Yemen Project Experiencing Delays
(Appeared January, 2007)

Yemen’s first LNG project has met with financing delays, after bankers grew increasingly concerned about changes at the upstream end of the project. Construction work is continuing on schedule, however.

Plans to raise loans to cover 60% of the $3.7 billion project cost have run into complications. The financing “is still ongoing. … It started more than one year ago. However, the whole process has been slightly delayed because there has been a major change in the upstream when Hunt [Oil] was replaced by Sepoc,” Joel Fort, general manager of Yemen LNG,said.

The government unexpectedly cancelled Hunt Oil’s long-standing contract for the Marib Block 18 concession when it expired in November 2005. State-owned Safer Exploration and Production Operation Co. (Sepoc), created to take over the block, is now in control of providing all gas feedstock for the LNG project.

Many of the problems are technical, including the need to update all the previous contracts, which had been drawn up in Hunt’s name. “If the operator is no longer Hunt, the agreements need to be modified or have to be innovated. It takes time,” Fort said.

But Yemen LNG says there is some concern among investors that Safer is an unknown industry participant, in contrast to an established international operator like Hunt. Commercial banks and export credit agencies are demanding further protection before they finance the project, meaning the government might need to bring in technical and operational support to help guarantee gas delivery, according to Yemen LNG officials.

Shareholders in Yemen LNG are also getting nervous, as their initial equity funding agreement for the project expires in February 2007. “The shareholders would like to see this [financing] in place as soon as possible,” said Fort.

Under optimal conditions, Yemen LNG does not expect financing to be finalized until the end of this summer.

The Yemen LNG venture is building the country’s first liquefaction plant, located at Balhaf on Yemen’s southern coast, with the goal of producing a total 6.7 MMT/Y of LNG. It represents the largest investment in the country to date.

Yemen LNG is owned by Total (39.62%), Hunt (17.22%), Yemen Gas (16.73%), South Korea’s SK (9.55%), Korea Gas (Kogas) 6%, Hyundai (5.88%), and the local General Authority of Social Security and Pensions (5%).

Construction work is on schedule, Fort emphasized. “By the end of 2006, we reached overall progress of 45%. We have 40% progress on the plant itself and 52% of the pipeline. That is perfectly in line with our expected progress curves,” Fort claimed.

This makes it feasible for the first train to achieve the most optimistic delivery timetable. “We are targeting our early delivery for the month of December 2008. Our not-stretched, normal objective is the beginning of 2009,” said Fort.

He said a second train is expected to be ready “any time” between May and August in 2009.

Kogas will load the first cargo for delivery to Korea, while the other two contract holders, Suez LNG Trading and Total Gas & Power, will take future deliveries. Suez will deliver either to terminals in Boston or the Gulf of Mexico, while Total will supply the Altamira terminal in Mexico or the Sabine Pass facility in Louisiana.

While there are provisions for a third train, decisions on expansion are on hold until the government frees up more gas. At the moment the country is estimated to have 16-17 TCF of gas, of which 9 TCF is dedicated to Yemen LNG.

EU Concerned About Russian Energy Power
(Appeared January, 2007)

Europe wants to break its decades-old dependence on increasingly unreliable Russian natural gas supplies amid fears that Moscow is using its vast energy resources as a foreign policy weapon. Although most western observers see potential problems with the rapid ascendency of Russia in the energy arena, they see no easy solution to the thorny issue.

The alternatives are seeking other energy partners in North Africa and the Middle East, reviving nuclear power and investing heavily in renewable energy like biomass and wind power. All bring financial or political challenges that European Union governments may find hard to accept.

“There will be imports of Russian gas to the EU for a very, very long time, that is beyond any doubt,” said Lars Josefsson, chief executive of Sweden’s state-owned energy group Vattenfall AB. “What you can discuss is how much of our energy supply should come from one source.” Russia supplies nearly 40% of the EU’s imports of natural gas and about one-third of its oil imports, making it by far the biggest outside supplier of energy to the economic bloc.

Some say that dependence, which stretches back to the Soviet era, is likely to grow along with the EU’s seemingly insatiable thirst for energy. The EU imports about 50% of its energy, and expects that figure to rise to over 65% by 2030.

Huge natural gas reserves and pipelines feeding into Europe’s network make Russia an indispensable energy partner for Europe. The construction of a Baltic Sea pipeline connecting Russian gas directly to Germany will only make it more vulnerable to supply disruptions, experts say.

Disruptions in the past year, including a three-day cutoff this month of the Druzhba pipeline carrying Russian oil through Belarus, have heightened concerns that Moscow sees its energy supplies as a way to intimidate trading partners. Many EU countries are now seriously looking for alternate sources, from the Arctic to the Sahara to the Caspian Sea.

“I think Russia really is now showing it is very much unreliable,” said Claudia Kemfert, of the German Institute for Economic Research, a Berlin-based think tank.

Aside from the threat of disruptions, Russia will not be able to deliver enough gas to meet Europe’s future demand over the near term because it has not investing enough money in exploration and pipelines. Russia’s shortcomings are welcomed by Norway, the No. 2 supplier of petroleum to Europe. Norway, which is not an EU member, has made a fortune on oil and gas deposits in the North Sea and is now exploring new finds in the Barents Sea it tenuously shares with Russia.

Nevertheless, analysts contend that Norway does not have the resources or capacity to replace Russia’s gas exports to Europe. Its North Sea gas production is believed to be near-peak, and is expected to decline in coming decades.

Stephen O’Sullivan, head of emerging markets research at Deutsche Bank in Moscow, said it remains to be seen whether Europe is willing to pay a premium for secure Norwegian gas to replace insecure Russian supplies.

“People aren’t dependent on Russia because they like Russia. They like the prices,” he said. “It’s one of the most economic alternatives for Europe.” Europe is also turning to North Africa for energy – Algeria already is the third-largest exporter of gas to Europe through Mediterranean pipelines to Italy and Spain. Another pipeline carries Libyan gas to Italy.

The question of whether other suppliers of gas are any more dependable than Russia is constantly raised. “What are the alternatives? Iran, Libya, are they reliable alternatives?” asked Lucia Montanaro-Jankovski, an analyst at the European Policy Center in Brussels.

The disruptions related to the oil price dispute between Russia and Belarus, as well as alarm over climate change, has fueled European debate about another controversial energy source: nuclear power.

Many nuclear countries, including Germany and Sweden, that decided to gradually dismantle their reactors, are now having second thoughts. German Chancellor Angela Merkel, whose election campaign program called the phase-out “disastrous,” sparked debate when she said that Germany needed to reconsider the consequences of the 2000 shutdown deal. Swedes voted in 1980 to phase out nuclear power, but so far only two of the country’s 12 reactors have been shut down.

The threat of Russian dominance of EU energy supplies is being taken very seriously in European centers. Top European Union energy officials warn that Russia is trying to build a gas cartel in Europe by linking up with Algeria. Despite protestations of little, or no interest in creating a cartel for gas, President Putin, on a visit to Qatar, suggested the establishment of an OPEC-like cartel for gas producers and was quite candid about his desire to exploit Russia’s newly-acquired economic stature as the depository of the world’s largest gas deposits.

Andris Piebalgs, the EU energy commissioner, said in Berlin that if Russia and Algeria agreed to cooperate in the production and distribution of gas to Europe, “they could create a kind of cartel.” Piebalgs said such a concentration of resources could hinder competition when the commission is trying to break up some of the biggest European energy companies.