US embassy cable - 05SANAA966

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 000966 
 
SIPDIS 
 
E.O. 12958: DECL: 04/16/2015 
TAGS: EPET, ECON, YM, ECON/COM, ENERGY 
SUBJECT: ROYG REJECTS BLOCK 18 EXTENSION: HUNT CONTEMPLATES 
"NUCLEAR OPTION" 
 
REF: A. SANAA 326 
     B. SANAA 04 1537 
     C. SANAA 106 
     D. SANAA 196 
 
Classified By: Ambassador Thomas C. Krajeski for reasons 1.5 b and d. 
 
1. (C) Summary.  On April 13, Ambassador met with Wyndell 
Caviness, Vice President and General Manager of Yemen Hunt 
Oil to discuss the ROYG's rejection of the Block 18 
extension.  It appears certain that there are no further 
negotiating options for Hunt and that they have decided to 
pursue litigation as their only course of action.  Caviness 
was explicit that he did not want Post to advocate on Hunt's 
behalf.  Ambassador made clear that litigation could have a 
negative effect on bilateral relations and Yemen's often 
stated intention to attract U.S. and foreign investment. 
Without the extension, Hunt's future investments in Yemen are 
in doubt, specifically in liquid natural gas.  Protracted 
litigation could have a disastrous effect on Yemen's economy, 
and the ROYG's true motives for rejecting the deal remain 
unclear.  End summary. 
 
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The End of the Pipeline for Hunt 
-------------------------------- 
 
2. (C) Ambassador met April 13 with Yemen Hunt Vice President 
and General Manager Wyndell Caviness to discuss deteriorating 
relations between Hunt Oil and the ROYG.  Caviness reviewed 
Hunt's history in Yemen, which dates back uninterrupted to 
1981.  The meeting followed an April 5 Cabinet Decree 
supporting Parliament's decision to reject an extension of 
Hunt's drilling rights in Block 18.  Caviness said the move 
was politically motivated and violated Hunt's legitimate 
agreement with the Ministry of Oil (MOO), signed in January 
2004.  He added that there was no legal obligation for the 
ROYG to refer the extension to Parliament, and that Minister 
of Oil Rasheed Baraba repeatedly claimed authority to ink the 
deal. 
 
3. (C) There is as yet no official letter from the ROYG to 
Hunt, but several ROYG insiders stated explicitly that the 
decision is final and ruled out any intervention from 
President Saleh.  Caviness said that Hunt is left with no 
choice but litigation.  The oil company will likely sue the 
ROYG in Paris, on the grounds that the agreement with MOO is 
a legal document signed in good faith.  Caviness explained 
that Hunt cannot afford to set a precedent of capitulation, 
considering its business interests around the world. 
 
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Hunt: "Don't Advocate on our Behalf" 
------------------------------------ 
 
4. (C) Senior ROYG officials, said Caviness, including the 
MOO and Presidential Advisor Dr. al-Iryani, suggested that 
USG intervene with Saleh on behalf of Hunt.  Caviness 
rejected this option, and explained that Hunt Oil wanted to 
avoid any suggestion of improper conduct.  Ambassador said 
this was clear, but that a high profile conflict between the 
ROYG and a U.S. company could complicate bilateral relations 
at a critical time.  Post will explore this issue from a 
foreign policy perspective, said Ambassador, as it would have 
an adverse effect on the ROYG's stated commitment to 
improving the investment climate as part of the MCC Threshold 
Program. 
 
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Will Oil and Gas Flow From Block 18? 
------------------------------------ 
 
5. (C) The Cabinet decision stated that Block 18 will no 
longer be operated as a profit sharing operation, but instead 
be directly owned by the ROYG, which will hire the services 
of an operator.  There are few details on how the government 
plans to implement this, or who the prospective operators may 
be.  Caviness said ROYG projections of an additional USD one 
billion income are "a joke."  If there is no extension, Hunt 
will freeze developments in the field, contended Caviness, 
and many current employees will be forced to seek employment 
elsewhere.  If the case were tied up in court, Caviness 
continued, both ROYG and Hunt revenue would be locked in 
escrow pending a decision.  Even if the ROYG wins in court, a 
public dispute with Hunt may deter legitimate companies from 
doing business in Yemen. 
 
