May 19, 2010

Yemen and Natural Gas: What’s Up With That?

Last week I had the privilege of speaking with a group of a few dozen government officials from Yemen. They were all concerned about water, the lack of biodiversity in their country and whether foreign companies would help them explore for more oil as current reserves run dry. There is one subject we discussed that, in the media and public discourse, does not seem to get much attention yet is important to understand: Yemen’s natural gas.

If you look at BP’s natural gas reserve to production ratios (which I recommend you all do regularly), you’ll notice that it indicates that Yemen’s natural gas reserves should last more than 100 years at current production rates. However, this is misleading, as it has only the 8th-largest reserves in the Middle East. Countries like Iran and Qatar have almost order of magnitude greater reserve levels. That 100+ year R/P estimate indicates that production is very low. It began producing natural gas on its own only in 2009, and previously only extracted it as a bi-product of oil production.

Expect this R/P ratio to drop. Yemen is actively increasing liquefied natural gas (LNG) exports. Investors include Total and Hunt Oil, and it currently exports LNG primarily to South Korea and the United States. According to the EIA:

Yemen's first LNG plant went online in October 2009, at the port of Balhaf on the Gulf of Aden. The first cargo of 5.1 MMcf (147,000 cubic meters), was shipped to South Korea at the beginning of November 2009, almost a year behind schedule. Several more LNG shipments were made in December 2009, to Spain, Mexico, and South Korea. Other LNG deliveries have since been made to China, Texas, and most recently, Boston. An estimated 5 MMcf of LNG arrived at GDF Suez' Everett terminal in Boston on February 23, 2010. Yemen LNG has 4 tankers with a total capacity of 13 MMcf. A second liquefaction unit, currently under construction, is expected to become operational towards the end of 2010, according to Yemen LNG. Yemen will be able to export 6.7 million metric tons of LNG when the project reaches full capacity in 2011.

On that shipment to Boston…When the Yemeni tanker tried to deliver LNG into the Boston area this year, there was a strong public reaction and anger at the U.S. Coast Guard. Locals feared that a Yemeni LNG tanker, which would be highly flammable and dangerous, could be boarded by someone attempting to ignite the tanker in an act of terrorism against the United States. The shipment eventually went through, but Yemen’s image as a major source of terrorism threats could continue to hinder its ability to expand its energy trade.

One final question: Is increasing export revenues from LNG a viable way to offset some of decline in oil revenues?

Not much. Oil revenue for Yemen, which accounts for about 75% of its government’s budget, was US$3.5 billion in 2009. According to a recent CRS report (pdf), natural gas is only expected to bring in $30 billion to $50 billion in revenue over the next 25 years. So LNG exports will likely make up less than 60% of the revenue that oil exports provide, using the high-end estimate. This is still significant, but not quite enough given that some estimates indicate that in about 5 years, this level of oil revenues will no longer be sufficient to pay for Yemen’s government labor force given rising population levels.

Continue to watch Yemen’s natural gas market as it evolves – and especially whether they continue to invest in using more of it to meet domestic energy needs. As my Yemeni friends confirmed, it will be an important piece of the picture for their future.