US embassy cable - 05SANAA3185

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 003185 
 
SIPDIS 
 
E.O. 12958: DECL: 10/31/2015 
TAGS: PGOV, PREL, ECON, EINV, EPET, YM, ENERGY, ECON/COM 
SUBJECT: EXIT HUNT: YEMEN MOVES TO NATIONALIZE OIL 
PRODUCTION IN BLOCK 18 
 
REF: SANAA 1511 
 
Classified By: DCM Nabeel Khoury for reasons 1.4 (b) and (d). 
 
1. (C) Summary:  On October 17, Yemen's Cabinet announced 
that it would not renew Hunt's contract for oil production in 
Block 18, and would instead award it to the Yemeni-owned 
Safer Company.  Hunt intends to sue the ROYG for violation of 
contract, and will likely announce legal action to coincide 
with President Saleh's November visit to Washington.  Safer 
is rumored to be an alliance of Yemen's major business 
families, and will hold a 25 percent share.  The ROYG will 
hold the remaining 75 percent, and is encouraging Hunt local 
employees to stay with the new government-owned venture. 
Hunt continues to seek a compromise solution, and there is 
some possibility that Saleh will look to deal while in 
Washington.  High oil prices, however, and the promise of 
large personal profits for those involved, make such a 
resolution unlikely.  End summary. 
 
----------------------------------- 
It's Official:  Hunt Loses Block 18 
----------------------------------- 
 
2. (C) The Cabinet announced on October 17 that the ROYG 
would award drilling rights in Block 18 to the locally owned 
Safer Petroleum Exploration Company.  Hunt Oil has operated 
in Block 18 for 20 years under a production sharing agreement 
(PSA), but that agreement will expire on November 15.  Block 
18 has been one of Yemen's highest producing oil fields, with 
an average yield of approximately 80,000 barrels per day of 
crude, and Hunt currently produces approximately 30 percent 
of Yemen's oil.  Hunt was seeking a five-year extension for 
the block, which was approved by the Ministry of Oil but 
blocked by Parliament in May 2005. (Reftel) The Cabinet's 
announcement appears to close the door on any last-minute 
deal between the ROYG and the American company. 
 
3. (C) Ambassador met October 23 with Hunt Vice President and 
General Manager, Wendell Caviness, and the company's chief 
negotiator, Bill Lewis.  The executives presented Ambassador 
with a written request to include the Block 18 issue in the 
agenda during President Saleh's upcoming visit to Washington. 
 Lewis made clear that Hunt remains open to negotiation, yet 
the ROYG has made no indication that it is interested.  If 
there is no change in the coming week, Lewis said Hunt would 
pursue arbitration in international court for approximately 
USD 450 million, charging breach of contract.  General 
Counsel Dennis Grindinger told Econoff that Hunt and Exxon 
executives (partners in Block 18) are meeting October 31 to 
decide the timing of the lawsuit, which will they will either 
announce immediately before or after Saleh's meeting with 
President Bush. Lewis also shared that Hunt planned to launch 
a simultaneous media campaign against the ROYG in the 
American and international press. 
 
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"The Government is Taking Over" 
------------------------------- 
 
4. (C) Hunt officials say the message from ROYG officials, 
including Presidential Advisor Abdulkarim al-Iryani, is 
clear: "The Government is taking over Block 18."  The 
official Yemeni press has reported that Safer will have full 
legal authority to operate and develop the block.  According 
to Caviness, however, Safer will hold only a 25 percent 
working interest in Block 18, while the ROYG will hold the 
remaining 75 percent.  The ROYG has assured Hunt's local 
employees that their jobs will be guaranteed after the 
transition, and has appealed to the patriotic duty of Yemeni 
citizens to discourage them from resigning.  When Prime 
Minister Bajammal appeared before Parliament in September, 
however, he admitted that the ROYG had done nothing to 
prepare for the transition. 
 
---------------------- 
Who Stands to Benefit? 
---------------------- 
 
5. (C) There is little information available as to who owns 
Safer, a company that has existed only on paper since 1998. 
The ROYG proposed at that time that Safer take over Block 18 
after the expiration of Hunt's five-year extension, during 
which time Hunt would help improve the local company's 
capacity.  Tarik al-Haidary, an executive in the Al-Ahmar 
Group, told Econoff that Safer is essentially an umbrella 
company for all of Yemen's leading investors, including the 
Ahmar family, the Hayel Saeeds and others.  By joining 
together, said Haidary, the stakeholders made a strong case 
to Parliament and the ROYG that the transfer of Block 18 to 
Safer was in the national interest.  Hunt director Caviness 
added that at USD 1.5 billion annual revenue from the block, 
it wasn't hard to convince Saleh that it was in the ROYG's 
interest to nationalize. 
 
