Worldpress.org

Yemen's Natural Gas: Who Benefits?

Jane Novak, Worldpress.org contributing editor, August 4, 2006

One way Yemen's "resource curse" syndrome can be avoided, economists suggest, is to distribute the profits from the sales of natural resources directly to every citizen. (Photo: Khaled Fazaa / AFP-Getty Images)

Freedom House recently noted Yemen as among the world's most corrupt developing nations. With the personal interests of the ruling elite taking priority over national development, nearly half of Yemeni children are malnourished and out of school. Unemployment is high and medical services scarce. A looming water crisis threatens to destabilize the country. Claims of development are little more than government propaganda with the gap between the extremely rich and the extremely poor widening and infant mortality remaining high year after year.

Atop the existing national crisis, experts predict Yemen's oil reserves, which provide nearly 70 percent of governmental revenue, will substantially deplete within a decade. A natural gas project is under development. Yemen LNG (YLNG), the company responsible for producing and marketing Yemen's natural gas, will produce 6.7 million tons of natural gas annually for 20 years. Although the gas liquefaction plant and pipeline is 23 percent complete, concerns exist about sales prices, domestic allocation, and the project's local impact.

Sales Prices

France's energy giant, Total SA is the major shareholder in YLNG with 39.6 percent and is in the lead on the project. Total SA has touted YLNG as "a giant gas project" and noted that it is a main component of Total SA's future growth.

Yemen owns 21.73 percent of YLNG, which estimates Yemen's profits to be $10 billion to $20 billion over the 20-year span. U.S. based Hunt Oil has a 17.22 percent ownership stake in YLNG. Assorted South Korean companies own 21.43 percent of YLNG.

Total SA had the concession to develop and market Yemen's gas since 1997 but was unable to find any customers for nearly a decade. In 2005, with worldwide demand for YLNG surging, Total Gas and Power purchased two million tons of natural gas per year for 20 years, about a third of proven reserves.

Korean Gas Company (Kogas) purchased a 6 percent share of YLNG for $104 million in a transaction negotiated by Yemen's Oil Ministry. Currently Kogas owns 8.88 percent of YLNG. Kogas (like Total Gas) is also a customer, buying between 1.3 million and 2 million tons a year. The remaining third of export production (2.5 million tons) was sold to Suez. Deliveries begin in 2008.

Yemeni parliamentarians have voiced concerns that the sales prices were under market levels. Joel Fort, the general manager of YLNG, dismissed those claims as "a legend." Fort, at a press conference, said Suez and Total Gas purchased the gas in accordance with international prices and the gas is intended for distribution in the U.S. market.

Fears of collusion by YLNG, Total SA, its subsidiary Total Gas, and the Yemeni regime are not unfounded in light of the high level of regime corruption and Total SA's involvement in Iraq's massive "oil for food" scandal. Activists have charged that Total SA uses forced labor in Burma and has wrought environmental devastation in the construction of Burma's Yadana pipeline.

Total SA's corporate policy considers financial transparency "an absolutely fundamental issue" in developing countries. In keeping with this policy, Total SA notes on its Web site, "We disclose information on our activities in different countries." Yet Total SA has not addressed the conflict of interest created by YLNG's sale to Total Gas nor has it disclosed the purchase price.

Another entity withholding information is the Yemeni government, which did not fully inform Parliament of the terms of the transactions. One member of the Parliaments Committee on Oil and Minerals said in a media statement that parliamentary members of President Ali Abdullah Saleh's ruling party, the General People's Congress, were pressured to vote in support of the YLNG sales without having full knowledge of the terms.

In a 2005 interview, Ali Ashal, a Member of Parliament on the Oil and Minerals Committee, told the Yemen Times, "Total did not find us the best possible markets and prices as it is supposed to …

"It is said also that Total has bought also a share of our gas. How can it be a buyer and marketer at the same time? The Oil and Development Committee in Parliament has written to the Oil Ministry warning of the consequences of reaching any decisions regarding the gas project without Parliament being acquainted with the details," he said.

While the sales to Total Gas and Suez are shrouded in mystery, Kogas has been much more transparent. International media have reported the purchase price to be just above $3 per million BTU ex-ship. The price for natural gas in the U.S. is around $11 per million BTU for delivery in January 2008. Current spot prices are near $7 per million BTU according to the Henry Hub Index.

The South Korean Ministry for Commerce, Trade, and Energy noted "the contract is 35-40 percent lower than existing contracts," with pricing at $197 to $218 per ton, while current Korean contracts averaged $322 per ton. Members of Parliament have also raised concerns about whether the contract's adjustments for exchange rate fluctuations are adequate.

While a few other YLNG producers have sold their product at similar levels, Total Gas's market strategy, prepared for stockholders in April 2006, predicts that demand for gas will increase at a rate of more than 2 percent a year through 2030. In fact, global demand for YLNG rose 9 percent in 2005. Total Gas's report predicts "a sharp increase in gas prices," noting "average spot gas prices multiplied by 3 since 2000." With Total Gas predicting higher prices through two decades, YLNG's low price to Kogas is, at a minimum, poor marketing.

The government of Malta posted an article on its Web site calling the transaction "extremely favorable" to Kogas. The article noted that the deal was struck at a time when oil prices were rising and Kogas's price was less than 30 percent indexed to the price of oil. Historically, the price of natural gas has been strictly indexed to the price of oil. It is a sorry state of affairs when the government of Malta has more details about the sale of Yemeni gas than the Yemeni Parliament or public.

