Strategic themes to manage our oilresources [Archives:2008/1198/Opinion]

October 13 2008

Saif Mohsen Al-Sharif
For tens of years, oil has played a primary role in the world economy, most notably in oil-exporting states. The lion's share was demonstrated by many Middle East states, which have more than half of the global reserves of oil and gas.

Despite Yemen's late entry into the club of oil-producing states, but with modest quantities of crude, oil turns to constitute the backbone for the country's national economy. However, excessive dependence of state's general revenues on the oil sector reflects how important this sector is since it greatly contributes to developing the Yemeni economy. As all know that at lest 70 percent of state's general revenues come from oil, oil also accounts for 90 percent of Yemen's export. There is also excessive dependence on oil to provide fuel derivatives for local consumption.

As such a vital product has a crucial significance in driving forward wheels of national economic development amid absence of an economic alternative in the near future, and due to the great challenge represented by the continued decrease of oil quantities in Yemen's mature blocks, the government continues encouraging oil companies to explore in further areas.

Yemen faced threats that its mature blocks were about to deplete, particularly as the bell of risk started to ring in the official agencies, as well as among all those observers who care a lot about the future of Yemen's national economy. The competent authorities in the government are recommended to expend serous efforts in studying and setting up a comprehensive strategic plan for the oil operations in Yemen and this should include exploration, production and development in a way ensuring maximal economic returns for the country throughout a long time period.

A strong sense of responsibility needed:

At this point and based on a strong sense of responsibility that must be shouldered by each one, who is jealous of the future of Yemen's economy, as well as through my modest experience in the oil sector, I suggest to the kind readership some basic themes due to function as the foundation for a strategic vision that may contribute to building an integrated strategic plan for oil operations in our country.

I also hope that all those concerned and the competent authorities in the government should pay close attention to the situation of such a vital sector in Yemen. The kind readership also needs to know some of data about the situation of oil in our country, plus some facts accompanying these data. As is widely known, petroleum exploration operations in Yemen first began in the early 1960s. The first exploratory well was drilled in the Salif area in 1961 but of no avail. This was followed by a non-commercial oil exploration in the 15th Marine Block in Hadhramout governorate in 1982. Successive petroleum exploration operations followed in various southern and eastern parts of Yemen until Yemen's crude production reached 435 thousand bpd in 1991. It is worth mentioning that productive oil blocks numbered up to 12 while exploration operations were still taking place in other 31 blocks. Up to 49 marine and land blocks are open for petroleum-related investment.

Having presented these data, the author feels that there is a need to highlight some oil-related facts that play an effective role in petroleum-related investment. These facts come as follows:

– Yemen's oil resources are considered to be small and medium size resources;

– Investing in the oil sector is a strategic process that requires spending a considerable time period in the area of exploration, production and development;

– All the production operations in Yemen cover only limited areas of investment, compared to the all available opportunities of investment in the oil sector;

– There is a large number of workers in the oil sector, but most of them lacked the technical and administrative qualification over the past 20 years; and

– There is no investment in the field of petrochemical industries depending on oil derivatives in Yemen.

After presenting the above-cited facts with regard to Yemen's oil sector, the author recommends that the state should give a top priority to such a vital sector by taking clear visions in order to create a strategic vision on how to manage the most important and biggest national product, aside from any bureaucracy seen within the current administrative system of the state.

