YEMEN

Trading has been an integral part of Yemen's ancient and complex history. Thousands of years ago, that trade centered on frankincense and myrrh, made from the resins of trees and bushes that grew in its harsh deserts. Camel caravans carried these highly prized products along precarious routes from Yemen through oases at Mecca and Medina, and on to Petra, east of the Dead Sea. Today, Yemen's largest export is oil. Although its volumes of crude rank near the bottom of the cadre of Middle Eastern producers, Yemen nonetheless depends mightily on its oil industry. Since the unification of North Yemen and South Yemen in 1990, and the conclusion of the 1994 civil war, it has been actively promoting its exploration potential. Yemen currently produces some 440,000 barrels of oil per day, a level that it reached in 2000. The government would very much like to see that volume grow, but the anchor fields that underpin the bulk of its production are mature. Maintaining existing rates is a challenge, and the hope for additional oil comes from the country's underexplored regions. However, giant discoveries are improbable and Yemen's geology does not attract the big multinational firms. The upshot? This is one corner of the globe where independents are welcome. The Sayun-Masila Basin Calgary-based Nexen Inc. is the largest oil producer in Yemen, and its Yemeni oil output accounts for almost half of the company's total production. The crown jewel of Nexen's portfolio is the Masila Block (Block 14) in the Sayun-Masila Basin in central Yemen's Hadramaut region. To date, 14 fields on Block 14 have produced more than 750 million barrels of oil, and ultimate gross recoverable reserves are more than 1.150 billion barrels. Nexen operates the block and holds a 52% interest; its partners are Occidental Petroleum and Consolidated Contractors International Ltd. Although production from the Masila Block has grown significantly since Nexen made its first discovery in 1990, rates have reached a plateau. The company now produces 230,000 barrels of oil per day (gross) and has been at that level since 2001, says Larry Murphy, senior vice president of international operations. "This year it will be more difficult for us to maintain production at 230,000 barrels per day. But next year, when we bring the Tammum discovery on a neighboring block on production, we'll add another 25,000 barrels per day," he says. "The Yemen story is still one of potential increase for us. We're not done there yet." Most of Masila's oil is produced from the Cretaceous Upper Qishn sandstones, trapped in tilted fault blocks at depths of around 2,200 meters. The company has 320 producing wells and more than 80 water-disposal wells, as the reservoirs are very permeable and have strong water drives. "Today, we produce 1.6 million barrels of water a day, and we reinject all of that. Masila is essentially a huge water-management project." Although Nexen has been working at Masila for nearly a decade and a half, potential still exists on the block. Recently, the company shot 50 square miles of 3-D seismic in a large graben between Tawila and Heijah fields, and drilled an exploratory well. "We found some oil, which is very positive, because it's the first time we've found oil in this area." To the south and east of Tawila, its largest field, it is exploring another area that contains a buried reef complex. Nexen also holds several exploration licenses in Yemen. Last year, it made the Tammum and Amir discoveries on the Hajr Block (Block 51). It has been focusing its development efforts on Tammum, where it has booked 32 million barrels of proven and 29 million of probable reserves. It has drilled eight delineation wells, and has received government approval to develop the discovery. It is building a central processing facility, and will construct a 22-kilometer pipeline from Tammum to Masila's main oil line. Early in 2005, the company expects to be producing between 20,000 and 25,000 barrels of oil per day from Tammum. On Amir, Nexen is shooting 3-D seismic to further assess the structure. Additionally, it has a number of other prospects that it plans to test on Block 51. "The Hajr block has very significant exploration potential," says Murphy. This year, Nexen will drill 80 to 90 wells on Masila and 16 to 20 wells in Block 51. "When we started production in 1993, we thought that we would produce 120,000 barrels a day for three or four years, then production would decline and we would be finished by 2004. We still have more barrels to produce now than we thought we had in the beginning. And we continue to