6. (C) Failure to honor Hunt's Block 18 extension agreement 
will likely have a negative impact on the ROYG's recent USD 
2.5 billion liquid natural gas (LNG) agreements (ref A). 
Initial LNG production is expected to come from Block 18, and 
Caviness suggested that extended litigation would delay 
output.  He also hinted that the ROYG is not satisfied with 
the deal it signed with Kogas (the Korean Gas Company), and 
may subject the LNG deal to Parliamentary approval as well. 
In combination with Parliament's rejection of the Block 18 
extension, Caviness believes such actions would cause other 
foreign companies to rethink LNG investments. (Note: Hunt 
owns 18 percent of the Yemen LNG company. End note.) 
 
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Hunt Caught up in the Corruption Debate 
--------------------------------------- 
 
7. (C) In an earlier meeting with econoff, former 
parliamentarian Dr. Saadaldeen Talib shared his view that 
Parliament acted appropriately in blocking the Hunt 
extension.  According to Talib, the legislature has the legal 
responsibility to review ROYG contracts with foreign 
investors, and in the wake of last year's oil scandal would 
have been negligent not to do so (ref B).  The fault did not 
lie with Hunt, said Talib, but with the MOO for signing an 
insider deal that would have cost the Yemeni people revenue. 
The extension agreement included 15 percent profits for 
CREST, a little known company with ties to corrupt officials. 
 In Talib's view, it was Parliament's role to stamp out 
corruption and the Cabinet had a moral obligation to comply. 
Caviness argued that in rejecting the extension Parliament 
was "throwing the baby out with the bathwater," as Hunt's 
experience and expertise would result in greater profits from 
Block 18.  He added that Parliament's hasty deliberation on 
the matter proves that the ROYG was using the GPC-controlled 
legislature as a convenient excuse for canceling the deal. 
 
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Hunt's Departure Bad for Yemen, Bad for US-ROYG Relations 
--------------------------------------------- ------------ 
 
8. (C) Comment: A protracted dispute with Hunt would have a 
direct negative effect on Yemen's economy.  Eighty percent of 
Yemen's budget is derived from oil profits and, according to 
Caviness, the Hunt concession accounts for thirty percent of 
the country's total oil production.  Following on the heels 
of Proctor and Gamble's litigation and withdrawal from Yemen 
due to IPR disputes, Hunt's departure would cast a large 
shadow over any future U.S. private investment.  Coupled with 
doubt over the legitimacy of the Aden Port tender, it would 
be even more difficult for the ROYG to attract much needed 
foreign direct investment (ref C), a major milestone in 
Yemen's MCC threshold proposal bid for MCC country status. 
 
9. (C) Comment continued: Understanding the ROYG's motives on 
the Block 18 extension is an exercise in divination.  If 
Parliament is indeed flexing its muscles in combating 
corruption, this could be viewed as a positive sign for 
democratic reform in Yemen.  A pattern appears to be 
emerging, however, in which the ROYG uses the GPC-controlled 
Parliament to block unpopular decisions (such as economic 
reforms), blaming democracy for the setback.  The decision on 
Block 18 follows another developing pattern of backdoor 
nationalization and reverse privatization (ref D).  Close 
advisors to the President, keen on immediate profits and 
personal gain, are winning the day over reformers who favor 
an improved investment climate and long-term growth. 
Considering Hunt's central role in U.S. investment in Yemen, 
each of these possibilities poses significant challenges to 
future bilateral relations.  Post will keep its eyes and ears 
open as the case progresses, but will not advocate for Hunt 
unless specifically asked to intervene.  End comment. 
Krajeski