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Are Political Risks of Oil Exploration Becoming Clearer? - International Law Office

International Law Office

Energy & Natural Resources - Yemen

Are Political Risks of Oil Exploration Becoming Clearer?

May 22 2006

Marib Arbitration
Comment


The Yemeni oil exploration sector is at a crossroads. As the major producing fields decline, Yemen has recently been looking for, and attracting, interest from the oil industry's major players. The two most recent licensing rounds - the latest closed on April 15 2006 - saw applications from, among others, Total, Petronas, DNO, OMV, Petrobas, Repsol and Sonatrach.

The activity in this sector is taking place against the background of widely reported legal proceedings involving the government and two major oil companies with longstanding interests in Yemen. The oil companies allege that the government has expropriated their assets illegally. Foreign investors will be keeping a watchful eye on developments in this case, as it is expected to help clarify the political risks facing 'big oil' companies in the country.

Marib Arbitration

In November 2005 the Yemeni government took back the Marib oil field concession from YEPC, a joint venture company owned by Exxon Mobil and Hunt Oil. YEPC had operated the block for over 20 years. In place of YEPC, the government installed Safer Exploration & Production Operations, a wholly owned government entity.

YEPC responded by filing arbitration proceedings with the International Chamber of Commerce. The claim alleges that the government and YEPC signed a five-year extension of the production sharing agreement in January 2004, and that the five-year term began on November 15 2005. Not surprisingly, the parties wish to keep these proceedings confidential. Meanwhile, Safer Exploration & Production Operations continues to operate the field. Whatever the outcome of the case, it will put the spotlight firmly on the risks to foreign companies pursuing initiatives in Yemen.

Comment

Foreign investment in the oil industry in Yemen is clearly not for the faint-hearted. Although foreign oil companies have been involved in the sector for decades, it is only recently that international licensing rounds with increased transparency have been introduced. As current producing fields (eg, Marib and Masila) continue to decline, the government wishes to engage foreign companies, with their capital investment and technological expertise, in order to establish a clearer picture of the country's remaining oil resources. At the same time, there have been indications of the government's intent to take a greater domestic stake in the industry.

The outcome of the Marib arbitration will be crucial. If the tribunal finds that the concession was unlawfully expropriated, the confidence of foreign investors in Yemen is bound to be affected. In the meantime, however, the case does not seem to have dampened the enthusiasm of foreign oil companies. Yemen's most recent exploration round attracted 62 applicants. Moreover, Yemen looks set to become a significant gas producer following the sanction of a two-train liquefied natural gas liquefaction plant and an export terminal in Balhaf on the Gulf of Aden. A consortium that includes Total, Hyundai and Hunt Oil is developing the project.

As long as oil prices remain high it is likely that oil companies will remain ready to confront unusual levels of political risk, not only in Yemen but also in other politically volatile areas. At the same time, high oil prices will continue to place political pressure on the governments of these countries with regard to the foreign investors. This points to one conclusion: the Marib dispute is unlikely to be a one-off.


For further information on this topic please contact Richard Devine or Sean Korney at Denton Wilde Sapte by telephone (+971 4 331 0220) or by fax (+971 4 331 0201) or by email (richard.devine@dentonwildesapte.com or sean.korney@dentonwildesapte.com).



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