Yemen plans to establish a new company to develop the key Masila oil field in the centre of the country, after the government chose not to renew its contract with Canada’s Nexen at the block.

The Supreme Economic Council approved the establishment of Masila Company for Petroleum Exploration & Production (PetroMasila) on 19 November, state news agency Saba reports.

PetroMasila will replace Nexen in block 14 in Masila, “after the date of 17 December 2011, when the production sharing contract with Nexen company expires”, says the report.

Nexen could not be reached for comment. The company has been seeking an extension to its production-sharing agreement, but as Yemen’s largest producing acreage, the block is also coveted by state-owned Safer Exploration & Production Operations Company (Sepoc).

The Canadian firm appeared resigned to losing the block in its latest company results published on 27 October, saying “preparing for an orderly exit from the country if our renewal discussions are unsuccessful”.

Industry sources in Yemen say the government plans to establish a new oil company, which will hold a 51 per cent stake of PetroMasila. It remains unclear what will happen to the remaining 49 per cent.

According to industry sources in Yemen, Sepoc will become the operator for all PetroMasila’s assets and will be owned by the new oil company. State-run oil distributor, Yemen Petroleum Company (YPC) could also see its ownership transferred from the government to the new oil company.

Nexen produces oil at two blocks Masila (Block 14) and East al-Hajr (Block 51). Having reached a high of 230,000 barrels a day (b/d) in 2004, production at the 1,257-square-kilometre block, has dropped to less than 74,000 b/d. Without the use of enhanced oil recovery techniques, analysts say output could fall as low as 30,000 b/d by the end of 2011 (MEED 15:7:11).