Yemen Oil Market Analysis

Yemen’s economy, much like all the economies in the Middle East, relies heavily on oil exports.  Determining the politics of the region requires first a study in the production figures of Yemeni oil and the crude oil exports and petroleum imports.  In order to fully understand the politics of the region, it is beneficial to include other surrounding countries in the comparison.

Yemen is a country situated in the Middle East and is attempting to become a worldwide leader in an economic setting.  The current economy of Yemen relies heavily on oil production, and it can be calculated that if oil production was non-existent in the country, the wealth of the country would fall further and possibly make the country one of the poorest countries in the world (World Fact Book).  The GDP of Yemen demonstrates how even though oil production is a major source of wealth in the country; it still is considered a fairly poor country.  The current figures of Yemen’s GDP are $22.74 billion (in dollars after the exchange rate), which makes Yemen number 85 in the world as far as GDP numbers (World Fact Book).

Comparing Yemen to the entire world is not an accurate depiction.  To garner a greater perception of Yemen’s situation, it is essential to discuss Yemen in terms of their position alongside other countries in the Middle East region.  The table below displays Yemen’s oil production in relation to Saudi Arabia, Qatar, UAE, Kuwait, Oman, and Bahrain.  This table represents how Yemen is in a fairly impressive position when compared to other major oil producers in the area.  Other countries have been producing oil for many years before Yemen, which means Yemen has made some progress in their production capabilities in recent years.

Table: “Production of Oil in Middle East Countries as of 2005 (in thousands)”
Yemen
Qatar
Saudi Arabia
UAE
Kuwait
Oman
Bahrain
Production

(bbls/day)
402
95
2,000
2,540
333
740
184
Source: IEA

Understanding Yemen’s profits from oil and Yemen’s use of oil-based products is important when attempting to identify the strengths and weaknesses of Yemen’s economy.  The following table below displays Yemen’s oil exports and oil imports in barrels per day.

Table: “Yemen Oil Exports and Oil Imports as of 2004 (in bbl per day)”
Petroleum Exports
Petroleum Imports
Barrels Per Day
320,600
58,100
Source: World Fact Book

One important finding from the table above is that Yemen has greater exports than imports.  Actually the amounts are nearly six times more exports than imports, which denotes the fact that Yemen is maintaining a great export market and not risking that market to meet domestic petroleum needs.

3.1.1 Political Factors

Yemen’s current oil production is in a transition.  Currently, Yemen has an aging refinery and a more recent refinery that is supplying crude production capabilities.  Yemen’s dependence on foreign companies for oil services also contributes to the idea of attempting to find new sources.  A look into Yemen’s governmental control over oil demonstrates how the government is attempting to have at least minimal contacts within every facet of oil production and exportation.

Yemen currently has two main refineries in which to conduct their oil marketing.  The Aden and Marib refineries compose the entire refined production capabilities for the country.  The Aden refinery is the oldest refinery in Yemen and was constructed by British Petroleum in 1952 and later acquired by the Yemeni government in 1977 (Yemeni Times Staff).  The Marib refinery is the most recent production facility online for Yemen (Yemeni Times Staff).  A real comparison of the two refineries is needed in order to denote production capabilities and compare the old style to the new style of oil refining.  The Aden refinery produces 120,000 barrels per day as of 2005 (Yemeni Times Staff).  The Marib refinery currently produces 10,000 barrels per day (EIA).  These two figures represent the advancement in technology that Yemen has experienced from the meager beginnings to the current production capabilities seen in the Aden refinery.

Reliance of foreign companies is rampant in Yemen.  In particular, Yemen relies heavily on Hunt Oil and Nexen to procure exploration, production, and exportation.  Both of these companies have conducted exploration for years in Yemen, production facilities such as refineries, and exportation in the form of pipeline construction across the country (EIA).  Yemen’s reliance on foreign companies is in direct contrast to their governmental control over resources in the country.  Yemen does employ many private companies to produce and export their oil, but they still maintain control over these companies by either granting or denying land to drill in the form of concessions and by constructing production-sharing agreements (Oil and Gas Author).  The production-sharing agreements ensure the Yemeni government will get a share of the oil resources found in the country by mandating a large percentage of the royalties from the exportation of crude oil from the country to foreign markets (Oil and Gas Author).  The current situation in Yemen is a strange dichotomy where much reliance on foreign entities is needed, but Yemen still maintains control to a great extent.

