Nexen under pressure as Yemeni licence expires

“Nexen has been lobbying and negotiating for some years for a five-year extension to its production-sharing agreement (PSA), but has apparently been left stranded, after full political deadlock since early this year in Yemen has effectively put a stop to any government and parliament decision-making. Given the continued deadlock between a wide and disparate opposition movement and the remaining regime of beleaguered president Ali Abdullah Saleh, it is increasingly likely that time will run out on a possible renewal of the expiring licence, which, given the Yemeni system of each licence being a law in itself, has to be passed by parliament.”

Yemen has been in political deadlock since February, when the so-called “Arab Spring” protests spread across the region and erupted in the Yemeni capital of Sana’a, the southern port city of Aden and other main cities. The protests quickly drew in a myriad of forces that either support or oppose the regime, including some of the country’s most powerful tribes, urban and youth-based groups, as well as the northern Houthi rebels and southern secessionists.

The country’s political process has, since the end of the first quarter, been effectively suspended, with the two camps pitted against each other in physical standoffs mainly across the capital city, with large parts of Yemen’s armed forces having defected to the opposition since March. Further complicating matters, President Saleh has been absent from the country for several months, recuperating from serious injuries sustained from a bomb attack on his compound in June.

His sudden return from Saudi Arabia today (23 September) has raised fears of an escalation in violence. While his regime’s hold on most of the countryside remains highly tenuous, his loyalists still appear to be in control of the country’s weak institutions and economy, although the government has lost control of many regions and there is a virtual complete decision-making paralysis throughout the state bureaucracy.

With that in mind and given increasing reports that some Yemeni factions are advocating for allowing the licence to lapse in order for a state-owned oil company—most likely Safer E&P Operations Company (sometimes referred to as SEPOC)—to control the entire revenue generation at Masila, the possibility that the legal process to extend the Masila licence could be restarted looks remote.

“It looks like there is a mood within the government for SEPOC to take over Block 14 in Masila”, an industry source told Reuters, with a Safer source confirming to the news agency that the possibility is being discussed, although they clarified that the decision rests with the Oil Ministry.

Tough to Manage

Masila has since its development been a highly important oilfield for Yemen and in the last months of political crisis has proven almost invaluable, as production from the country’s Ma’rib region oilfields was largely shut in for several months because of the bombing of a pipeline connecting the region to the Ras Isa port on the Red Sea. Masila and its neighboring Shabwa region, however, export crude through a 138-km pipeline to the Indian Ocean Ash Shihr terminal, allowing them to weather the unrest in Yemen’s more populated areas, save for the worker strikes earlier this year.

The field was initially discovered in 1990 and came onstream in 1993, producing about 200,000 b/d at its peak. Decline over the last five years has, however, been particularly rapid, with Nexen’s total Yemeni production falling below 100,000 b/d in 2008 and showing year-on-year decline rates between 15-25%, particularly in the second half of the past decade. Output decline stood at around 15% between the second quarter of last year and the second quarter of this year, but was at 17% during 2010, with production from the Masila Block as well as the adjacent Block 51 in total coming in as low as 34.700 b/d before royalties in the second quarter of this year. Nexen holds a 52% operating stake in the block and is partnered by US midsize Occidental (Oxy) and Greece-based Consolidated Contractors Company (CCC).

In this year’s outlook, Nexen has flagged for its Yemeni output to fall as far as 28,000 b/d, indicating the speed with which decline is eating into mainly Masila output. Even in 2008, it was reported that almost 2 million b/d of water was being pumped out of Block 14, indicating the extremely high water/oil cut.

Outlook and Implications
The lack of a long-term investment recovery horizon has clearly made it impossible for Nexen to invest in the EOR (enhanced oil recovery) necessary to arrest decline and extend the field’s lifespan. Most of the reservoir’s recoverable reserves have been produced, although the company has been optimistic about its ability to extract further value out of the deposit. With Yemen’s state-owned industry lacking the technical skills to implement a complex EOR project on its own, the outlook for the Masila field to remain a significant contributor to Yemen’s dwindling total output looks dire, particularly since Yemen for the foreseeable future lacks any meaningful investment abilities of the sums that would be required.

The push for greater government-owned oil company control is likely to come from a precedent set by Ma’rib Block 18, where some of Yemen’s main production capacity was nationalised upon the expiry of an ExxonMobil-operated contract and given to then newly-created Safer. While this failed to halt decline rates rising in overall quite mature Yemen, the Block 18 assets were taken over at a less advanced stage of maturity compared to Masila today, meaning the inability of Yemen’s state-owned sector to arrest decline was less pronounced, but also served as less of a lesson.

Given the general maturity of much of its upstream assets, Yemen is in more dire need of IOC know-how and advanced technology investment then ever before, but while the country is rapidly running out of export revenues large enough to fuel the economy—which to some extent is why the country’s politics are in deadlock and the country is breaking up—a failure to extend the Masila licence would counter all such efforts and scare away potential investment further.

Still, without a working political process and with Yemen’s political groupings fighting desperately for access to revenue sources, a long-term perspective appears lost, leaving Yemen further impoverished in the medium term. In the meantime, Nexen’s PSA is set to expire, as there is no parliamentary process in place to make sure the law is extended.
 

ABOUT THE AUTHOR: Samuel Ciszuk IHS Senior Middle East Energy analyst