YEMEN - LNG Project Hit By Asian Crisis; Start Up For India Not Before Mid- 2002

Yemen's LNG venture, led by Total of France, has been delayed because of the Asian economic crisis. But the project "remains very sound", Total's E&P head Daniel Valot has said, with China, India, Lebanon and Turkey being among the potential markets pursued by the company. This is the biggest project undertaken in Yemen and one of several LNG ventures hit by the Asian crisis. Called Yemen LNG Co. (YLNG), the venture will have a gas liquefaction plant with a capacity of 5.3 million tons/year, in two 2.65m t/y trains, at the Arabian Sea port of Balhaf in the Ras Omran region about 100 km west of Mukalla. The gas feed will reach the plant by pipeline from the Maarib/Jawf and Jannah fields, 320 km to the north. Construction of the plant will begin as soon as Total has secured a firm buyer for at least one train. Completion of the train is not expected before mid- 2002, the earliest possible date for the start up of a receiving terminal in India. The Partners: Already approved by parliament, with the plant's front-end engineering and design completed in mid-1997 by Technip and Bechtel, the LNG venture will be owned by the following companies: Total, holding 36%, will be operating the venture's downstream element. This is the first LNG project in which Total plays a leading role. But the French major has been involved in LNG business for many years. It is the upstream operator of Qatar's first LNG venture (Qatargas) which is led by Mobil and came on stream in early 1997, a minority partner in Abu Dhabi's LNG venture led by British Petroleum which was the first project of its kind in the Middle East when it went on stream in 1978, and a minority partner in Oman's LNG which is led by Shell and will be on stream in 2000. It is an upstream operator in one of Indonesia's LNG ventures, among Total's involvements around the world. It also has gas-based IPPs. In Yemen, Total is operator of the East Shabwa block, where an oilfield began producing in December 1997, and a partner in the Jannah block where oil has been onstream since October 1996 as well. Total's top management is close to Yemeni President Saleh, with the French government having played key mediating roles in Yemen's territorial problems involving Saudi Arabia and Eritrea. Total is close to Yemen's most Francophone technocrat, former deputy premier and oil minister Attar who acts as senior advisor to President Saleh (see profiles in Downstream Trends). Yemen Gas Co. (YNG), holding 21%. YNG is a unit of the oil ministry's General Gas Corp. (GGC), which was created in October 1993 (a few weeks before an MOU was signed in London on Nov. 10, 1993, between then oil minister Bin Hussainoun and Enron of Houston for the latter to lead a rival LNG venture. But Enron dropped out after Yemen's May-July 1994 war). Yemen Hunt Oil Co. (YHOC), holding 15.1%. In partnership with Exxon and SK Corp. (ex-Yukong) of South Korea, Hunt will develop the gas to feed the LNG venture as well as the domestic market. Its work will be done through Yemen Exploration & Production Co. (YEPC), a JV owned 51% by Hunt and 49% by Exxon. YHOC, owned by Ray Hunt of Dallas, was the first oil producer in Yemen operating the Maarib/Jawf Block 18. This area has the bulk of the proven non- associated gas reserves which are mostly dedicated to the LNG venture and the domestic market. Ray Hunt is close to President Saleh, whom he meets whenever he visits Yemen. Until early 1997, he was at odds with the oil ministry over ownership of the gas reserves in Block 18 (see following pages). Exxon, holding 14.5%, was the first among the majors to venture into LNG business in the late 1960s, when it launched the Libyan project. Since the early 1990s, Exxon has wanted to catch up with Shell and Mobil in this business. It is the project leader and main partner in Indonesia's LNG venture on Natuna island, by far the most expensive gas project in the world, and a minority partner in now-shelved Venezuelan LNG project of which Shell is the leader. Exxon, developing major oil and gas reserves on Sakhalin island, Russia's Far East, also has a 40% share of proved 37 TCF of gas reserves in the North Slope which the state of Alaska hopes would be developed and sold in LNG form to Japan eventually. SK Corp. (ex-Yukong), holding 8.4%. This South Korean group has a 24.5% economic interest in the Maarib/Jawf PSA and buys Yemeni crudes (see OMT). It has been keen on the LNG project, as it has wanted to market an important part of the gas in South Korea. But South Korea now is in deep economic crisis and its LNG demand projections have been scaled down considerably since late 1997. SK consists of Korea Petroleum Development Corp., Hyundai, and