3.1.2 Domestic Production of Crude Oil

Yemen’s current status in the world as a Middle East oil producer is comparable to other countries in the region.  Investigating Yemen’s current production and known reserves assists economists in determining Yemen’s leverage in oil production.

Yemen is a non-OPEC oil producer and as such is ranked number 34 in the world for total production of oil (EIA).  As stated in the table from section 3.1, Yemen is in a fairly average position in terms of oil production in terms of 402,000 barrels per day as compared to neighboring countries (IEA).  Yemen’s current position in comparison to its neighbors appears to possibly be at a peak due to Yemen’s shrinking oil reserves.  The table below displays key dates where Yemen’s oil reserves have slowly declined starting with 100% reserves in the 1950s after the introduction of the first refinery, to a key pivot point in 2003, and finally to a point in 2012.

Table: “Reserve Depletion in Yemen”

Source: Thirumalai

 

The table demonstrates that in 2003, depletion of reserves became 2/3 of the total reserves originally present in the 1950s.  The table also displays how in 2012 the total reserves will be depleted and Yemen will not have any proved reserves left.

3.1.3 Domestic Consumption of Petroleum Products

Domestic markets within Middle East countries do exist.  An unusual figure is the amount of domestic use of petroleum products in Yemen.  The main uses of these products involve energy markets.  Yemen’s two main refineries attempt to fulfill a majority of the domestic demand for petroleum products.

The demand for petroleum products in Yemen is not much different from other countries around the world that currently do not supply a major amount of the world’s energy.  Yemen is in a beneficial position where the country produces a certain amount of petroleum products and the country as a whole uses less than what is produced by their production facilities.  The table below demonstrates the production of gasoline/diesel as well as residual fuel oil, and further displays the domestic consumption of these products.

TABLE: “Production and Consumption of Gasoline/Diesel and Residual Fuel Oil (in tons)”
Gasoline/Diesel
Residual Fuel Oil
Production
959,000
399,000
Imports
1,555,000
1,143,000
Domestic Supply
2,449,000
1,082,000
Net Available for Export
65,000
460,000
Source: IEA

As the table above suggests, Yemen has 65,000 tons of gasoline/diesel available for export after the country fulfills its domestic needs.  Yemen utilizes importing to fulfill some of its domestic consumption needs because the two refineries they currently have presumably do not have the capacity to quench the domestic consumption.  The table above shows that domestic production is much lower than the imports of the noted petroleum products.  Compared to domestic supply, Yemen still contains some amount available for exporting due to differing production schedules (IEA).  This allows Yemen to derive some benefit from their resources through lowered imports for domestic consumption.  Currently, the Marib and Aden refineries supply all of the gasoline/diesel and residual fuel oil for domestic consumption and export.

3.1.4 Price Controls and Petroleum Product Subsidies

Yemen maintains tight control over petroleum product prices.  Global pressures have caused Yemen to rethink their pricing policies.  The effects of price controls and subsidies have different impacts on the overall budget of the country.

 

 

3.2.3 Oil Field Licensing Blocks and Operating Companies

Currently the Yemeni government is offering concessions for oil production to meet efficient production standards.  The major players in concession management are well established already within the company’s domestic production market.  However, Yemen realizes the economics of the situation and identifies the need for new concessions in order to establish a greater quantity of bids from a greater variety of companies willing to explore and produce in the country.

