Yemen’s oil industry is a victim of, and the catalyst for, country’s unravelling

The comfort of dinner at the Sanaa home of a leading oil executive, with the Saudi ambassador chatting to the finance minister as gazelles scampered across the lawn, did not dispel awareness of Yemen’s problems.

And since then the situation has deteriorated sharply, with northern Houthi opposition taking over Sanaa last September.

Yemen’s oil industry is both catalyst for, and victim of, the country’s unravelling.

It was only a small oil producer before the 2011 uprising against the long-time president Ali Abdullah Saleh. Production peaked at 440,000 barrels per day (bpd) in 2000 but by 2010 had fallen sharply to 282,000 bpd.

Under the weight of regular sabotage attacks on pipelines that caused severe disruptions, output last year dropped to just 100,000 bpd – not even enough to cover the country’s own consumption.

Even at its peak, Yemen had only half the oil of next-door neighbour Oman, but seven times the population.

As production fell, government finances were increasingly eaten up by US$3 billion of subsidies, a third of state revenues. It became impossible to sustain the patronage networks through which the Machiavellian Mr Saleh had ruled.

Fuel and electricity shortages compounded Yemen’s mounting problems of lack of water, food insecurity and a collapsing economy for its young, fast-growing population. At 24 million, Yemen has the largest population in the Arabian Peninsula after Saudi Arabia, and those people are among the poorest in the Arab world.

Ironically, the Houthi withdrawal from the Yemeni government in August 2014 was precipitated by a rise in fuel prices, aiming to cut the unsustainable subsidies.

A 2013 federal plan would have divided the country into six regions. But it was opposed both by the Houthis and by southern separatists, the Hirak. And it did not properly address the uneven distribution of resources – particularly oil.

Now it’s possible that the country’s division may be much less tidy, between the Houthis in the north and Sanaa, tribal forces and remnant central government in the rest of the old North Yemen, and a revived South Yemen. It should be noted that the southern territory is also subject to tensions between Hirak and Hadhramaut federalists, that could lead to further fragmentation.

Such a division would cut the country’s oil industry in half. Production is divided between the Masila Basin in Hadhramaut province, squarely in the former South Yemen, and the Marib-Shabwa Basin. Shabwa was in South Yemen, Marib in North Yemen, and pipelines run both south to the Indian Ocean, and west, close to Houthi-controlled Sanaa on the way to the Red Sea.

The important Yemen liquefied natural gas (LNG) plant on the south coast is fed by gas from Marib.

There seems little chance of an industry divided between two or three autonomous states continuing to function.

Insecurity has already damaged the oil industry across the country and further undermined the economy. The oil pipeline from Marib, and the gas pipeline serving Yemen LNG, have been repeatedly sabotaged.

A tribal uprising in Hadhramaut starting in December 2013 was fed by demands that oilfield security should be provided by local forces rather than by allegedly corrupt Yemeni army commanders. It shut down the Masila export pipeline. In October, Hirak demanded that oil companies in the south halt exports.

And in January 2014, the governor of Shabwa province ordered oil companies, including Total, OMV and Occidental, to shut down production – about 50,000 bpd – in protest against the detention of the president’s chief of staff by the Houthis. Those companies that remain in Yemen run their operations remotely from Dubai, as far as possible.

It is difficult to see how Yemen’s oil industry can survive a descent into chaos or a break-up of the country. But without it, the national economy and finances will be in ruins. Avoiding the worst outcomes will require a radical rethink of how the oil industry operates and how its resources are distributed.

Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis

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