By: Meir Javedanfar - meepas.com

25/04/2005

Introduction

Economically Yemen is one of the poorest countries in the Arab world. This is despite its natural resources which include oil, gas, and abundant tourism attractions. Yemen's economic problems are due to a number of reasons including economic mismanagement, high population growth rates, lack of security, lack of water, unification costs and external debt. The Yemeni government headed by its President Ali Abdallah Saleh has been making a visible effort to improve Yemen's economy and to some extent he has been successful.

Examples include falling population growth figures, focused efforts to fight anti-government insurgents and development of Yemen's gas industry with the recent $2.5 billion project which will enable Yemeni gas exports to the US and South Korea. This is in addition to drafting of new investment friendly laws as means of attracting foreign investment in Yemen's economy. Foreign participation is also being encouraged with proposals to allow foreign companies to run Yemen's Aden container port. At the same time the Yemeni parliament has proposed a draft law which aims to curb the use of illegal weapons in the country. This is an important step in government efforts to improve Yemen's security situation. Such improvement will have a positive impact on foreign investment in Yemen.

Although currently Yemen may not be a top investment destination, nevertheless the country does offer opportunities which are worth exploring by foreign companies. Furthermore investment in the Yemeni economy will assist the Yemeni government's plans to improve the economic situation in the country as means of reducing terrorism and religious extremism. Therefore although Israeli companies are not allowed to invest in Yemen, it is the opinion of meepas that other foreign companies should be made aware of potential investment opportunities there. This is in accordance to our opinion that fighting poverty and terrorism through economic development in the region is in the interest of all countries of the Middle East.

Subsequently the following analysis by meepas will focus on the most promising sectors of the Yemeni economy for foreign investment.

Investment policy

Yemen has streamlined its investment laws and procedures in an attempt to attract more foreign investment and permits foreign investment in most sectors. A new policy grants equal treatment to all investors, both domestic and foreign. However the following two conditions must be observed:

•  Foreign investment in the exploration for and production of oil, gas, and minerals is subject to production-sharing agreements.

•  Foreign investment is not permitted in the arms and explosive materials industries, banking and money exchange, industries that could cause environmental disasters, or wholesale and retail imports.

Oil Industry

Increasing production and efficiency at the country's present oil fields, plus finding new sources of oil are targets set by the Yemeni governments for the oil sector. According to the Energy Information Administration Website, the government of Yemen recently announced a 1-million-bbl/d production target for 2006. In terms of strengths and advantages offered for investors wishing to invest in Yemen's oil industry, the following factors can be taken into consideration:

•  Yemen's strategic location: Owing to Yemen's strategic location on the Red Sea and the Indian Ocean,Yemeni oil is easily accessible to the world's tankers. The country's strategic location also provides it with a comparative advantage over GCC oil exporters because oil export by those countries is influenced by the political and military status of the countries which surround the strait of Hormuz waterway.

•  Low production costs: According to sources in the oil industry, it costs $1.70/bbl to produce oil in Yemen, while it costs $3/bbl in Saudi Arabia and $4/bbl in neighboring Sudan and $10/bbl in the North Sea.

The reason behind the establishment of such targets are also due to oil being the country's biggest export and income earner. Earnings from oil are also to be used to finance the government's second five year plan and social projects such as improvement of the country's health and education system. Such targets are very important for the Yemeni government due to commitments made to the World Bank as part of the loan agreement.   It is also worth noting that Yemen is not a member of OPEC and is therefore not obliged or bound by any quotas in the export of oil. Therefore in time of high oil prices it can produce oil in accordance to its own best interests. Subsequently the Yemeni government is conducting a marketing campaign in order to encourage investment in the country's oil sector. Focusing on advantages offered by Yemen's oil reserves and strategic location, whilst emphasising the government's commitment to reduce associated risks such as lack of security, the Yemeni government hopes to attract the attention of oil company giants. At the same time, according to oil industry sources, the Yemeni government is offering incentives to foreign companies wishing to invest in the country's oil industry such as:

•  Lower signature bonuses

•  An increase in the proportion of oil earnings that companies can claim for development cost recovery to between 50% and 70% (compared with a previous range of 25-45%)

•  Introduction of a sliding scale of 3-10% for royalties (compared with a previous flat fee of 10%).

