US embassy cable - 05SANAA1511

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 001511 
 
SIPDIS 
 
E.O. 12958: DECL: 06/01/2015 
TAGS: EPET, ECON, EINV, YM, ECON/COM, ENERGY 
SUBJECT: SEARCH FOR BLOCK 18 SOLUTION: HUNT ASKS AMBASSADOR 
TO INTERVENE 
 
REF: A. SANAA 1281 
     B. SANAA 1352 
 
Classified By: Ambassador Thomas C. Krajeski for reasons 1.5 b and d. 
 
1. (U) This is an action request.  See para. 3 
 
2. (C) Summary and Action Request.  Tensions continue to 
mount over Block 18 and Yemen Hunt's future in Yemen.  On May 
24 Ambassador met a group of Hunt executives preparing to 
litigate in international court for ROYG breach of contract 
(ref A).  Although still looking to strike a deal, Hunt is 
increasingly pessimistic about its ability to influence 
President Saleh.  Hunt's legal advisors believe they have a 
strong case and an international reputation to maintain. 
Parliamentary sources contend that the legislature is flexing 
its muscle in a legitimate attempt to crack down on 
corruption and that following last year's oil scandals, Saleh 
is not in a position to impose his will on Parliament.  Saleh 
is reportedly willing to sign a new contract with Hunt for a 
higher ROYG profit share, but the parameters of such 
agreement are still unknown.  On June 3, Hunt formally 
requested Ambassador to weigh in with President Saleh to find 
a solution. Post seeks guidance from NEA/ARPI on Hunt's 
request and has provided suggested talking points below.  See 
para. 3.  End summary and action request. 
 
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Hunt asks Ambassador to Intervene with Saleh 
-------------------------------------------- 
 
3. (C) On June 3 Hunt formally requested the Ambassador to 
weigh in with President Saleh to "defend the sanctity of the 
five-year extension of the Maarib PSA" granted in late 2003. 
Post requests guidance on Hunt's request for the Ambassador 
to meet with Saleh in support of Hunt. 
 
Suggested talking points: 
 
-- We are very concerned that Hunt, the major American 
company in Yemen, will be forced to leave at a time when the 
ROYG has made improving its investment climate a major tenet 
of economic reform. 
-- Understand the legal issues are complex but Hunt's claim 
appears valid. 
-- Hunt has stated its intention to take this issue to the 
Public International Court in Paris.  Litigation promises to 
be a costly and lengthy legal battle, with negative 
implications for Yemen's image among international investors. 
-- Block 18 is critical to Yemen's revenue, both for oil and 
LNG.  It is important that reputable international companies 
such as Hunt manage these projects. 
 
------------------------ 
Hunt Prepares for Battle 
------------------------ 
 
4. (C) Ambassador met May 24 with Yemen Hunt representatives 
for continued discussion regarding the American oil company's 
Block 18 extension.  Hunt executives included Vice President 
and General Manager Wendell Caviness, post's regular 
interlocutor, joined by Senior VP Tom Meurer, Senior VP and 
General Counsel Dennis Grindinger, and Karim Abu Hamad, 
General Manager of Yemen Hunt LNG Co.  Hunt maintains it 
intends to take Yemen to the Paris Public International 
Court, as outlined in the Production Sharing Agreement (PSA). 
 Company lawyers are confident they can prevail in court by 
charging that the ROYG violated the sanctity of Hunt's 
contract with the Ministry of Oil (MOO).  In Hunt's view, 
Parliament did not have the authority to reject the PSA 
extension, only to ratify or reject specific terms of the 
agreement.  Meurer explained that Hunt will not seek 
injunctive relief for Block 18 revenues if it goes to court, 
but will claim for damages based on a price of USD 50 per 
barrel.  The Government will have to find someone else to 
operate Block 18, said Meurer.  "Once it goes to court, we're 
out." 
 
