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Promising signs for Yemen's oil industry, but civil war rages

Highlights

Output up to 55,000 b/d, fraction of pre-war levels

Sectarian tensions keep IOCs wary of returning

Government needs oil revenue to rebuild

London — Nearly five years into a devastating civil war that has spiraled into a humanitarian crisis, Yemen continues to pump a trickle of oil.

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In fact, its crude output has increased some 40% in the last year, averaging around 55,000 b/d, according to S&P Global Platts Analytics, as state-owned Safer Exploration & Production restarted pumping at two blocks in the Marib field in October.

Further growth, however, will be a challenge, with international oil companies largely wary and stability still elusive. A tenuous peace deal between the competing Yemeni factions that are part of a Saudi-led coalition fighting the Iranian-backed Houthi rebels has raised hopes. But analysts say much more needs to be done to attract investment.

"Overall the security risk remains high in Yemen and for many companies it is still premature to place the country on their radar screen, especially at a time when there are many more lucrative opportunities and safer bets elsewhere," said Carole Nakhle, an energy economist who heads the consultancy Crystol Energy.

Underdeveloped Yemen has never been a massive oil producer, particularly relative to its Arab neighbors, but it contains significant proved hydrocarbon reserves of some 3 billion barrels of crude and 16.9 Tcf of gas, according to the US Energy Information Administration.

Since reaching a peak of about 450,000 b/d in 2001, oil production has declined precipitously due to natural field decline, lack of investment, and the war, which has killed thousands and led to famine and deteriorating health conditions.

The oil industry is vital to Yemen's finances, contributing some 63% of government revenues before the fighting broke out, according to the International Monetary Fund, and will play a central role in rebuilding the Middle East's poorest country, should peace one day return.

The landmark accord signed in November between Yemen's UN-recognized government and southern separatists was a positive first step that helped end infighting that had threatened to further splinter the country. Most of Yemen's oil resources and ports on the Gulf of Aden are in territory controlled by the government.

But progress in implementing the agreement has been slow and hostilities continue with the northern-entrenched Houthis, who control a key oil port on the Red Sea.

The US' killing of Iranian general Qassem Soleimani has further inflamed sectarian divides, and the death of Oman's Sultan Qaboos bin Said, who had mediated between Saudi Arabia and the Houthis, is a blow. A suspected Houthi missile attack on Yemeni government forces Saturday reportedly killed 116.

"To get Yemen to a place where IOCs can return in strength... we need to see a peace agreement between the Houthis and the anti-Houthi alliance first, and importantly a ceasefire that holds," said Niamh McBurney, who heads risk consultancy Verisk Maplecroft's Middle East and North Africa division.

Rebuilding amid risk

State-owned companies PetroMasila and Safer produce the bulk of Yemen's crude, with Austria-based OMV and Indonesia's Medco the only two international companies still operating in Yemen.

OMV said its production at the Habban oil field has been stable at around 4,000 b/d of oil equivalent but declined to elaborate on its plans.

"Please understand that we cannot comment further nor can we make future predictions based on the volatile situation in Yemen," the company said in an email.

Medco could not be reached for comment.

As for the Yemen LNG project on the southern coast, French major Total, which holds a 39.6% stake but evacuated its employees in 2015, said in November that it "obviously hopes that it will be possible in the future to restart LNG production." But it said damage to a key pipeline and the security risks will keep it on the sidelines for now.

Yemen's oil reserves are largely concentrated in the inland Masila Basin in the center of the country, and the Marib and Shabwa basins further west.

Prior to the conflict, Marib Light crude was sent via pipeline to the Ras Isa terminal on the Red Sea coast, now occupied by Houthi forces. The pipeline was shuttered in March 2015 as hostilities escalated and Saudi Arabia and the UAE imposed a blockade on oil exports from Houthi-controlled areas.

Current production is trucked to a pipeline running 200 km south to the Bir Ali terminal on the Gulf of Aden coast, though the Yemeni government has planned for a new 80 km pipeline that would connect the Marib fields to the Bir Ali pipeline and is scheduled to be operational as soon as this month.

Medium-grade Masila Blend, meanwhile, is piped to the Ash Shihr port, also on the Gulf of Aden coast.

S&P Global Platts Analytics forecasts crude production will remain flat through the end of 2020, but improved stability could provide a lift.

"An upward revision for Yemen would be unsurprising, but jihadists, Houthis, and tribal violence pose persistent risks," it said in a recent note.

Tiny independent Petsec Energy, which holds two leases in Yemen but has yet to start production, remains bullish on the country, CEO Terrence Fern told Platts. The Sydney-based company is aiming to begin production in the coming months, eventually ramping up to 5,000 b/d within six months and 20,000 b/d within two years.

"We are comfortable with the security position," Fern said.