At the outset, it must be emphasized that preserving Yemen’s sovereign resources; oil and gas revenues, fisheries and others, is one of the aspects of protecting the country’s national security, and any negligence or slackness in maximizing its returns affects one of the pillars of the country’s sovereignty and national interests. Therefore, in light of the scarcity of natural and mineral resources available to the Yemeni economy, it becomes of paramount importance that the LNG resource be optimally exploited for the benefit of generations, present and future.
In a previous article, we talked about the damage and losses incurred by the Yemeni government as a result of the implementation of the LNG production and export agreement, signed between the Yemeni government and Total and its partners, during the first five years of implementation (2009-2014).
The Yemeni government obtained only 5% of the liquefied gas export revenues, which amounted to approximately 14.5 billion dollars during the mentioned period, which is a flagrant prejudice to the rights and higher interests of Yemen. We further explained that the reason for this is due to two catastrophic clauses in the agreement; one of them relates to the gas pricing mechanism, and the second is related to the formula for determining the government’s share of the profits. Both clauses were developed with malicious cunning and inadvertently by or with the complicity of the government negotiating team; who knows?!
Social media and some newspaper websites are filled with articles and documents confirming the premeditated tampering and corruption of the Total Company, represented by the Yemen Liquefied Natural Gas (YLNG), in Yemen's most important sovereign resource, which is the natural gas extracted from the oilfield reservoirs in Yemen, Marib, which is exported through Balhaf port in Shabwa, providing misleading and incorrect information about oil reserves in gas extraction fields. This in addition to the company attempting to acquire huge quantities of gas reserves, estimated at two trillion cubic feet, and establishing an upstream services company which contradicts Yemeni sovereignty and the laws in force.
All the evidence confirms the need to review the pricing mechanism of one million BTU of liquefied natural gas, which is intended for export to the outside world, because if the situation remains as it was in the past, it will lead to outrageous profits that "Total" and its partners will exclusively reap.
Additionally, it must be noted that Yemen's misfortune led it to fall into the Total company's trap to sign contracts with it for the production and export of liquefied natural gas, which were approved by the Yemeni state agencies in 2005. And the misfortune here emerges from the bad reputation of "Total" in the ways and methods of signing and executing its contracts with many developing countries in the Middle East, Africa, Asia and other countries. This poor reputation was confirmed by many reports which reveal the company's involvement in corruption and debt purchase deals in a number of countries, for example: Iraq, Iran, Nigeria and other countries.
In the same context, Yemen was not an exception. Rather, the worst forms of corruption and appropriation of the country's gas revenues were practiced, causing severe economic damages to the Yemeni government and the properties of the Yemeni people in the past, and we hope that it will not be so in the future. This article is based on reports by national consultants and experts in oil and gas affairs who worked in senior positions in oil companies and in the Ministry of Oil and Minerals.
The future of gas and its revenues
The agreements and contracts concluded with "Total" and its partners, gave it the concession rights to produce and export liquefied natural gas for a period of twenty years, five years of which have passed; It was fat for Total, and lean on Yemen and its people. There are pivotal and legitimate questions that arise strongly in light of the talk about making arrangements to re-enable Total to produce and export gas after a seven-year hiatus, due to force majeure conditions of the war in Yemen and its repercussions.
Can the contractual arrangements with "Total" remain as they are regarding the pricing of the quantities of gas sold and the government's share of the profits, despite the huge losses and damages incurred by Yemen during the first five years of the project's life? What are the options available to Yemen to maintain/protect the revenues due to the export of gas, during the remaining 15 years of the project’s life, which ends in 2036?
In order to answer these questions, it can be said that according to all these confirmed findings, it is very critical to review the pricing mechanism of the million thermal units of liquefied natural gas intended for export to the outside world, because keeping the situation as it was in the past will lead to outrageous profits that Total and its partners will reap; while it will also lead to huge losses for the Yemeni government resulting from price differences and deception for the country's share of profits.