In mid-2001, Yemeni officials took further steps to improve the energy-related investment climate, announcing a policy of contract extensions, added flexibility on negotiations, and a commitment to amending existing legislation if necessary.

The Ministry of Oil and Mineral Resources (MOMR) places oil tenders up for bid on a semi-annual basis. Contracts typically involve a 2-3 year exploration period and a 20-year production concession. All licenses for exploration and production in Yemen are authorized by the Petroleum Exploration and Production Board of MOMR, subject to ratification by parliamentary secession. All contracts are signed between a company or group of companies, as contractor to the government of Yemen.

The Yemeni government has been able to attract investments from companies such as the Austrian group OMV which in October 2004 signed an understanding memorandum with the Yemeni government according to which OMV pledged to invest $14 million for excavation of oil in the Shabwa region. The agreement stipulates that the company would spend the money during two phases of oil exploration in the region.

Yemen has also attracted investment in its oil refinery capacity which include:

•  A new $300 USD refinery in Ras Issa near a terminal in Hudeida, 270 kilometres (170 miles) west of Sanaa. 40% of the project is financed by local businessmen and the rest by a consortium of foreign banks and investors. Construction for the new refinery will start in 2005 and is to be completed in early 2007. The capacity for the new refinery will be of 50,000-60,000 barrels of oil per day.

•  There are also plans for a $900 USD refinery in the southeastern region of Al-Mukallah to be financed by Saudi and UAE investors.

The new refineries will certainly provide a boost to the country's export capacity and earnings. At the same time with proven reserves of 4.6 billions barrels of oil and the government's plans and commitments to increase oil capacity and exports, there is opportunity for oil companies to participate as investors and/or as suppliers to Yemen's oil industry.

Gas Industry

According to the US Energy Information Administration's annual country reports, "with reserves of 16.9 trillion cubic feet (Tcf), Yemen has the potential to become a commercial producer and exporter of natural gas. The bulk of Yemen's gas reserves are concentrated in the Marib-Jawf fields".

France's Total has a 43% stake in Yemen LNG (Yemen's Gas Company), followed by state-owned Yemen Gas owning 23%, followed by Texas-based Hunt Oil with 18%, then South Korea's largest oil refiner SK Corp having 10% and lastly Hyundai owning 6%.

As mentioned new developments in the Yemeni gas sector include the $2.5 billion project launched recently. Three contracts were signed in February 2005 for the export of liquified natural gas (LNG) annually to the United States and South Korea over 20 years starting in 2009. The project is a major breakthrough in the Yemeni gas sector. At the same time the Yemeni government is looking for other potential customers and investors as it aims to turn its Gas industry into a major revenue generator for the Yemeni economy.

Power Generation

According to a number of analysts Yemen's infrastructure is inadequate for a country of 20 million people. Its maximum electricity capacity is 600 megawatts, but actual output is between 350-400, and that only reaches 30 percent of the population. As a result of such shortfalls, the Yemeni government has a programme to increase power generation capacity in the country over the next ten years. Therefore there will be a need for new power plants as well as transmission and distribution systems.

Projects which have been commissioned so far include a new gas fired power station which is to be built in the Ma'rib area. This new power station will be using locally available natural gas. According to trade and investment sources, the Yemeni government's aim is to have the first phase of the power plant (500KV) operational within the next four years and the second phase (200KV) operational after a further two years. However after the completion of this power station, there will still be a need for further power generation as in rural areas, the general population relies heavily on private generators. Unlike its neighbour Oman, Yemen has not opened up its power generation market to investors for complete foreign ownership. However opportunity exists for international companies to participate in joint ventures with Yemeni companies for the construction of power plants in the country as well as supply of equipment and skills.  