Sam Wham. Hyundai, holding 5%, which it acquired from the state's YNG under a final accord signed on Oct. 12, 1997. It took the stake in return for a major contribution into YNG's share of the project financing and an undertaking to keep pressing Korea Gas Corp. (Kogas), the sole company with the right to import LNG into South Korea, to buy at least a part of Yemen's gas project. The Upstream Background: YEPC produces about 2 BCF/day of associated gas in the Maarib/Jawf block. It reinjects the bulk of this into the oilfields, where oil production has been declining in recent years. This gas, mostly propane, is also the source of LPG being consumed in Yemen and of condensates used to whiten the mix of YEPC's crude oil exports (see OMT). It is its block's non- associated gas, mainly methane, which YEPC is to develop. Under Total's September 1995 agreement with Sanaa, the government has dedicated 8.5 TCF of the proven non-associated gas reserves in Maarib/Jawf and Jannah to the LNG venture and another 1 TCF to the domestic market. YEPC operates both Maarib/Jawf and Jannah. The proven non-associated gas reserves of Maarib/Jawf are estimated by Sanaa at more than 15 TCF, with another 3 TCF said to be in Jannah. YEPC has contested the 15 TCF estimate and, until Jan. 20, 1997, was in dispute with the oil ministry over who owns the gas. Its PSA - expiring in 2005 - contains a clause which, Hunt has said, proved that the gas was part of the concession, whereas the oil ministry insisted that the state owned all the non-associated gas in Yemen because it had only granted PSA for oil. The dispute resulted in YEPC putting obstacles to the LNG venture and causing serious doubts on the market that the project had sufficient gas reserves. YEPC had also bid for the LNG project in 1993 as a rival of both Enron and Total. The problem was resolved on Jan. 20, 1997, when the partnership agreement for the LNG venture and an agreement on the upstream sector were signed by the oil ministry, Total and YEPC. Basically, YEPC had wanted the oil ministry to guarantee that it will renew its Maarib/Jawf PSA by 2005, in return for full support for the LNG venture by Hunt and Exxon. The oil ministry did not provide the guarantee; but the agreement on the upstream sector which it signed on Jan. 20, 1997 said, according to a press release by Exxon, that "a new operating company formed by YEPC, Yemen LNG Co. and the Republic of Yemen will assume operations", i.e., gas production and delivery to YLNG. While no mention was made of its oil operations beyond 2005, the deal explicitly said that YEPC will continue to exist and work in Yemen during the 25-year lifetime of the LNG venture. It was reported that the oil ministry also agreed to pay YEPC a "discovery and development bonus" of about 7-8 cents/m BTU for the gas delivered to YLNG. The oil ministry will sell the gas to YLNG but will not be paid a wellhead price; instead, it will collect royalties on the LNG sold, with the YLNG partners to share the profits after all costs have been covered. It was said earlier that the cost of gas feeding the LNG plant would come to about $0.30/million BTU. This will cover upstream development, operating and delivery of the gas. In addition, reportedly the partners were to pay in the 30-year period a lump sum fee of $900m (in 1996 US dollars) to cover Maarib/Jawf gas, which was to be split 60% to the government and 40% to the Hunt, Exxon and SK (Yukong) partnership. There was to be a different formula for any gas used from Jannah. (In its LNG project offer of 1993, YEPC had asked for an upstream profit split of 60% for itself and Yukong, offering the remaining 40% to the oil ministry during a period of 15 years. This was to be followed by 52% for the oil ministry and 48% for YEPC during the following 10-year period. YEPC had also offered a royalty of 1% to the oil ministry. In the middle of February 1994, Ray Hunt visited Sanaa and had a meeting with President Saleh. Later he said the LNG project his company and Exxon had offered to Sanaa was "a better proposal for Yemen" and that the gas partly belonged to YEPC's operation. This gas, he added, was subject to the PSA between YEPC and the government, with Yukong also having rights to the gas reserves of the Maarib/Jawf region. But Hadhrami officials in Sanaa said later that all gas discovered in Yemen belonged to the state). Total's accord with the oil ministry and GGC, signed on Sept. 21, 1995, just days after President Saleh visited Paris, put the total upstream and downstream costs of the LNG venture and related projects at $3 bn. No breakdown was provided to the public. It was estimated that another $2 bn would be required for LNG tankers, if the partners decided to sell the LNG on CIF-basis.