Public oil prospecting in Yemen 1: why bother?

I have been invited to speak at Chatham House in November on Yemen. The discussion will be somewhat about Yemen’s EITI process, which is struggling if truth be told. But also there will be a rare chance to discuss publicly funded oil prospecting – and in this case, whether the international community should entertain the idea of financing  such prospecting, to the tune, say, of $100 million,  in order to try and find new revenues and save Yemen from its slow motion collapse as a state.

This is a knotty problem indeed and there are many serious and legitimate objections to it. In short, it’s a little bit crazy. The only thing it has going for it is that Yemen is running out of money, eight million people are malnourished… and nobody even claims to have any viable game plan for how to create a post-oil Yemeni economy.

The Premise: Yemen is totally screwed & there’s no game plan to fix it

What renders the argument worth making is that Yemen really is on the verge of becoming another Somalia and while the international community is lining up to plough hundreds of millions of dollars, if not billions into conventional failed and failing state policies, nobody actually has any alternative game plan for Yemen’s sustainability in the future.

According to the IMF, oil represents over 70% of fiscal revenue for the government and over 90% of foreign exchange earnings. According to BP’s Statistical Analysis, Yemen has about 2.7 billion barrels of oil left and produced 298,000 barrels a day in 2009, down from a high of 457,000 bpd in 2002. This year, analysts predict production could drop again to 260,000 bpd or less.

The bottom line is it could be all over in five years, and many of the foreign companies in Yemen are already thinking about packing their bags.

Meanwhile this is no place to go into the poli sci of Yemen’s troubles but just to list: as well as the issue of Al Qaeda in Yemen, which is what engages the West the most, there are two insurgencies going on and half a million Somali refugees and rising.

Unemployment is probably over 50%, the state is imploding, the water table is dropping so much there is already talk of mass migrations out of the capital Sanaa, and eight million people, a third of the population, are suffering some kind of food shortage or malnutrition.

The international financial institutions are talking about initiatives to promote new artisanal cottage industries. USAID and the Europeans are issuing tenders to promote “entrepreneurial activities”, donor speak for informal sector self-employment; UNDP is trying to promote tourism and, in a delicious turn of phrase, an IMF paper advises “an essential element of a successful transition to a non-oil economy will be a smooth adjustment of the exchange rate” – the Yemeni rial went from about 190 to the US dollar in January to about 235 in August, and many see that as being the top of a long and vertiginous slope.

Perhaps most important, the decline has been clear for several years – the impact masked it’s true by the surge in crude prices through the middle of 2008 – and none of the many actors and agencies concerned with Yemen’s political and economic stability have been able to forge any kind of effective response to it.

In short, no idea is so bad it’s not worth considering.

Enough funds are already allocated for $100 million on oil exploration to be part of a bigger picture

Because of the Amsterdam-New York bomb attempt over the New Year 2009-10 Yemen leapt to the forefront of international community concerns as the next AQ safe haven. The United States and the UK have dramatically increased their aid budgets to something around $100 million a year each. But we’ve been here before. One of the major points at a donors conference  convened in London in January after the bomb scare was that a similar conference in 2006 had resulted in pledges of about $5 billion – some press reports speak of $4.7 billion, some speak of $5.7 billion – but very little of it was actually delivered over the next few years. While Yemeni government interlocutors have politely implied that Western and Gulf governments had renegued on their promises, aid officials demur, talking instead of the Yemeni state’s in ability to absorb the funds. In other words, nobody can work out development funding for the normal range of projects which meets minimum guarantees of not getting ripped off, so they have been administratively bound not to hand over the money even though they made a high level pledge. This is a strong argument in favour of oil exploration funding, as from a project management point of  view, outsourcing first the specification and design and then the implementation of large scale seismic involves hardly any reliance on the mechanisms of the Yemeni state. Governance issues for sure kick in down the line but that would be a problem of success – and also an opportunity in its own right as perhaps we could discuss later.

These sums are certainly small change compared to military expenditure on encircling Yemen, running into tens if not hundreds of billions of dollars a year. While not all of that attention is focused on Yemen itself – much attention for example is focused on the Bab al-Mandab straits off the coast, through which nearly 4 million barrels of oil pass a day – there is no doubt that a sizeable proportion of the spend on French, US, EU navies and special forces is positioned for reach into Yemen if the state finally actually disintegrates.

The Gulfis and in particular the Saudis are also heavily committed in Yemen. Some insiders estimate Saudi support of the Yemeni state budget this year at two billion dollars, or about a quarter of the total. Given the fact that Saudis are unlikely to suffer the same sensitivities to investing in oil exploration as a charitable activity as we are in OECD countries where the Green agenda dominates, we may well need to work on the Saudis and the Gulfis as being the funders of this oil exploration.

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