The types of concessions developed by Yemen displays how oil reserves are found all around the country.  In order to fully understand the intricate development of the oil producing regions, it is essential to first identify the major players already established within the country.  Currently the major producers of oil that have enlisted many of the concessions blocks in the country are Canadian Nexen, Safer E&P Operation Company, Total E&P Yemen, Jannah Hunt, Dove Energy, DNO, Occidental, Calvally, VICOM, and OMV (EIA).  The Energy Information Administration identifies the fact that Yemen employs numerous and varied companies from different regions and locales.  Since the main companies participating in the concessions have been established, it is helpful to understand exactly what types of concessions these companies have rights to as well as what regions the concessions can be found.  The table below will display the companies already identified above as well as the concession blocks they control and what regions those concession blocks are found.  Also included in the table are the area size, year starting the concession, the accumulated oil production thus far, the average daily production of the particular concession, and the number of fields found within the concession.

Table: “Concession size, region, name, production, and company rights”

Block Name
Region
Company
Area (km)
Start Year
Accum. Oil Prod. (mm bll)
Avg. Daily Prod. (bpd)
Number of Fields
Marib (18)
Marib
Safer E&P Operation Co.
8,479
1986
984.15
66,645
14
Masila (14)
Hadhrmout
Canadian Nexen
1,257
1993
936.81
134,161
16
East Shabwah (10)
Hadhrmout
TOTAL E&P Yemen
964
1997
84.56
42,000
3
Jannah (5)
Shabwah
Jannah HUNT
280
1996
156.56
43,677
5
East SAAR (53)
Hadhrmout
DOVE Energy
474
2001
31.76
10,032
1
Hwarim (32)
Hadhrmout
DNO
592
2000
28.94
14,258
1
Damis (S1)
Shabwah
Occidental
1,156
2004
7.97
9,548
2
East Al – Hajr (51)
Hadhrmout
Canadian Nexen
2,004
2004
17.64
19,129
2
South Hwarim (43)
Hadhrmout
DNO
2,026
2005
4.16
7,484
1
Malik (9)
Hadhrmout
Calvally
3,530
2006
1.38
4,226
3
W. Ayad (4)
Shabwah
VICOM
1,998
1987
9.35
129
3
Al – Uqlah (S2)
Shabwah
OMV
2,100
2006

3,000
3
Source: EIA

The concession of Al-Uqlah is currently not experiencing accumulated production, but is included because it is in the same region as the Jannah, Damis, and W. Ayad blocks.  Also, the Al-Uqlah block is already experiencing values for daily production in the 3,000 barrels per day range.  It can be presumed that this area will experience accumulated production soon due to the readily producing blocks found in that region and after the block has some time to further produce.  The table above also demonstrates that the length of time the concession began and the acreage covered by the concession will contribute some to the overall production of the concession, but smaller concessions with less time also have produced high numbers in terms of production capacities.  It is important to note that the major blocks in play are situated around three distinct regions, which further emphasizes that Yemen is concentrating production within a smaller sample of their country’s area, but also emphasizes the idea that Yemen has some room to grow.

Yemen has created many different concession areas, but currently the concessions that are having activity lie in only certain specific areas.  A concession map that is current as of February 2008 displays how Yemen is concentrating on production within only certain areas.  Below Source: PEPA: “Concession Map”

 