see significant upside in Yemen for our company." Nexen has experienced few problems in Yemen, and its operations have never been interrupted. It enjoys a favorable relationship with the government: "We don't hold our cards close to the vest. We work with the government as equal partners, and we have a good relationship all the way up to the president." Nexen is proud of its Yemenization program, in which it trains Yemeni employees to take on oilfield positions. Some 800 of its employees in Yemen are nationals working directly for Nexen, comprising about 80% of its in-country workforce. "We concentrate on training and developing people for every job that we have. As people are trained, they get complete responsibility for a position and the same authority as the expatriates. It's not tokenism; these are real jobs." Contractors in its fields also employ several thousand Yemeni construction workers. "Yemen is a fascinating country, and we have found the people to be very warm and very capable." Although the Masila Block developments form the core of the area's infrastructure, Total's East Shabwa Block 10, just to the west, produces 20,000 barrels of oil per day, mainly from the older Saar formation and fractured basement. The French firm recently held a celebration to mark cumulative production of 50 million barrels of oil from East Shabwa, which is the amount of oil it originally estimated it would recover during the entire life of its project. Total's partners in Block 10 are Occidental, Kufpec and Soco International. Other firms are actively exploring and developing projects around the perimeters of the Masila and East Shabwa licenses. One such company is Calgary-based independent TransGlobe Energy. The Canadian minnow has been working in Yemen since 1997. Ross Clarkson, president and chief executive officer, has lived in Yemen and has years of industry experience in the country. "We've had good luck in Yemen," he says. "We have found a niche there that works for us." TransGlobe's first project in Yemen was on Block 32, a license that is just north of the Masila block. In 1997, TransGlobe farmed into an interest in Block 32 with Clyde Petroleum, a U.K. independent. Clyde, which had been awarded the block in 1992, was subsequently acquired by DNO, a small Norwegian firm. In late 1997, the partners made a discovery at their Tasour prospect. They had already shot 1,500 kilometers of seismic and drilled five dry holes before the Tasour-1 tested approximately 4,800 barrels of oil per day from the Qishn sandstone. Like other fields in the area, it is a tilted fault-block trap. "We started production in November 2000," says Clarkson. "It was the fastest development ever done in the country, and it also came in well under budget." Tasour's oil is produced into the central processing facility at Masila, which is about 60 kilometers away. From there, it is piped to the export terminal at Riyan on the Indian Ocean. It's an understatement to say that Tasour has exceeded expectations. "We've had a good record on finding new oil and expanding the field. It's been a wonderful project." When Tasour was declared commercial in 2000, it was estimated to contain 6.9 million barrels of recoverable reserves. In January 2004, DNO announced that the recent drilling campaign had proved up new areas, and remaining reserves now stand at 17 million barrels of oil. To date, Tasour has already produced some 13 million barrels of oil, bringing its ultimate reserves to 30 million barrels. Last year, DNO, TransGlobe and partner Ansan Wikfs Hadramaut Ltd., a Yemeni firm, drilled five wells in Tasour, four of which were successful. Production from the field is currently 17,200 barrels per day, gross. This year, the Block 32 partners expect to drill one exploration well and three wells in Tasour Field. Four additional wells could be added to the program, contingent on the upcoming results. A 3-D seismic survey, the first for the area, is also in progress. Such a shoot is extremely challenging, as Tasour is in a harsh and unforgiving part of the Arabian Peninsula, where deep wadis scour the rocky desert terrain. Areas of high interest are east and west of the field, along the main bounding fault. "We haven't found the limits of the field yet," says Clarkson. In addition to its Block 32 activity, DNO has other activity in Yemen. It operates Block 43, immediately east of the Masila Block, and is now drilling an exploratory well there, the Meshat-1. Its partners are Australian firm Oil Search Ltd., First Calgary Petroleums and the Yemen Oil Co. The Block 43 prospects offer reserve