To clarify the answer, a financial analysis model developed by a national expert in oil and gas affairs was used, and based on accurate equations for revenues and capital and operating expenses at the prices fixed in contracts to determine the share of each of the government and Total and its partners, and to simplify the picture, we will review three alternatives or scenarios, according to profit and loss strategies for all parties; The government, Total and its partners:
The first - the catastrophic scenario: which is that the contractual arrangements with Total and its partners remain as they were before, as in the proverb: “Leaving everything open”, or as it is said in English: “Business as Usual”, and this means that prices remain restricted according to the terms of the contract. The agreement, which ranges between $2.5 and 3.5 per million thermal units, and determines the government’s share of the profits according to the profit share equation contained in the agreement. Based on this scenario, the government shall obtain only about $5.2 billion during the project period (20 years), while incurring huge losses, including about $57 billion due to price differences in contracts compared to international gas prices, and also due to manipulation of profit shares between the government and project partners. The government is also incurring additional losses in crude oil, natural and petroleum gas, and upstream fees amounting to $13.6 billion; That is, the government's losses at the end of the project's life amount to $70.6 billion - as shown in Figure (1). In contrast, Total Company will make a profit of $6 billion at prices of $2.78 per million BTU, and take on price differences of $57 billion. Thus, the total revenues achieved by Total and its partners will be approximately $63 billion by the end of the project's life; while the government will receive only about 8% of the revenues compared with profits obtained by Total and its partners.
In fact, this scenario has a result (winner - loser); Total and the partners obtain the lion’s share of the profits, and the government gets the crumbs, and this situation represents injustice against Yemen and its higher interests, and accepting it and not reviewing prices and profit shares is considered a betrayal of the homeland and neglecting its wealth and resources.
The second - the likely unacceptable scenario: considering the price adjustment, while the equation for determining profit shares between the government and the partners remains the same. In this case, the government will achieve great profits at all selling prices, and the highest value at the selling price is 11.7 dollars per million thermal units. Accordingly, the government's share at the end of the project's life is about 62 billion dollars; on the other hand, "Total" and its partners will get nearly ten billion dollars - as in Figure (2) - and it is clear that this scenario is not beneficial for Total and its partners, and its result is (winner - loser), as the government achieves high returns that exceed, six times, the returns of "Total". and its partners, and certainly this alternative would be unacceptable to them, as it contradicts the investment opportunities and returns.
Third - Balanced Scenario: This alternative option is based on the government negotiating with Total and its partners to adjust prices and calculate it according to world prices, with an adjustment to the profit share equation between the government and the partners (In this scenario, the reason for the quota of profits between the government and the partners calculated at a minimum price of $2.78 per million thermal units was assumed as fixed ratios for all prices - to show the imbalance in this equation), as it is also assumed - to adjust prices for US markets similar to what the government implemented in the year 2013, in agreement with the Korean company "Kogas" (one of the partners with Total) to adjust prices.
According to the equation: (the price of one million thermal units = 12.6% x the price of a barrel of oil), where prices reached $12 per million thermal units, during the year 2014, according to this amendment. And if this is implemented at the present time, and gas is exported according to the prices that are not restricted to contracts, and adjusted to 11.6 dollars per million thermal units, then the profit shares will change for both the government and the partners, and the government’s share will amount to about 33 billion dollars, and the share of Total and its partners will reach 40 billion dollars at the end of the life of the project - as shown in Figure (3) - and it can be said that this scenario represents a (win-win) for all parties, and the government and decision-makers in oil and gas affairs must work hard to implement this alternative. The implementation of this scenario will ensure the achievement of rewarding returns, the benefits of which are embodied on more than one level; On the one hand, these returns will contribute to supporting the international reserves of foreign exchange, and it will be positively reflected in the stability of the exchange rate of the Yemeni riyal, halting the deterioration of its purchasing value, and reducing inflation. On the other hand, these returns will be also used in the reconstruction of the was destroyed infrastructure facilities, public and private facilities. This in addition to its use in revitalizing and recovering the national economy through the implementation of developmental projects in all economic and civil sectors.
