Saudi Arabia launches Yemen air strikes: Update 2

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Saudi Arabia has launched air strikes against Yemen's northern Shi'a Houthi opposition as the Houthis advance on many fronts, including an area near the strategic Bab al-Mandeb chokepoint, which connects Mideast Gulf oil production to Europe via the Red Sea and the Suez Canal.

Saudi Arabia is attempting to stem its southern neighbour's descent into civil war and break the Houthi advance on its ally, President Abd Rabbo Mansour Hadi. Yemen's embattled president fled the capital for the southern port city of Aden in January after the Houthis took control of Sana'a.

The Saudi-spearheaded operation was conducted with the participation of a 10-member coalition including all of the Saudi Arabia's GCC allies with the exception of Oman, which has warmer relations with Iran. Jordan, Sudan, Morocco and Pakistan have also indicated to Saudi Arabia that they are prepared to join the operation in Yemen. Meanwhile, the US will provide the coalition with logistical and intelligence support, although US capabilities in Yemen are handicapped by a decision to pull all remaining personnel from the country in response to escalating violence. Egypt has committed air and naval assets and is prepared to offer a ground force, if necessary, in support of Saudi-led military operations in Yemen.

Saudi Arabia's ambassador to Washington, Adel bin Ahmad al-Jubeir, said it was spurred into action by a direct plea from president Hadi. Hadi's palace in Aden has come under repeated air attack in recent days. The Yemeni air force is said to remain loyal to former president, Ali Abdullah Saleh, whose supporters have clashed with pro-government forces around Aden as the conflict devolves into a multi-front sectarian and tribal war.

Saudi-led air strikes targeted Houthi air defences in the north of the country yesterday.

The region has a history of border conflict between the Houthis and Saudi forces. The risk of Houthi retaliation for the air strikes is high. As a precautionary measure, Saudi Arabia has suspended all passenger air travel to and from the southern cities of Jazan, Abha, Wadi al-Dawasir, Bisha, Shahrourah and Najran. Jazan is a key industrial hub in the remote southwest and the site of a planned 400,000 b/d refinery. Both Saudi Arabia and Kuwait said they have put oil facilities under increased security measures.

Political turmoil is hampering efforts to kick start the country's oil and gas industry, which is its primary revenue source. The oil industry accounts for around 70pc of the government revenues, with 2014 oil revenues falling by $1bn against a year earlier to $1.6bn, according to the Central Bank of Yemen. Yemen's share of oil exports fell by 30pc to 17mn bl last year and domestic crude supplies slid by 10.5pc to 18.6mn bl.

China is the main buyer of Yemen's Masila crude from the eastern Hadramaut region with state-owned Unipec is a regular lifter of the grade. Small volumes sometimes go to Thailand. If Masila exports are disrupted, buyers would likely increase purchases of ESPO or Sokol crudes.

The government share of Marib Light crude produced in a central region goes to the country's only refinery at Aden for domestic products. Any volumes exported by other partners go to Europe.

The oil ministry in the capital Sana'a admits it is in the dark about crude exports at present.

A brief respite in attacks on oil infrastructure pushed production up by 23pc on the 2014 average of 130,000 b/d to 150,000-160,000 b/d in January, according to officials at Yemen's ministry of oil and minerals. Oil and gas infrastructure has come under repeated attack in Yemen. Although Yemen LNG's Balhaf terminal halted exports on 19 January in response to the Houthi's kidnapping of Hadi's chief of staff, Ahmad Awad bin Mubarak, force majeure was lifted in late January or early February. Total has a stake in Yemen LNG and it said today that none of its sites in country were hit during the airstrikes.

Meanwhile, the Houthis are said to be advancing in the southwest of the country towards the Bab al-Mandeb chokepoint. Some 4mn b/d of crude and around 100,000 t/d of LNG – roughly 900,000 b/d of oil equivalent — flows through Bab al-Mandeb.

The sea lane is already deemed a high risk area for shipping with high insurance premiums in place. In recent years, tankers have been attacked by Somali pirates. Further instability is likely to increase the room for manouevre for both pirates and the al-Qaeda affiliate that attacked the US warship USS Cole in 2000. That said, the waters between Yemen and the Horn of Africa are now heavily patrolled by western navies.

Tanker owners and charterers are waiting further information before deciding whether to change their instructions.

An indication of the increasing division of Yemen into spheres of influence has come with the issuing of a tender for 50,000 t of gasoline and 50,000 t of diesel by state-owned Yemen Petroleum, based Houthi controlled Sana'a, for delivery to Hodaidah on the Red Sea coast. Product imports are usually handled by the Aden Refinery operator. With fighting going on around Aden, no imports to the refinery terminal are possible.

Traders are unsure if Yemen Petroleum can pull off the deal. Hodaidah can only handle 10,000-12,000t cargoes because of the port's draft restrictions.

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