Water Management

The scarcity of water and its continued depletion at present rate is of serious concern to the Yemeni government as it has a direct negative impact on the country's agriculture industry and the the general population's drinking needs. The Yemeni government has committed itself to the continued implementation of efforts and plans to address this matter. Therefore opportunities exist for investors (as joint owners with a Yemeni partner) and/or suppliers in the areas of Water Management, irrigation equipment, and construction of water reservoirs and storage points.    

Food and Agriculture

Majority of Yemen's food (75%)is imported. As a result the every year the Yemeni government spends a noticeable part of its income on the purchase of food abroad. The need to import is partly due to the fact that Yemen's own agriculture industry has been suffering from problems such as soil erosion, overgrazing, desertification and pollution which reduce the agricultural output of the land . Major flooding in the late 1990s also caused the loss of much valuable topsoil thus leading to falls in agriculture production. As part of the Second Five Year Plan, the Yemeni government has set target growth rate of 6.7% per annum for the agriculture industry. The government's motives behind the planned growth are to:

•  Maintain existing jobs in the Agriculture industry (appx 15% of the country's workforce is currently employed in the sector)

•  Create new employment in the sector

•  Increasing Yemen's food production capabilities

•  Reduce food imports

There are opportunities for foreign companies for the supply of agriculture equipment, expertise, fertilizers and food processing equipment and machinery.

Tourism

Tourism has been identified as one of the most important sectors for the Yemeni government's SFYP. The SFYP strives to increase tourism value added by 11% per annum. The expansion of the tourism industry is to be used to achieve the following goals:

•  To diversifying the economy

•  To increase foreign urrency revenue for the economy

•  To create additional employment positions

Yemen is certainly not short of tourism atractions and potential for further development of this industry. Tourism guide book descriptions about the country include "unspoiled mountains, temples dating from Sheba's reign in the 10th century BC, and remote villages that have been inhabited for thousands of years. Yemen is also famous for Shibam, its "Manhattan of the desert". The United Nations Educational, Scientific, and Cultural Organization (UNESCO) has declared this 1,500-year old site as one of the most beautiful places in the world.

Other potential advantages offered by the Tourism industry include increased foreign exchange earnings and economic growth in supporting industries such as those of Hospitality Management, Food , Art and Crafts. Opportunities exists for the development of Yemen's tourism industry in areas such as Hospitality Management skills and hotels.

Health Industry

Improvement of the country's Health care facilities has been one of the target areas set by the Second Five Year Plan (SFYP). According to the UN Human Development Index, current health facilities in the country are underdeveloped and as the Yemeni government has committed to its improvement (also as part of World Bank Country Assistance Strategy Scheme). Opportunities exist for the supply of medical training and equipment, as well medicine and pharmaceuticals.    

Aden Free Trade Zone

The Aden Free Zone provides many opportunities for foreign investors, mainly because this area was established by the Yemeni government specifically for this purpose. Several projects have been designated and completed for the improvement and expansion of this commercial area, which include the construction of a container port, power station, industrial estate, and an expanded international airport. Numerous incentives have been offered to attract foreign investors. Current participants include the Port of Singapore Authority (PSA) which was awarded a construction contract in 1997 worth $187 million. After the contract was awarded, PSA decided to increase its involvement in the project by taking a 49 percent stake in the Yemen Investment and Development Company (Yeminvest). Other foreign participants in the Aden Free Zone project include Hyundai of Korea, Reggiane of Italy, and FELS Cranes of Singapore as well as a number of Malaysian companies.

In conclusion the Yemeni economy offers attractive opportunities for companies who wish to invest in the region. Investing in the Yemeni economy will also be an investment in the war against terror as economic development is one of the most effective weapons in reducing the influence and popularity of extremist organisations in the region as a whole and in Yemen especially.

End of Analysis

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