---------------------- 
"Stop the Train Wreck" 
---------------------- 
 
5. (C) Hunt is looking for assistance to "stop the train 
wreck," said Meurer.  Hunt's usual ROYG contacts, Minister of 
Oil Baraba and Presidential Advisor al-Iryani, appear no 
longer to have the President's ear (ref B).  During April 
talks with al-Iryani, confided Meurer, both sides reached a 
compromise in which Hunt would keep the existing production 
area and return the remainder of Block 18 to the ROYG.  The 
ROYG would then reimburse Hunt for exploration and investment 
costs.  The President, however, was reportedly unmoved by 
this proposal.  Nevertheless, this week a contact close to 
Saleh maintained that the President is indeed ready to deal, 
reporting that Saleh wants to draw up an entirely new 
contract with a higher profit share for the ROYG.  Ambassador 
offered to engage Saleh directly on the matter, and on June 3 
Hunt accepted the offer. 
----------------------------- 
Block 18 Debated in the Media 
----------------------------- 
 
6. (C) The Hunt negotiations have recently received extensive 
and varied coverage in the press.  Caviness acknowledged that 
Hunt leaked its letter to MOO protesting the Block 18 
decision (ref A).  Government newspaper al-Thawra reported 
that Prime Minister Bajammal made overtures to Hunt in a May 
25 meeting.  Bajammal stated that the ROYG would shift from a 
PSA arrangement to an operations contract, but that Hunt 
would be given priority in the selection process.  (Note: 
Hunt indicated that it would only accept a PSA agreement, 
which provides more extensive guarantees for foreign 
investors.  With an operating contract, the Government 
retains full ownership over the Block, and has greater 
freedom to alter terms in the agreement. End note.)  In 
contrast, the English language newspaper Yemen Observer 
blasted Hunt, saying the company was suing Yemen for USD 7 
billion (denied by Hunt) and leveling multiple accusations at 
Hunt relating to the extension agreement. 
 
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Hunt Rubs Parliament the Wrong Way 
---------------------------------- 
 
7. (C) According to MP Mohamed Al-Shaddi and former MP Dr. 
Saadaldeen Talib, Hunt's letter was a tactical mistake (ref 
A).  Parliament believed that because the extension included 
amendments to the original PSA, MPs have a constitutional 
right to vote on the matter.  By denying this, Hunt aroused 
the ire of independent-minded MPs who believed that Hunt was 
violating Yemen's sovereignty.  Following last year's scandal 
surrounding Block 53, contended Talib, oil is the one area 
where Parliament seems to have some real leverage over the 
executive.  Al-Shaddi agreed, saying the scandal tarnished 
the President's reputation and he is loath to repeat the 
experience.  Talib feels that Hunt tragically misread Yemeni 
politics and the role of Parliament in this affair.  Because 
Hunt's letter mentions Parliament by name, it was formally 
presented to MPs by Bajammal, thereby forcing the legislature 
to respond to the allegations and making any potential deal 
more difficult. 
 
8. (C) Hunt executives believe that much of Parliament's 
opposition is due to personal vendettas against the American 
company.  For example, said Meurer, Abdul Khader Thabet, 
Chairman of the Economic and Petroleum Affairs Committee and 
one of the extension's main opponents, recently lost a 
trucking contract with Hunt.  Meurer also accused Hamid 
al-Ahmar, powerful MP and son of Parliamentary Speaker Sheikh 
Abdullah al-Ahmar, of attempting to squeeze out Hunt so he 
could operate Block 18 in partnership with a Saudi company. 
Talib disagreed, saying the issue is much too sensitive for 
Thabet to exert such influence.  It is more likely, he said, 
that Saleh himself was not satisfied with the deal negotiated 
by the MOO and gave Parliament the green light to shoot it 
down.  Al-Shaddi said that all MPs believe the MOO to be a 
sacrificial lamb in this struggle, offered up so that Saleh 
can appear tough on oil corruption. 
 
