Yemen Energy Sector & Economy: CHALLENGES & POTENTIAL [Archives:1998/30/Business & Economy]

July 27 1998

Dr. Hisham Khatib (Jordan)
Honorary Vice Chairman –
World Energy Council
Yemen is a country of limited natural resources, particularly water. It has however some mining wealth in oil and gas. The per capita income in Yemen is low, even by developing countries standards, it also has one of the highest population increases in the region and faces challenges in every aspect of human developing.
Development of the oil and gas potential of Yemen has become very essential for the future of the country and enhancing its economic development as well as improving the standard of its oil resources.
Yemen’s energy sector also involves the electricity sector. Electrical services in the country are still limited, the majority of Yemenis do not have access to any electricity supply of any reliable value. Development of the electricity supply has till now been handicapped by shortages of financial resources and inefficient management of the sector. Availability of a reliable electricity supply that extensively covers the country is essential not only for economic, but as well as human development of this country.
This article covers the three main energy products: oil, gas and electricity. It evaluates their statistics, status and their contribution to the economy of Yemen and their future potential economic contribution to Yemen’s economy.
The Yemen energy sector is almost totally government owned and controlled, at least as far as commercial energy (oil, gas and electricity) is concerned.
The oil and gas sector is controlled by the Ministry of Petroleum and Mineral Resources and the electricity sector by the Ministry of Electricity and Water. The private sector is involved in non-commercial energy supplies, mainly wood and charcoal, as well as in the bottling and distribution of liquefied petroleum gas (LPG) which is increasingly being used in Yemen to replace the traditional wood fuel supplies which were used for cooking and heating.
Yemen’s present commercial energy consumption in 1997/97 amounts to almost 5 million tons, i.e. 100,000 barrels of oil per day. Therefore, almost one quarter of the oil production is eaten up by local consumption.
Over the last few years, commercial energy consumption grew at an average of 7% annually. Such a very high growth rate was mainly caused by economic growth and the low past basic consumption and proliferation of oil and LPG supplies, also by subsidized price of oil products and lack of energy conservation and efficiency measures. Recently the government, at the urging of World Bank and the IMF, increased the prices of oil products and electricity. However, in the absence of demand side management, the consumption of oil and LPG will continue to rise rapidly and will gradually swallow an increasing proportion of the country’s valuable oil production.
There is still a lot of non-commercial energy consumption in Yemen, mainly in the form of wood fuel as well as animal and agricultural waste. Wood fuel was obtained at the expense of the country’s limited fortress wealth and was threatening it.
To overcome this serious environmental challenge, the government of Yemen (GOY) assisted by funds from the Global Environmental Facility (GEF) was successfully able to prevent further erosion of Yemen’s forest wood wealth by assisting in publicizing the use of LPG instead. It is not possible to exactly estimate Yemen’s dependence on non-commercial energy supplies, they are still substantial, but are gradually being replaced by commercial energy.
According to the Arab Unified Economic Report (1997), Yemen’s Gross Domestic Product (GDP) was US $5840 million in 1996. These figures are higher than the World Bank estimates. Even then it implies on average a GDP of US $356 per capita, which is low by developing country’s standards and Arab standards (US $ 2200 per capita). Even when Yemen’s income is presented in real purchasing power parity dollar (ppp$) it amounts to less than US $1000 per capita compared to US $ 3000 for developing countries and US $6000 average world capita income in (ppp$) in 1996.
Because of its limited and poor resource base, Yemen’s economy has become increasingly dependent on oil exports. Of the $5840 million GDP in 1996, up to 30% were made up by crude oil exports. With the dwindling expatriate remittances, as a consequence of the 1991 Gulf war, oil exports has become the main foreign currency earner for Yemen.
The fact that the Yemen’s economy has become mainly dependent on the export of a single commodity (i.e. oil) whose price is volatile and whose quantity is limited, indicates the narrow base and vulnerability of the Yemen’s economy. The GOY, realizing all this, tried to overcome this vulnerability though the introduction of LNG exports as will be explained later.
In 1998, prices of crude oil tumbled.
Yemen, in spite of slightly increased oil exports, is going to suffer more than its neighbors from the decreasing prices due to its heavy dependence on oil exports for income and foreign currency. Unless improvements in oil price take place, as well as new major oil discoveries in Yemen and improved world LNG market prospects, Yemen’s economy is going to suffer, in the short term at least. Such prospects are going to be accentuated by the growing local oil consumption which is now competing with exports.
The Oil Sector Contribution Potential and Challenges
Yemen is moderately endowed with crude oil resources. It is not possible to exactly estimate the crude oil potential of the country since extensive explorations are still taking place. However present proven crude oil reserves are estimated, by the world oil industry at 4 thousand million barrels and present production rate is 400 thousand barrels per day. Indicating that reserves will suffice for 35-30 years at the present rate of production. Yemen’s reserves are minor when compared to world oil reserves. They represent only 0.4% of the world’s 1000 thousand million barrels reserves and only 1.5% of neighboring Saudi Arabia reserves.
No doubt the oil discovery by the US Hunt Oil company was a major boost to Yemen’s economic fortunes. Although the Yemen-Hunt production sharing agreement (PSA) was not very favorable to Yemen, however the discovery attracted many of the world class oil exploration firms, from whom Yemen was able to extract more favorable PSA terms.
After the first oil discovery, the Yemen Ministry of Petroleum and Mineral Rescues was able to gradually market the country to oil exploration firms. Yemen was divided into 53 separate blocks, some of the them offshore. Early in 1997, seventeen of these blocks were already marketed to 14 different oil companies.
No doubt there is more oil in Yemen than has been discovered. This is obvious from the increasing number of companies willing to undertake PSA. But with the population increasing at the rate of 4% annually and local oil consumption rising up by an average of 5% – 7% per annum, the prospect of oil continuing to buttress the modest Yemen’s economy does not look very promising.
There is need to manage demand for oil products in the local market to enhance export prospects. There is also need to attract more oil exploration firms. Most of Yemen’s blocks are still not allocated and the country’s potential not fully exploited. Therefore Yemen is trying to market its promising oil and gas potential through offering better terms and attracting more companies through a conference on prospects to invest in Yemen’s oil ad gas to be held in Sana’a early in Autumn 1998.