Yemen's oil comeback has far to go as three-year war rages on

By Mohammed Hatem and Matthias Wabl on 10/12/2018

YEMEN and VIENNA (Bloomberg) -- OMV AG’s return to an oil field in Yemen marked a small step toward a comeback in production for the Middle East’s poorest country, where a proxy war between Saudi Arabia and Iran has choked energy output and shuttered a key export terminal and pipeline.

Vienna-based OMV re-opened production wells at Shabwa province in southern Yemen in April, three years after withdrawing due to the conflict. It exported a first cargo of 500,000 bbl in July.

“For now, the security situation is manageable,” OMV CEOr Rainer Seele said in an interview. “We decided to go back even though there is always a risk that we’ll have to stop producing there. The infrastructure is in place and working.”

Yemen’s oil production has all but collapsed since 2015 due to fighting between government forces supported by Saudi Arabia and the United Arab Emirates on the one side and Houthi rebels backed by Iran on the other. The civil war spurred Total SA to shut a gas-exporting plant and DNO ASA to suspend operations. A return to pre-war output levels for crude would put Yemen on par with OPEC’s Gabon and Equatorial Guinea.

“It is premature to say that Yemen is on its way back to the oil market,” said Riccardo Fabiani, an analyst at Energy Aspects Ltd. in London. While the region where OMV is operating is “relatively unscathed” and its export facility is still working, “other fields are in poorer condition and, most importantly, export terminals have been badly damaged or controlled by the Houthis.”

The Houthis lack the advanced weaponry of their foes but have proven tenacious and still control the capital Sana’a, the key export terminal Ras Issa on Yemen’s west coast and a pipeline to the port from oil-producing Marib province. They have fired missiles at airports and other targets in Saudi Arabia, for whom the war has become a quagmire, with no end in sight. Meanwhile, cholera is rife, and the United Nations says Yemen’s 28 million people are in the throes of the world’s worst man-made humanitarian disaster.

The war’s impact on energy supplies has been almost as stark. By 2016, Yemen’s oil output had plunged to 957,000 tons from 7.78 million tons in 2014, before the war, while natural gas production tumbled to 431,000 tons of oil equivalent from 8.4 million tons over the same period, according to International Energy Agency data.

“We hope this step by OMV will encourage other companies to resume production of oil,” Shawki al-Mikhlafi, deputy oil minister, said in a phone interview. “It is the backbone of our economy, and without its production, the economy cannot recover.”

Calvalley Petroleum (Cyprus) Ltd., operator of Block 9 in the Masila oil fields in the eastern Hadramout province, said in an email that it is “tentatively looking” to begin operations in the first part of 2019. The potential resumption is a result of collaboration between the government and local authorities, Calvalley said. It put Yemen operations on hold in 2015 for safety and security reasons.

Oslo-based DNO’s operations remain suspended due to the country’s security and political conditions, a spokesman said when asked if the company is considering a re-start. A Total spokeswoman said the LNG plant is still in preservation mode.

OMV’s return is a sign of “relative stability in the areas under government control” and Yemen’s desire for hard currency, Mustafa Nasr, chairman of the Studies and Economic Media Center, a non-profit organization based in Sana’a, said by phone.

The Austrian-based firm, as operator of the S-2 block, is trucking its new production to a 204-km (127-mi) pipeline that transports the crude to the Al Nushaima terminal on the Indian Ocean, according to the company. There have been no “major” incidents or disruptions since it resumed pumping, it said.

OMV’s joint venture is producing about 13,000 bpd, said al-Mikhlafi, the deputy oil minister. The company has a 44% stake in the venture, with China Petroleum & Chemical Corp. (Sinopec) owning 37.5%, and their Yemeni partners holding the rest.

The venture sold its first 500,000 bbl of Shabwa output in July to China, Yemen’s official Saba news agency reported, citing the ministry. OMV declined to say when it expects to make another shipment. Twenty percent of the revenue from the sales will be returned to Shabwa province for development projects, according to Saba.

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