Public oil prospecting in Yemen 3: what happens if it succeeds?

Suppose you’ve won the policy argument and even managed to persuade a donor to put her money down while simultaneously managing an incomprehending and at times openly hostile public opinion and media. Suppose also it all happened: terms of reference were set, a bid process launched and a reputable exploration company won the bid and acquired the new data (in this scenario across 20,000 square kilometres of open water, which, in that helpful way that broadcasters always do during the Olympic flag ceremony, we’re going to say is the size of Slovenia). Suppose also the seismic shows as strongly as possible that there are sizeable “shows” of oil and maybe also gas.

What comes next?

Open Source all the data and the interpretations

The first thing might be to open source both the results and the finalised imagery. This is unconventional, to be sure, but surely the $100 million investment buys the right to do that. There are three points to this:

  • First, you may widen the circle of potential bidders for production considerably by lowering the barrier to entry for the medium and smaller size companies. The kind of oil companies listed on London’s AIM market, for example. They’re used to high risk – often these are actually “one play” companies and we hear about the ones that succeed, and are transformed virtually overnight from minnows into mid-level players. These companies would be much more likely to enter a bid round for offshore Yemen if they had direct access to the geological. At the current rates PEPA is charging this data would cost many millions!
  • Second, instead of seeking to auction production rights in fixed blocks, you could allow bids across any sub-section of the blocks – either just a part of one, or areas which straddle the boundaries between the previous blocks. In effect, you make the entire area just surveyed one big block. Most of the point of allocating blocks as blocks is to require information gathering – exploration and appraisal – and as you’ve already done that you can allow companies to bid for whatever segment they might feel is viable. In order to keep the process transparent you’d then need some rules to allow decision-making between bids which overlap, and therefore compete partially. But this could be managed. You may raise the total amount of investment in production across the same area, as companies may “constructively disagree” about the value of respective portions of the area on offer.
  • Third, it’s possible other exploration companies may choose to re-process the raw data and come up with different results – more resource voluntarily spent by the industry can only be good for the project.

What kind of a find would you need to make this viable?

Highly unpredictable – but high. For a start, there’s no comparison between the 400m deep waters near the Saudi border and the 3,000m deep waters to the east of Socotra. Then there’s the ease of appraisal and access, again very variable.

In deep offshore, it seems unlikely production of less than 500 million barrels would be viable just because of the infrastructural and ongoing operating costs. In regular offshore that might be 50 to 100 million barrels.

The weather is highly unpredictable, as is security. Some of the super-block described is well within striking distance of Somali pirates. And while it should be quite possible for a fixed and sizeable installation to defend itself against the kind of firepower the rigs have shown in the past, it would substantially increase costs – and risks creating a very bad impression.

How to regulate the find

The exploration here has been done out of public interest. So the typical structure of license for both exploration and production will not hold. In fact, one of the purposes of the publicly funded exploration is precisely to be able to transform the terms of the production license. The structuring of cost recovery and profit and cost oil would have to be carefully looked at and terms laid out ahead of the bidding process.

How do we know the money would actually stop Yemen disintegrating?

There are two aspects to this question: how much oil would it take to generate the hard cash to significantly alter the outcome of Yemen’s inevitable decline? And how do we know the money would be well used – what would be the governance structures attached to this investment?

As regards the first question. Estimating the government take at about 70% of fiscal gives us revenues of about $5 billion a year at the moment. This represents somewhere between 60% and 65% of the total hard currency value of crude production – but domestic fuel subsidies are thought to take a third of the government budget and any new production above and beyond the current total of about 290,000 bpd could be expected to go to foreign market. Conservatively estimating the cost of production at $10 per barrel in the offshore environment, assuming 65% take and crude prices remaining at $75 a barrel, reaching production of 100,000 bpd would effectively buy Yemen another five years or so offsetting the declines of the existing fields – assuming some semblance of state functionality and social fabric can indeed hold together with revenues in an ongoing holding pattern. Anything above that level could significantly improve from the current situation. At 300,000 bpd government revenues are effectively doubled. At 500,000 bpd Yemen has the resources to start to graduate out of LDC status.

Of course that leads us to the secondquestion – the mere presence of more money is no guarantee it will do much good for the economy. Corruption and malgovernance of all kinds is rampant in Yemen. But the unusual nature of the exploration contract should open the possibility for new forms of transparency – as would the fact that any hydrocarbons produced would be in new blocks and untethered by existing contracts and arrangements. For instance, terms for production could include publicly available real-time metering at every critical node in the chain, as well as all posted sales prices of oil and gas, and, if practicable, a separate bank account for the government take from the field with published monthly accounts.

Of course all that does is to ensure good governance as far as it goes into the public budget. It becomes politically harder to maintain those levels of scrutiny once the funds get into the budget. Ringfencing funds to particular development goals risks market distortions of one kind or another, and despite the existence of a local anti-corruption authority, the SNACC, any attempt to impose conditionality is likely to be sensitive.

But here we could be helped by the lead time on new oil production. Especially in offshore developments, it could be at least five years before significant production. The government will need funds during that time. As long as the reserves are provable to normal industry standard (such as is used in SEC listings in the United States, for example), it should be possible to raise significant funds from the markets – as long as the IFIs undertake some form of guarantee. The combination of certain forms of transparency imposable within the project itself as a condition for investment, together with ongoing need for loan approval amounts to at least some degree of leverage during a transitional stage.

What happens if no oil is found?

Then it’s bad luck. The international community has spent $100 million without significant result. But again we should put this in context: donor pledges in Yemen have been executed to less than 20% since the 2006 conference precisely because of an inability to obtain assurances and mechanisms from the Yemeni government as to how this money could be managed. In the case of a failed oil exploration, we at least would have very high chance of proper expenditures and procedures.

It is true that development funding tend to be risk-averse, unlike, say, venture capital. The trouble is that in a case like Yemen, sticking purely with conventional policy options may seem like a safe bet. But no serious analyst of Yemeni affairs is prepared to say they believe the policy options on the table now will work. Many, indeed, have been tried and failed many times over in the past few years. A hundred million dollars is in fact a relatively modest amount in the Yemeni context, considering the stakes, and certainly compared to the inevitable cost one way or another to the international community should Yemen end up as a failed state.

Category: Middle East, Public prospecting, Yemen · Tags:

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One Response to “Public oil prospecting in Yemen 3: what happens if it succeeds?”
  1. Saipira Furstenberg says:

    Dear Madam/Sir,

    My name is Saipira Furstenberg and I am currently pursuing a doctoral degree at the Research Centre for East European Studies at the University of Bremen, Germany. My PhD project explores the implementation of Extractive Industries Transparency Initiative (EITI) in post-Soviet countries.

    I’d like to offer you a story about the development of EITI in Azerbaijan. More precisely the article discusses the recent amendments made to the laws on Non-Governmental Organisations (Public Associations and Funds) in Azerbaijan and its impacts on public associations and NGOs’ operations in the country. This situation is a serious breach to the EITI foundation. In the article I argue that the case of Azerbaijan provides a clear test for EITI to either commit to its principles and use its enforcement mechanisms, or stay in the shadow and remain a ‘label statement’ initiative.

    If my pitch is accepted, I can turn in a draft of the piece by the end of this week.

    I am looking forward to hearing from you.

    Best regards,
    Saipira Furstenberg

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