9. (C) The corruption is real, argued Talib, pointing out 
that Parliament's report issued before the extension vote was 
based on MOO numbers that showed Hunt would receive 15 USD 
per barrel while a fresh operator could do the job for only 2 
USD per barrel.  At a low estimate of 40 USD per barrel, said 
Talib, the ROYG stood to lose 1 billion USD.  The inclusion 
of the shady Crest Company as a third partner, continued 
Talib, smacked of corruption similar to that in the Block 53 
scandal.  In that case, ROYG officials and oil companies 
agreed to undersell crude to a third party and then 
distribute profits derived from the market prices to unnamed 
partners. 
 
---------------------- 
Oil Spills Over to Gas 
---------------------- 
 
10. (C) Adding fuel to the fire, the Block 18 debate is 
influencing the still pending Liquid Natural Gas (LNG) 
agreement.  Grindinger said that with LNG Yemen has the 
opportunity to move investment to a new level.  The ROYG 
stands to benefit from equity, taxes, and royalties derived 
from 6.7 million tons of natural gas extracted per year, 
"This could be a twenty year cash machine for the 
Government," said Grindinger.  However, the project depends 
on USD 3 billion up front, half of which will need to be 
borrowed, and capital could prove hard to secure if the Block 
18 extension ends up in international court.  Hunt is 
preparing its case, "to drive a stake in the heart of the 
Government's ability to contract," said the Hunt council. 
AbuHamad contended that a high profile case would damage the 
ROYG's international commercial reputation.  Coupled with 
ongoing security concerns, this would level a crushing blow 
to financing efforts for the LNG deal. 
 
11. (C) As the LNG agreement reaches the finish line, rumors 
abound that the LNG deal is going the way of Block 18. 
Parliament recently raised objections similar to those in the 
Hunt debate, saying that French company Total was issued 
three "unconstitutional" extensions without review by 
Parliament, and that prices were fixed below market value in 
collusion with Total and the South Korean Kogas Company. 
According to AbuHamad, Deputy Prime Minister Ahmed Sofan 
wants to reserve natural gas for domestic use in order to 
meet Yemen's domestic energy deficit, a sentiment echoed by 
Parliament's Petroleum Committee.  The Committee ordered 
further study and recommended halting any further measures 
pending a full review. 
 
----------------------------------- 
Saleh Between Hunt and a Hard Place 
----------------------------------- 
 
12. (C) Comment:  Hunt takes great pains to advance its image 
as an honest dealer in Yemen, contrasting itself with other 
foreign companies who regularly pay bribes to ROYG officials 
and private parties.  In the case of the Block 18 expansion, 
however, Hunt may have been caught with its pants down.  It 
seems clear that Hunt got a sweetheart deal from MOO, and in 
exchange agreed to give the little-known Crest a healthy 
share of profits.  Having just drawn blood from the executive 
in the Block 53 scandal, Parliament set its sights on the 
Hunt extension.  By revealing price fixing schemes, 
Parliament identified an oft-used means of embezzlement among 
Yemen's elite.  MPs have essentially accused foreign 
companies of colluding with their own corrupt government 
officials. 
 
13. (C) Comment Continued.  By repeatedly dismissing 
Parliament's authority, Hunt angered MPs, increasing their 
resolve to attack the PSA extension.  This is not to imply 
that Hunt's legal case is invalid, but rather that litigation 
could be a disaster for all parties.  Without a deal, Hunt 
will be forced to abandon Block 18 and Yemen's investment 
climate will be seriously damaged.  As joint investors in the 
LNG venture, both sides stand to lose considerable profits. 
Despite tough words, Hunt is still willing to negotiate, but 
time is running for all sides.  President Saleh, as always 
the deciding factor, is currently caught between Parliament's 
anti-corruption fervor and the expediency of a deal with 
Hunt.  It is likely that he will push for a new deal, but it 
remains unclear by what mechanism both Hunt and Parliament 
can be appeased. End comment. 
Krajeski