6. (C) Caviness speculated that the effective nationalization 
of Block 18 would only last a few months, until such time as 
Safer inevitably shows a decline in production.  At that 
point, he suggested, the ROYG will enlist the help of another 
international operator and could even sell a substantial 
share of the block to the new investor.  American-owned 
Occidental Petroleum is often mentioned as a potential 
partner, as are Premier from Great Britain and Total from 
France.  Occidental has been maneuvering behind the scenes 
for several months, in partnership with Lebanese-based CCC, 
to capture a share of Block 18. 
 
7. (C) A limited period of state ownership could shield 
Occidental or other international companies from legal action 
by Hunt in U.S. courts.  It may also allow the ROYG to reach 
a more lucrative deal, based on high oil prices, than it 
would have received under the Hunt extension.  In an October 
25 meeting with Ambassador, Saleh said he fully intended to 
bring in foreign partners, perhaps even Hunt.  (Note:  It is 
unclear what the terms of such an arrangement would be, and 
unlikely that Hunt would accept. End note). 
 
------------------------- 
Hunt Looks for Justice... 
------------------------- 
 
8. (C) Grindinger is confident about Hunt's legal case, which 
will be based on sanctity of contract.  Hunt maintains that 
Parliament had no authority to cancel the extension signed by 
the Ministry of Oil.  Grindinger also cited a 1997 contract 
signed by the ROYG, which stipulates that if Hunt's PSA ever 
expired the oil would revert back to the Government.  The 
contract also specifies, however, that Mareb Upstream 
Services (MUS) obtains the liquid natural gas (LNG) rights 
and must approve any new operator in Block 18.  Hunt is a 30 
percent owner in MUS, said Grindinger, and has blocking 
rights on any new operator.  Grindinger explained that Hunt 
bought its share of MUS for specifically this purpose:  to 
make sure that poor management of oil reserves did not 
endanger LNG production in the same area. 
 
9. (C) The case is likely to drag on for several years, said 
Caviness, and could have serious consequences for the ROYG if 
Hunt is successful.  Yemen would be liable for Hunt's losses, 
explained Caviness, and if they refused to pay Hunt could 
move to garnish their assets anywhere in the world. 
Recognizing the seriousness of the situation, the ROYG has 
retained the legal services of British firm Clyde and Co. 
(Note: British-owned Cable and Wireless actually seized 
planes from Yemenia Airlines in London following a similar 
dispute with TeleYemen.  End note). 
 
10. (C) Caviness was concerned that perhaps the ROYG believes 
it can avoid litigation by threatening Hunt's other 
investments in Yemen.  Hunt continues to operate Block 5, 
with average production of 55,000 barrels per day and holds 
an 18 percent share in Yemen LNG (YLNG), with a projected 
total profit of USD 20 billion over 17 years.  Block 18 is 
the source of 95 percent of the LNG for the proposed project, 
with the remainder coming from Block 5.  The Prime Minister 
assured Ambassador on July 4 that, "Hunt is not leaving 
YLNG!"  Should the ROYG attempt to remove the American 
company from either Block 5 or LNG, however, Caviness said 
Hunt would counter with additional lawsuits. 
 
------------------------- 
...and Hopes Against Hope 
------------------------- 
 
11. (C) President Saleh has yet to approve the Safer deal 
officially, indicating that there may still be some room for 
a compromise.  In previous meetings with Ambassador, Hunt 
executives indicated that they would be willing to accept 
different ownership configurations, as long as their 
percentage of profits is at least 15 percent and they retain 
majority representation on the board of directors for five 
years.  Grindinger said that Hunt will continue to explore 
every avenue, noting that the company may look to set up a 
meeting between Saleh and CEO Ray Hunt during the President's 
visit to the United States. 
 
12. (C) Comment:  Nothing is ever final in Yemen and there is 
some hope that Saleh may be persuaded to reach a deal with 
Hunt during his trip to Washington.  Post recommends 
discussion of Block 18 within the context of the broader 
challenges of corruption and rule of law.  American companies 
find it impossible to invest in Yemen as they cannot depend 
on contract enforcement, tendering guidelines, or legal 
protection.  Even with such arguments, there is little cause 
for optimism.  The high price of oil has made the short-term 
gains of nationalizing Block 18 too tempting for the ROYG to 
pass up.  The corruption will be evenly distributed through 
the Safer Company, which appears to offer a piece of the pie 
to many of Yemen's most influential business families.  At 
the same time, the ROYG can boast that it is increasing 
revenue to meet short-term budget needs, even if production 
in Block 18 declines and Yemen's investment climate 
deteriorates further.  In short, everyone wins -- except Hunt 
and the Yemeni people.  End comment. 
Krajeski