The concession map listed previously displays the producing areas or the areas that currently have active exploration.  The white areas are concessions that do not have production or active exploration.  The fact that many white areas exist on the map demonstrates that the government currently has many concessions up for bid, but it is also useful to discuss the concessions created and up for bid since 2003 to better understand Yemen’s concentration on further development.  As of right now there are a total of 87 concession blocks, 12 total producing blocks used by 11 companies, 26 blocks in the exploratory phase currently being explored by 16 companies, 7 blocks awaiting approval, and a total of 34 open blocks (PEPA: “Concession Map”).  These figures represent the stationary aspect of the concession leases and production, but also represent the prospects of growth that Yemen is attempting to exploit.  Problems with companies have existed throughout the years, and a majority of activity revolved around the recent 2000 decade.  In 2005 the Yemeni government terminated the Hunt Oil concession on Block 18 and instead gave the block to Safer Exploration and Production Operations Company despite the promise to Hunt to renew the lease on Block 18 (EIA).  This is an example of one of the many disputes and competitive actions that companies conduct for the Yemen concessions.  Other concession member companies have expressed interest in covering Hunt’s production, which is in reaction to Hunt’s dissatisfaction with the Yemeni government.  For instance, in 2005 the government was considering replacing Hunt with Premier Oil and the Yemen Oil Company specifically to combat the allegations surrounding Block 18 (Oil and Gas Author).  This conflict shows how the Yemen government does not want to use up time consulting existing oil companies if they do not wish to create a more harmonious relationship.  This also signifies how Yemen is in a constant state of expansion whereby new partnerships and alliances will replace non-working partnerships in order to speed up production.  One of the more recent concessions involved the Iyad (Block 4) where Yemen awarded this concession to Korea’s KNOC (Oil and Gas Author).  Block 4 has yet to create any sizeable production as seen from the previous table concerning the concession productions, but the grant signifies Yemen’s acceptance of more diversity within the domestic oil production market.  The year 2005 experienced a dramatic increase in concession awards to a variety of companies, and these concessions are either producing or experiencing planning time before production may commence.  The following results from the 2005 bidding are as follows: “Oil Search (Blocks 7 and 74), Al Thani (Blocks 34, 37 and 55), and Occidental (Block 75)” (Oil and Gas Author).  A huge block was discovered to contain a large amount of oil resources in 2003, which induced the Yemeni government to create a grouping of companies that will assist in the production of the oil rich block.  In 2003 a Canadian company called Calvalley made the oil discovery and the Yemeni government granted Calvalley, Reliance Industries and Hoodoil a license to develop Block 9 through 2025 (Oil and Gas Author).  The exploration was maintained throughout the years of 2003 and onward, which presented Yemen with more opportunities for granting bids on more concessions.  In 2004, Yemen granted a consortium of DNO and Transglobal Energy the rights to exploration of Block 72 (Oil and Gas Author).  Older bids that established this growth in concession building occurred in 2001.  OMV, Cepsa, and PanCanadian were granted production contracts for Block 60 (Oil and Gas Author).  As of today no sizeable production has occurred in this block according to the concession table and map, but these grants opened the door for future production expansion for the country.  More current concessions are currently up for bid which attempt to expand the reach of production to include offshore areas as well as other land-based areas in the country.  The oil ministry recently

Announced the Fourth International Bid Round for Offshore Exploration and

Production. This round is targeting eleven offshore blocks, namely: Kamaran

(22), Hodaidah (23), South Balhaf (46), Midi (55), South Mosina’ah (61), Atab

(62), South Nashtun (63), Ra’s Mume (93), Abd Al Kuri (94), Samhah (95), and

South Ra’s Mume (96) (EIA).

 

These areas represent the newest concessions that entrenched companies as well as any new companies wishing to conduct production in Yemen can bid on.  These bids will be granted to the highest bidder and are an attempt to create a more progressive society for Yemen.  The new blocks are of interest to many oil companies throughout the world.  For example, a conference for the new blocks commenced where “40 big oil firms [attended] including Shell, British Petroleum, Exxon Mobil, Oxy, Nexen, Oil Search and CCC” (Yemen Observer).  The attractiveness of Yemen has been enhanced by the earlier production sharing agreements and concession bids.