Domestic Consumption

Much of the gas being exported is needed for local consumption. Yemen's electric generating and distribution capacity is currently vastly deficient in meeting the public's electrical needs. Less than one-third of households in Yemen have access to electricity from the national power grid. In rural areas, only 13 percent of the population does. Most cities have regular rolling blackouts. Yemen's electricity shortage, in addition to impacting quality of life, has a negative impact on economic development, and foreign investment. Yemen's electrical requirements will grow substantially as Yemen's population of 20 million is expected to double in less than 25 years.

The Yemeni government estimated gas reserves were over 16 trillion cubic feet (t.c.f.) and this figure has been widely reported. Yemen's proven reserves, as produced by Hunt Oil during oil production in oil block 18 at Marib, are 10.3 t.c.f. In 2005, the Yemeni government failed to renew Hunt's agreements on block 18, and Hunt subsequently charged Yemen with expropriation. Block 18 is now operated by a state run concern. Of the 10.3 t.c.f. of certified proven reserves, 9.1 t.c.f. have been sold and 1 t.c.f. has been allocated for the local market.

However, the nation requires three times that amount to satisfy its needs for electricity through 2020. According to the Ministry of Electricity and Water, 1,650 megawatts of new electricity generating capacity are needed to satisfy demand by 2020. This would require 3 t.c.f. of natural gas. Other estimates, which include energy needed for desalination of water, have placed Yemen's gas needs through 2020 at 5 t.c.f. With the regime selling 90 percent of its proven natural gas reserves, Yemen will have to buy energy internationally for domestic consumption. Prime Minster Bajammal had assured Parliament that sufficient reserves remained after the export sales to satisfy local needs.

Local Impact

YLNG's "Yemenization" program will create only about 600 permanent jobs for Yemenis over 20 years. Some temporary jobs will be available during the two years of pipeline construction. Media reports have stated that the YLNG project will create 10,000 jobs to 15,000 jobs for Yemenis while YLNG uses the term "several thousand" on its Web site. Joel Fort, in an interview with the Yemen Times, said that "many" jobs would be created during the pipeline construction period and "several hundred" permanent positions were available for Yemeni citizens. YLNG has selected 650 trainees from 16,000 applicants and less than 200 are in training currently.

The Balhaf plant and pipeline will be large by international standards and may result in the destruction of some archeological sites. YLNG has begun constructing a new 320-kilometer pipeline that runs from the processing centers in Marib to the liquefaction plant at Balhaf harbor. A pipeline already exists, but according to YLNG, using the existing pipeline would require "expanding the security zone." The route of the new pipeline runs through 171 sites of archeological importance, most of them dating back to the Bronze Age. YLNG's experts have deemed two sites "scientifically significant." YLNG may divert the pipeline around the two sites but if that is not practical, the two sites have been surveyed and photographed in the event they are damaged or destroyed by the pipeline construction.

Local fishermen who harvested large quantities of fish in Balhaf harbor will be displaced by the liquefaction plant. YLNG is providing some compensation to both residents and fishermen who will be impacted by construction, although there is some confusion. YLNG's Environmental and Social Impact Assessment (E.S.I.A.) notes, "All of the data obtained to date on livelihoods in the project affected regions is difficult to reconcile." Balhaf was selected in part because a substantial corral reef eliminated the need for a breakwater, and YLNG is building a breakwater in another location for the displaced fishermen.

The long-term effects on the marine ecosystem and Yemen's fishing industry are unclear. The E.S.I.A. classified the large corral reef as "regionally significant" and "endangered." The E.S.I.A. noted Balhaf's corral reef is a nursery for commercial fish. YLNG has stated that "a small amount" of corral will be destroyed during construction but has not provided estimates. The harbor and pipeline have been designed to run through "less sensitive" corral areas. The E.S.I.A. noted the presence of sea turtles in Balhaf harbor but did not observe any turtle eggs. The plant will discharge heated water into the sea but the E.S.I.A. maintains that it will not have a "significant" impact on water temperature in the highly sensitive Balhaf region. A proposed Coastal Zone Management Plan included part of Balhaf as protected marine zone. The E.S.I.A. noted that in discussions with YLNG, the Environmental Protection Agency has indicated that Balhaf will be designated a general use zone.

YLNG plans to make a financial contribution toward the implementation of the Coast Zone Management Plan. It says it plans to implement some much needed community development programs, but the extent to which YLNG will put some real muscle into working with the local communities remains to be seen.

Conclusion

Yemen's natural gas project is central to Yemen's economic development, but only if strict corruption controls are implemented and transactions are made with transparency and in the best interest of the Yemeni people.

The Yemeni regime repetitively under reports the projected revenue of oil sales in the annual budgets, often by 30 percent or more. The actual revenue is not publicly known and there is no end of year reconciliation. The differential is allocated to a "special account" and effectively vanishes. The past 20 years of oil production in Yemen have done little to raise the standard of living for the Yemeni people. The coming 20 years of gas production may do little more.

Like some developing resource-rich countries, the Yemeni regime maintains authority through bribery and military might, rather than through growth-oriented economic policies. Typical of this "resource curse" syndrome, Yemen has high corruption and low investment in education. Economic diversification is stunted by governmental neglect, other industries are largely uncompetitive, and the regime is content with its dependency on the export of natural resources. One way economists suggest the syndrome can be avoided is to distribute the profits from the sales of natural resources directly to every citizen, which — beyond being inherently just — would assist in developing private enterprise and diversifying the economy. With regard to Yemen's natural gas reserves, it remains to be seen if President Saleh's regime is operating in the best interests of the Yemeni people or based on the personal interests of regime key players. Early indications are not good.

Jane Novak is an American journalist and political analyst.

Copyright © 1997-2017 Worldpress.org. All Rights Reserved. - - Privacy Notice - Front Page