Saudi Arabia has adopted strict austerity measures to combat the dual effect of falling oil prices and the coronavirus crisis. Unlike previous measures that were lifted when oil prices recovered, a July 1 VAT increase (from 5% to 15%) is more likely to stay in place, which could present challenges to low-income families, businesses, and plans to revive domestic tourism.
In an April 2015 press release, Yemen LNG declared force majeure to its stakeholders before shuttering its facility, halting its deliveries of liquefied natural gas, and evacuating all foreign personnel from the country. Yemen’s only gas exportation company asserted that it could no longer operate due to “further degradation to the security situation around Belhaf,” the coastal town in Shabwa governorate where the facility is located. Although the project’s international stakeholders still remain committed to Yemen LNG, a protracted war, the political circumstances in the country, and the current state of global gas markets threaten the prospect of Yemen regaining its status as a gas exporter.
Made up of two liquefaction and purification facilities, known as trains, that have a total capacity of 6.7 million tons per year, the $4.5 billion Yemen LNG project exported its first cargo in November 2009. Its multinational stakeholders include Total of France, the project leader with a 39.6% stake, along with U.S.-based Hunt Oil, Yemen Gas Company, and several South Korean firms. Gas exports provided a reliable revenue stream for the Yemeni government in addition to local jobs in a country where unemployment is a historic problem; Yemen LNG’s website claimed a “Yemenization” rate of its labor force of 85% when the company was still operating. Further, Yemen LNG also provided scholarships for Yemenis to pursue advanced degrees abroad as well as vocational training in professions outside of the hydrocarbon sector, such as carpentry, vehicle mechanics, and welding.
While Yemen LNG did enjoy some short-lived success, managing LNG exports from Yemen was not always an easy feat. Yemen LNG faced exporting delays in 2012 when the pipeline that delivered its gas from Block 18, in Marib governorate, was attacked by gunmen and taken offline. The attack received global media coverage, as local militants claimed their actions were a response to the targeted killing of an al-Qaeda leader in a U.S. drone strike. It was not the first such incident that had disrupted Yemen’s energy sector, however. Smaller-scale attacks on midstream assets had become relatively common, with local residents attacking pipelines and subsequently offering to protect energy assets for a fee. The Yemen LNG pipeline has been damaged as recently as June 2019, which Total cited as evidence that Yemen remains unsafe for the resumption of gas exports.
Yemen LNG Stakeholders
Yemeni gas exports also became the subject of external scrutiny in 2010 when former Boston Mayor Tom Menino attempted to block deliveries of LNG from Yemen into the Port of Boston over security concerns. The deliveries were eventually approved by the U.S. Coast Guard, but Yemen LNG vessels were subject to additional offshore security checks. Despite the concerns that Massachusetts lawmakers had at the time, likely stemming from terrorist attacks that had occurred in Yemen, there has never been a security incident involving LNG shipments worldwide from Yemen or any other gas-exporting country.
Against international and domestic challenges, Yemen LNG managed to prevail during its short-lived operational period, providing a steady stream of government revenue and local employment. At its peak in 2013, Yemen exported 9.9 billion cubic meters of gas, most of which went to South Korea and elsewhere in northeast Asia. Yemen LNG’s contracts with Korea Gas Corporation expired in 2019, although the company has not reported any plans to relinquish its 6% stake in the Belhaf liquefaction facility. Aws Abdullah al-Awd, oil minister in the ousted government of President Abd Rabbu Mansour Hadi, stated that LNG exports would resume in 2019, but this has not yet happened. Total has stated that it would remain invested in Yemen LNG until peace returns and operations can resume, and made clear that it remains committed despite incurring financial losses. No stakeholders have divested from Yemen LNG in the five years the project has remained dormant, but Yemen’s war is not the only factor that may continue to delay Yemen LNG operations from restarting.
The years in which Yemen LNG enjoyed successful operations were a different era not only for Yemen itself, but for gas markets around the world. Since gas exports have halted, the United States has emerged as a major LNG exporter along with Australia, and oversupplied gas markets around the world have caused global gas prices to plummet. Even without the current reduction in demand that is directly attributable to the effects of the coronavirus outbreak, LNG markets are changing. Should prices remain at their historic lows for the foreseeable future, the cost of liquefaction at Yemen LNG may not provide enough incentive for the project to restart.
This problem may be compounded by the fractious Yemeni political environment. Were Yemeni gas exports to resume, determining how to distribute revenue would be a complicated process, especially given that Yemen’s gas reserves are concentrated in one governorate, Marib, but exported from another, Shabwa. However, a more equitable distribution of hydrocarbon revenue is not unprecedented in Yemen, as is shown by the economic rebound that has taken place in Marib. Sultan al-Arada, the governor and an appointee of the Hadi government, has secured 20% of all oil revenue for the provincial government, and as a result Marib has been one of the few areas of Yemen that has been able to restore basic services and pay the salaries of government employees. Production from the Maslia field, east of the Marib governorate, provided up to $900 million in revenue in 2018, according to a World Bank report.
The Yemeni energy industry is nowhere near the size of its regional neighbors in the Gulf – oil production peaked at 197,000 barrels per day in 2013, according to BP. Current output levels are estimated at around only 60,000 b/d and most fields have passed peak production levels. Nonetheless, the case of Marib shows that modest oil and gas revenue can fill badly needed fiscal gaps in Yemen. If this level of improvement could be sustained despite the potential for more armed conflict, there may be room for some cautious optimism for the return of Yemen’s oil and gas sector, which is critical to restarting Yemen LNG’s export operations. SAFER, a state oil company controlled by the Hadi government, restarted production from Block 18 in late 2019, although this has not resulted in the resumption of gas delivery to Yemen LNG. However, since Yemen’s gas reserves consist of associated gas, resumption of gas exports is contingent on oil production, making the resumption of operations at Block 18 one of the most positive developments to date.
There is also the question of whether natural gas will play a significant role in the rebuilding of Yemen’s power infrastructure. If Yemeni gas exports are not profitable in international markets, Yemen’s government may decide to allocate the country’s gas resources to the domestic power sector – a decision that would effectively end any prospect of Yemen LNG restarting its operations. However, electrification rates in Yemen were low even before the recent conflict began, and crude oil made up the majority of Yemen’s power generation capacity. Further, Yemenis have developed solutions to the lack of reliable electricity services, notably with imported solar panels. The destruction of Yemen’s infrastructure after years of conflict has resulted in the adoption of small-scale solar solutions by thousands of Yemenis, who in 2017 used imported solar panels to generate 732 gigawatt hours of electricity, thus boosting the share of renewable power generation in the country to 14%. Should this trend prove sustainable, widespread usage of solar power solutions may displace a portion of demand for natural gas in postconflict Yemen.
The prospects for Yemen to recover its lost revenue stream from LNG exports appear bleak, especially in light of the price war that broke out in early March. Neither international nor domestic circumstances are conducive to restarting a project in which revenue distribution would be extremely complex to manage with little to no guarantee of profitability. Stabilized gas markets may provide the incentive for Yemen LNG’s stakeholders to restart operations, but the political circumstances in Yemen may prohibit them from doing so. Conversely, if Yemen does show signs of stabilization in the near future without natural gas prices recovering from their historic lows, Yemen LNG could remain an effectively stranded asset. Properly managed hydrocarbon revenue can play a strong role in boosting recovery efforts, as in the case of Marib. Yet where Yemen LNG is concerned, there are perhaps too many things that need to align for gas to play a significant role in Yemen’s recovery process.
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