The two major producers within Yemen are Nexen and Hunt, and these two companies currently hold major concessions in the country.  Nexen is a Canadian company that has been producing oil in Yemen for many years.  Nexen first created a presence in Yemen in 1993 when they were granted a concession in Masila  (Block 14) and began production that same year (Ford, 44).  Nexen had created a presence in Yemen early, which has assisted in further exploration projects and concession bids.  Yemen has had a long relationship with Nexen, which has created a trustful relationship whereby both the country and the company have benefited.  Nexen’s most recent Masila and East Al Hajr production in 2007 has had remarkable results and has become a major portion of the company’s total production.  In 2007, Nexen had produced a total 71,600 barrels of oil per day in the two Yemen concessions, which represents over 28% of Nexen’s overall production as a company (Ford, 44).  Nexen is experiencing substantial production growth due to their relationship with Yemen.  Nexen is also fortunate to have Yemen as a partner in production because the oil that remains in their concession blocks has bolstered their proved reserves.  Proved reserves are oil reserves that have already been explored and confirmed as being present within a given area, but have not yet been produced and procured from the ground (Mackenzie, 48).  Nexen has increased their total proved reserves by 4% by utilizing the concessions they control in Yemen (Ford, 44).  Nexen’s exposure in Yemen is considered one of the greatest single exposures of a company in a Middle East country.  Nexen has established their presence so much in Yemen that they are the largest project holder in the country (Ford, 44).  Nexen’s development in Yemen has flourished due to the relationship between the two entities that was established in 1993 and continues to this day.  Hunt Oil is another company with a very large control over certain concessions in Yemen.  Hunt Oil uses a subsidiary called Jennah Hunt Oil to control the oil concession they currently hold.  Hunt maintains Block 5 with a 15% interest and averages over 45,500 barrels per day from the production (Ford, 45).  The cumulative oil produced in 2006 from Block 5 production was in excess of 158 million barrels (Ford, 45).  In 2007 Hunt was mainly concerned with calculations for production as well as estimates of whether or not drilling of more wells would produce enough oil to garner the task.  2007 saw Hunt drill production wells at the Dhahab field and an additional two wells in the Halewah field have been granted for drilling (Ford, 45).  Hunt has experienced significant growth in technology associated with deciding the viability of certain areas of increased exploration.  The company has conducted reservoir simulation studies intended to determine drilling and capacity requirements that may be needed in the future concerning their Block 5 concession (Ford, 45).  Hunt Oil has had some complications with their relationship with Yemen, but has continued to exploit their concession to the fullest position possible.  The introduction of research on greater capacity and drilling denotes a step toward expanding their production in Block 5.  Hunt Oil and Nexen are two very different companies in their Yemeni participation as well as origin, but have created a majority of production in the country.

Nexen and Hunt Oil command two of the largest pipelines for transporting crude oil in Yemen.  Hunt Oil was the first company to begin exploration in Yemen, and because of this fact was the first company to assist the Yemeni government in construction of the first major oil pipeline.  First, Hunt Oil constructed the Mareb refinery, which was later handed over to the Yemeni Oil Refinery Company, but introduced the pipeline to the world (Haifi).  Hunt created all of this construction within a relatively short time period.  During the years of 1986-1987, Hunt Oil and the Yemeni government conducted a construction of a pipeline that would run from the Mareb basin and down to the Red Sea (Haifi).  The construction project was a complicated procedure for an oil company, but was considered unbelievable in the industry.  The pipeline consisted of 437 km of piping that traveled over mountains and to a final port, which is considered one of the most difficult and largest construction projects ever in the world (Haifi).  The flow of the oil relays to the refinery and ultimately ends at a transport terminal in the Red Sea.  Hunt Oil and the Yemeni government proposed and created a floating terminal that is connected to the pipeline in the Red Sea where all of the oil from the Mareb basin is fed (Haifi).  Hunt Oil helps in the maintaining of the pipeline and operates much of the pipeline infrastructure and has continued this operation as long as the Mareb basin produces resources.  Nexen’s pipeline was constructed in response to a lack of transportation of crude across the country.  Nexen began their exploration and production in the early 1990s, which means the company, was the second company to begin production after Hunt.  Nexen created the Masila pipeline called the Ash Shihr pipeline that is 138 km long and has a capacity of 300,000 barrels per day (PEPA: “Pipelines & Terminals”).  Nexen utilizes the pipeline in order to efficiently transport the products mined from the Masila concession area.  In both examples the pipelines were built by Hunt and Nexen and were pivotal to the development of Yemen’s oil production.