The oil and gas sector is playing a vital role in Yemen's economic revival. As the government aims to slash the budget deficit, it is relying on increasing oil revenues. Following unification in 1990 major international oil companies raced to take up acreage in Yemen: 18 exploration agreements were concluded in the next two years. However, the casualty rate was high and few of them subsequently renewed their agreements. Disappointing results dampened the initial enthusiasm and many found the terms too exacting. Logistical difficulties were compounded by the 1994 civil war.

The government has now adopted a fresh approach, offering better terms than in the past. 'Cost-oil recovery has been increased to an average of 30 per cent, compared with 25 per cent before,' says Ed Shmoon of Canada's Calvalley Petroleum, which earlier this year took on block 9 in Shabwa, previously held by British Gas. Calvalley will invest $8 million in a first, three-year exploration phase, aiming to drill its first well in early 1998.

In March, Kerr McGee Corporation of the US secured two concessions in northern Hadhramaut, taking a 95 per cent stake in block 50 and an 87.5 per cent stake in block 51. Kerr McGee will begin seismic surveys this year and says it aims to start drilling in 1998.

Hungary's MOL in April signed an exploration agreement for block 49, the 3,400-square-kilometre south east Al-Maber block. Pending parliamentary approval of the agreement, MOL hopes to begin work at the end of July. Holding a 100 per cent stake initially, MOL may later consider farming in partners. MOL's commitments for the three-year first phase of exploration include 300 kilometres of 2-D seismic surveys and deepening an existing exploratory well.

While the foreign investors steadily return, the government has ambitions of its own. It has recently established the Yemen General Corporation for Oil & Gas (YGCOG) to secure stakes of 15-25 per cent in newly-awarded blocks. A start was made earlier this year when YGCOG took a 25 per cent stake in East Saar block 53 - formerly held by Canadian Occidental Petroleum (CanOxy) and France's Total - when it was reawarded to the UK's Dove Energy. Such stakes are smaller than in the past, but some companies fear that the government's activist approach may become bureaucratic.

Clearly undeterred by such concerns, several companies have renewed their agreements. Mayfair Petroleum of the UK began a third, 18-month exploration phase in block 22 in northwest Yemen at the beginning of July. Mayfair plans to shoot 400 kilometres of seismic from the end of July and drill two exploration wells by the end of the year. Union Texas Petroleum of the US farmed into the block earlier this year.

The Cayman Islands-based Nimir Petroleum Company in the first quarter of this year resumed production in block 4 in Shabwa for the first time since the civil war. It also succeeded in negotiating new terms, under which it will pay 3 per cent of its revenues to the government in royalties. Nimir will take 70 per cent of the revenues in production costs, while profit oil will be shared equally with the government.

Nimir says current production in block 4 is at 1,500 b/d, half the level it had expected. It will drill one more exploration well before the second phase expires in 1999. Nimir also plans to drill one well each in blocks 16 and 33. No new terms were negotiated for the blocks, both of which are in second phases due to expire in late and mid-1998 respectively.

A consortium led by the UK's Clyde Petroleum in December 1995 began a second, 30-month phase of exploration in block 32, located north of the Masila concession operated by CanOxy. Canada's TransGlobe Energy this year took an 8 per cent working interest in the block. The consortium will drill three wells during the current phase. The first well, Sabia 1, has been plugged and abandoned dry. The second well, Darbah 1, was spudded on 2 July, with results expected at the end of the month. The third well is expected to be drilled later this year.

For all the new agreements signed recently, Yemen's oil production of 385,000 barrels a day (b/d) remains modest, although it is forecast to go above 400,000 b/d early next year. The government's share is currently 240,000-250,000 b/d.

The greater part of Yemen's oil still comes from the Masila fields, and the Marib fields operated by the US' Hunt Oil Company. CanOxy produced an average of 186,000 b/d at Masila during the first five months of this year, up by more than 5 per cent on 1996. Hunt says its production continues to average 170,000-175,000 b/d. Increments have come from the Jannah field, which rose to 22,000 b/d in April, from an initial 15,000 b/d in October. A joint-venture of France's Spie Capag with the local Hawk Development International has a $20 million contract to install new production facilities. The work, due for completion in mid-1998, will lift production at Jannah to more than 50,000 b/d. A third and final expansion phase is intended to lift it by a further 20,000 b/d.

The government's hopes of increasing refined products' output remain frustrated by continuing delays to the upgrade of the Aden oil refinery. The Aden Refinery Company (ARC) decided to retender the work earlier this year, despite having awarded a letter of intent for the work in late 1996 to the UK's Tarmac with ABB Lummus Global of the US. Tarmac/ABB had proposed constructing a new, smaller crude distillation unit, unlike ARC's original scope of works, which proposed simply upgrading the two existing units.

Tarmac/ABB had proposed a financing package secured against sales of refined products but Natwest Capital Markets, appointed as finance manager by the partnership in late 1996, has decided to withdraw following the retender. ARC is currently evaluating the new bids with the help of UK- based Kvaerner John Brown.

Plans for Yemen's first private refinery are moving ahead. In June the US Trade & Development Agency (USTDA) agreed to provide the local Al- Hashedi Trading & Contracting Company with a grant to part-finance a feasibility study for a new oil refinery at Ras Isa in Hodeidah, at the end of Hunt's export pipeline from Marib. Muse Stancil of the US is doing the financial study. The technical and engineering aspects of the study will go to tender soon. Al-Hashedi is seeking an international oil company to take as an equity partner in the project, which USTDA estimates will cost $300 million.

The development of Yemen's natural gas reserves in the Marib/Al-Jawf fields is also advancing with France's Technip and Bechtel of the US due to complete the front end engineering and design towards the end of July. Total, which is leading the development, is currently prequalifying companies for the engineering procurement and construction contract. Tender documents for the work are likely to be released within the next two months, contractors say.