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Yemen eyes Shabwa crude restart

15 May 2017 12:07 (+01:00 GMT)
Yemen eyes Shabwa crude restart

Dubai, 15 May (Argus) — The Saudi-backed government of Yemen has issued a tender for 75,000 bl of Shabwa blend crude for June delivery. But no such crude is being produced in the country. Nor is it likely to be produced in the short term.

The consignment is from oil produced by state-owned Yicom in 2015 from its Block 4 and stored at the Bir Ali export terminal, also known as Rudum, on the south coast of Yemen.

Although a small quantity, the tender is important as it demonstrates a determination to resume production from the Shabwa basin, the second largest producing region in the country. The tender also indicates that the security situation in the contested region — in central Yemen, east of the capital Sanaa — is under government control and safe enough to undertake remedial work on oil fields and sustain production.

Ultimately, kick starting output from Shabwa would open the door to resuming production from other nearby blocks, including the 30,000 b/d Block 18 that also supplies natural gas to the Balhaf gas liquefaction and LNG export facilities — the country's hydrocarbon crown jewel. Yemeni state-owned Safer, also known as Sepoc, operates Block 18.

The tender raised expectations that Shabwa production has resumed or will do so shortly, but current production is only from PetroMasila, an official at Yicom said. Yicom holds stakes in the strategically and logistically important Shabwa basin Blocks 4 and 5. Vitally, it operates Block 4, which has a crude export pipeline to the southern, government-controlled Bir Ali terminal.

All of the crude tenders since the war began in 2015, have been for lower quality Masila blend crude from the eastern Hadramaut region. Exports were enabled after the region was secured by Saudi-led coalition forces, granting the Yemen government control and the ability to resume crude production and exports.

State-owned PetroMasila consolidated its position by taking over operatorship of Blocks 10 and 14 and, buoyed by an improved security environment, resumed oil production far from the worst of the conflict in the remote easterly Hadramaut region. Its production restart was preceded by a 2mn bl tender of crude stored the southern coastal export terminal at Ash Shihr. That freed up storage capacity for further production.

PetroMasila is producing about 30,000 b/d from Blocks 10 and 14, which is then sent by pipeline to Ash Shihr. The blocks had a pre-war production capacity of around 65,000 b/d.

The Shabwa tender would be the country's fifth tender since they resumed last year and, at 75,000 bl, much smaller than the 2mn bl tenders of Masila blend that preceded it.

Yicom's Blocks 4 and 5 would be ideal for restarting production in the region because of the pipeline infrastructure. Pre-war, Block 4 was a marginal producer with output of just a few hundred b/d. Block 5 production was over 26,000 b/d.

Control of Block 5 needs to be resolved. State-owned Kuwait Energy (KEC) is the operator although its license expired last year. Yicom, for now, is running the show on the ground.

Before production resumes, work is required on some connections for the facilities, specifically the pipeline from Block 5 to 4.

The so-called export terminal Bir Ali is more beach than port, said a source. It has some five storage tanks with a total capacity of 750,000 bl. "A couple of tanks have holes in them," a foreign company source noted. The facilities are capable for exporting around 500,000 bl/month.

A pipeline route would be faster and more cost effective than trucking oil around 600 km eastwards to PetroMasila's export pipeline on Block 14. According to the UN's World Food Program, which monitors "access constraints", many of the major roads between the Shabwa fields and PetroMasila's fields are considered "difficult to access."

Nevertheless, the trucking option, at least initially, is the government's preferred option for resuming oil exports from the Shabwa region. The concern is that it passes through several military districts, which requires "the distribution of costs providing security."

The government has reportedly allocated funds for repairing and potentially upgrading the pipeline, but so far no work has been done. IOC working in the country expect that the pipeline, although damaged in several places, would take a few hundred thousand dollars to repair, if landowner tribes along the route can be persuaded to refrain from damaging it further.

Although difficult, trucking an initial 75,000 bl of Shabwa crude for export would likely pave the way for rehabilitation efforts, both at the port and the pipeline.

This, in turn, would facilitate restarting output on neighbouring blocks, including S1 operated by Petsec and S2 operated by OMV. Petsec acquired S1 in 2016 and hopes to start trucking production, at least initially, to Block 14 with the expectation it can produce at least 10,000 b/d. Pre-war, S2 produced around 18,000 b/d.

A restart would also facilitate a resumption of oil output from Block 18. But the current infrastructure sees the gas flow south to the Balhaf terminal but the oil northwest to the Ras Issa export terminal, currently held by rebel forces. A several hundred kilometre pipeline would have to be constructed to join Block 18 to Block 4, or the crude trucked.

Trucking would not be unprecedented in Yemen. OMV had been trucking its crude the other way, from S2 to Block 18. Better pipeline infrastructure would be the ideal and OMV is reported to have sufficient pipeline sitting in its yard in S1.

Ultimately, resuming production from the key producing Shabwa region makes sense — it has vast resources and has the infrastructure in place to facilitate the logistics of getting oil to government-controlled export terminals on the southern coast.