In this regard, I present to the kind readership many strategic themes that are key to the development of oil exploration and production operations. These themes come as follows:

Theme One: Establish a functional national oil company to be in charge of operating all the oil blocks, handed over to it from foreign companies whose contracts are going to expire, particularly between 2011 and 2015. Through Safer Exploration & Production Operations Co. Ltd, (SEPOC) the national staff proved to be skilled in managing the largest oil block (Block 18) in Yemen since 2005 in a way satisfying international criteria of oil industry. All of us know that the Agreement of Block 14 in Al-Masila, considered as the most important oil-producing block in Yemen (with a production capacity of nearly 95,000 bpd) will expire in 2011. And the same applies to Blocks 10 and 5 whose agreements are due to expire in 2015. As long as these blocks, plus Block 18, constitute 80 percent of the current crude production, the relevant agencies in Yemen are recommended to prepare for a smooth handover of these blocks from their former operators. The net production in these blocks is divided according to partnership agreements between the Yemeni government and foreign companies. In event these blocks are handed over to local companies, Yemen will receive 100 percent of the production revenues, like what is currently taking place in Safer Block, operated by SEPOC. This will contribute to reducing the economic effects resulting from declining production.

SEPOC's success in managing Block 18, considered to be the most complicated for the operations due to its huge oil and gas installations and large geological area, plus the difficulty to manage its sources after being exhausted by the former operator, proved that the national staff is more able to get and manage other blocks, which are less complicated.

Our oil resources are extremely limited. Therefore, we should not hand over any of such resources to foreign operators. The decision taken by the political leadership, represented by President Ali Abdullah Saleh, and the role played by Parliament that mandated SEPOC to manage Block 18 was a wise one. It reflected a national challenge and success via which Yemen reached great achievements despite difficulties relating with the handover process.

Theme Two: Ensure that oil resources of producing blocks remain in a healthy status so that they continue producing through the management of companies operating according to the international criteria of oil industry. It goes without saying that a foreign operator cares to accelerate production as much as possible, most notably as its agreement is nearing its expiry date. The foreign operators don't care about maintenance of resources, thereby leading these resources to deplete like what happened to some fields in Block 18. Staff of Petroleum Exploration and Production Authority (PEPA) expends hard efforts in this regard, however, the situation still requires more technical effort according to the international oil criteria. These criteria must be observed, particularly as the agreements signed with foreign operators are due to expire and the handover deadline is drawing nearer.

Theme Three: Foster opportunities of oil exploration investment in open blocks. It is known that the exploration operations are pondered upon as the real tributary to improve production, but the bureaucracy and time-consuming routine pursued during the handover of exploration blocks constitute a great obstacle to the business.

Theme Four: Qualify national staff technically and administratively in order to cope with demands of the next time period. The Oil Ministry has more than two thousand technical workers, but most of them lack the scientific experience required for work in the area of exploration, development, production and operation. The ministry should set a strategic plan to improve the technical capacity of its workers through training programs and real partnership between national staff and foreign oil companies.

Theme Five: Improve performance of the refining industry (Aden and Marib refineries). All of us know that Aden Refinery is one of the oldest installations in the Middle East. It is managed by a skilled Yemeni staff, famous for its technical performance. However, the fact that the installation is very old has negatively affected the distinctive performance of the refinery. As long as the capacity to refine crude is one of the most important challenges in the oil industry worldwide these days, the government should pay close attention to both Aden and Marib refineries in terms of providing enough funding to them and developing skills of their staff.

Them Six: Boost national investment in petrochemical industries. Although Yemen's oil and gas resources are limited in light of current explorations, this should not hinder any serious efforts to study the possibility of initiating petrochemical industries depending on the available oil and gas derivatives. The economic feasibility of this industry is very high, compared to returns from crude (oil or gas).

Theme Seven: Establish a national firm to offer oil services to companies operating in exploration and production areas. There are numerous basic services in oil industry such as drilling, surveying and technical maintenance of wells. 100 percent of the returns from these services go to foreign firms. If national firms engage in offering such services, even in association with foreign firms, this will help Yemen make good revenues and create more job opportunities for local staff in this area.

Theme Eight: Step up efforts to improve performance in all oil companies operating in producing blocks, as well as develop basic services in villages and rural areas in the vicinity of oil blocks. In addition, the relevant agencies should ensure that funds allocated for development and training are spent as planned. This will help create a stable investment environment in those areas.

The author is Manger of Exploration and Development Department at SEPOC.