for LNG production/development.

In 2005, Yemen LNG signed two agreements for the sale of 4.5 metric tons per year, the majority of which will be exported to the United States and South Korea. Construction on the LNG export facility began in September 2005, when it was expected to begin exporting in 2009. In October 2009, the Liquefied Natural Gas Company announced the start of producing LNG at the Balhaf Plant in southeastern Yemen. Yemen will export 5.7 million cubic meters of LNG a year. One cubic meter of LNG is equivalent to about 21,000 cubic meters of natural gas, and about 23.686 million Btu (MMBtu). LNG prices are usually expressed in US dollars per million Btu (MMBtu). In recent years market pricing for natural gas has ranged between $100 and $400 per 1000 cubic meters. Over the next 20 years, the project is expected to bring in $30-50 billion - $1.5-2.5 billion per year. One source estimates Yemen's profits to be $10-20 billion over the twenty year span - $0.5-1.0 billion per year.

By late 2009 Yemen was moving towards changes to approved production sharing agreements for oil-associated gas through negotiations with petroleum companies operating in the country. In September, the Dana Gas and Crescent Petroleum (Naft Al-Hilal) Companies in the Untied Arab Emirates announced they had signed a memorandum of understanding with Yemen to set up a gas city in the country. The project could attract investments worth $ 15-20 billion over 25-30 years, doubling foreign investment in Yemen and providing 15,000 direct jobs and 75,000 indirect jobs.



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