Devastated by war, Yemen's still surviving oil and gas sector needs peace to recover

S&P Global Platts (Claudia Carpenter)

 Yemen's oil and gas industry could be at a crossroads after six years of brutal civil war, with the US attempting to broker a peace deal that will be critical to reviving the decimated sector.

Yemen has never been a major oil producer, particularly relative to its Arab and Persian neighbors, but it pumped more than 400,000 b/d in the early 2000s, bringing much needed revenue to the region's poorest economy. Since 2015, however, output has plummeted to below 100,000 b/d and will average about 57,000 b/d this year, according to S&P Global Platts Analytics.

The fractured country has seen fighting between coalition forces and Iranian-backed Houthi rebels intensify in the oil and gas rich Marib region, the government's last stronghold in North Yemen, and in Al-Bayda province in South. The violence has led to a devastating humanitarian crisis and prompted many international oil companies to flee. Those that remain have seen their operations further debilitated by the pandemic, with Yemen severely lacking medical resources.

A flurry of diplomatic meetings in July initiated by the US and involving Saudi, Omani and Yemeni officials to end the war with the Houthis could be a positive step to creating stability, but a lasting peace still appears far off.

The US' outreach "shows the Biden administration is committing to engaging with the civil war," said Niamh McBurney, who heads risk consultancy Verisk Maplecroft's Middle East and North Africa research team. "Whether US engagement can actually bring the conflict to a less damaging stalemate, or even an end, is another question entirely."

Shortly after the Biden administration took office the Houthis were removed from the US' list of designated terrorist organizations, and Saudi Arabia, which has led coalition forces fighting the rebels, was publicly asked to bring an end to the war.

Despite the moves, the Houthis have intensified their attacks on the city of Marib, the gateway to the Shabwah oilfields, and increased their missile attacks on Saudi Arabia.

Marib fighting

The US State Department noted the "growing consequences" of the fighting in Marib in a July 27 statement announcing plans to send US Special Envoy for Yemen Tim Lenderking to Saudi Arabia.

Yemen, at the southern end of the Arabian Peninsula, sits on proved hydrocarbon reserves of some 3 billion barrels of crude and 17 Tcf of gas, according to the US Energy Information Administration.

Its main crude export grade is light sweet Masila, with a sulfur content of 0.51% and API gravity of 34.10, and it also exports smaller volumes of extra light sweet Marib Light.

Recent exports have been very lumpy, as high as 88,000 b/d in February 2021, while other months average 15,000 b/d or less, according to data analytics firm Kpler.

China is the biggest buyer of Yemeni crude, with Australia, Thailand, Italy, and the UAE occasionally buying some cargoes, the Kpler data showed.

Without a significant refinery presence, the country is reliant on refined product imports from the UAE, Saudi Arabia, Russia and Iraq for its gasoline and diesel needs.

Barring an escalation of violence, Platts Analytics forecasts that Yemeni crude production can grow slightly, up to 65,000 b/d in 2022.

"However, if notable growth fails to materialize and the conflict persists, a challenging investment environment could cause foreign operators to consider alternatives," said Paul Sheldon, chief geopolitical adviser at Platts Analytics.

Vienna-based OMV, the only sizeable international oil company still operating in Yemen, said its oil and NGL production there plunged 28% in 2020, as COVID-19 added to war-related disruptions. It declined to comment further, citing the delicate political situation in the country.

The Yemen LNG project, in which TotalEnergies holds a stake of 39.62%, stopped commercial production and exports in 2015. The 6.7 million mt/year of LNG production capacity plant has been put in "preservation mode," the company has said, also declining to comment on its Yemen plans.

In 2019, Canada's Calvalley, operator of Block 9 in the Masila Basin, was the second foreign firm to restart operations in Yemen after shutdown in 2015. Indonesia's Medco Energi is a 25% JV partner in Block 9.