potentials of between 20- and 50 million barrels of oil each, notes Oil Search, and dry-hole costs are between $1.5- and $2 million per well. And, DNO has an interest in Block 53, which is operated by U.K. independent Dove Energy. There, Sharyoof Field is producing about 20,000 barrels of oil per day. DNO says that two additional wells may be drilled in Sharyoof this year. Also, Oil Search operates two exploratory blocks in the Masila region. On Block 35, to the northeast of Nexen's production, Oil Search is shooting 300 kilometers of 2-D seismic data and intends to begin a drilling program late this year. In Block 15 in the Gulf of Aden, it is interpreting nearly 2,000 square kilometers of 3-D seismic data, and it expects to drill its initial wells next year. Oil Search's partner in Block 15 is Kufpec. Another Canadian independent, Calvalley Petroleum Inc., is under way with an exploration and appraisal program in Block 9. The 1.2-million-acre exploratory block lies on the west flank of the Masila Basin, some 100 kilometers west of Nexen's Masila Block. Since Calvalley started working in Yemen in 1997, it has discovered four separate accumulations on Block 9, says Edmund Shimoon, chairman and chief executive officer. Its initial well, Hiswah, was a Saar oil discovery. It followed that with its Auqban prospect, which found very light oil in the Jurassic Suqrah formation and is the first reef discovery in Yemen. Its Al Roidhat is a Qishn discovery, similar to Nexen's production at Masila. "These are fair-sized features. A third-party evaluation of Hiswah Field gives it between 350- and 500 million barrels of oil in place." There is also a 1994 gas-condensate discovery on the block, Qarn Qaymah, which is productive in the Kohlan sandstone, a granite wash. This year, Calvalley plans an 11-well program, nine of which will be appraisal wells on its discoveries. It also plans to production-test all of its wells and to shoot 200 kilometers of 2-D seismic data. "We want to delineate our reserves and find out exactly what we have," says Shimoon. "We expect to declare commerciality sometime this year." In the short term, Calvalley plans to begin oil production this year, trucking out its oil. Longer-term, it will connect either eastward into Nexen's main transmission system, or westward to the old Russian infrastructure in Block 4 in the Marib Al-Jawf Basin. Calvalley's partners in Block 9 are India's Reliance Industries Ltd. and Yemeni firm Hoodoil Ltd. "We haven't had any problem working in Yemen. The country is modernizing at a very rapid pace, and it is moving forward in the right direction." The Marib Al-Jawf Basin Hunt Oil Co discovered the first oil in Yemen in 1984, three years after it was awarded a license in the Marib Al-Jawf area by the government of North Yemen. It hit on its first test. The Alif-1 flowed from two zones at a combined rate of 7,800 barrels of oil per day. Hunt had discovered a 500-million-barrel field that covered an area of 30 square kilometers. The private Dallas-based company began exporting oil in December 1987, after drilling wells, building a 260-mile pipeline, and constructing production and export facilities. Hunt discovered 12 additional fields within its original Marib Al-Jawf contract area, and then found another five fields in the Jannah area, in Block 5 to the southeast. As of mid-2003, Hunt was producing 145,000 barrels of oil per day in Yemen, and had produced more than 1 billion barrels cumulative. Its partners in the blocks are ExxonMobil and Korean firm Yukong. Hunt has also found more than 10 trillion cubic feet of gas in the Marib Al-Jawf, which doesn't produce the copious volumes of water that are typical in the Masila Basin. As there is no market for natural gas in Yemen, Hunt reinjects more than 2.7 billion cubic feet per day into its producing reservoirs. (Plans for an LNG export project in Yemen have been in the works for years, but progress has been slow. The country's Middle Eastern neighbors have been attracting more interest from the world community.) Earlier this year, Hunt announced that its production-sharing agreement (PSA) on Block 18 had been extended by five years, to November 2010. The original 20-year agreement was set to expire in November 2005. In the wake of Hunt's Alif discovery, and the opening of new areas following the 1990 reunification, many international heavyweights rushed to work in Yemen. BP, Shell, BG, Chevron and BHP were among the eager explorers. The country enjoyed a flush of popularity during the late 1980s and early 1990s, but a lack of large finds caused most of the large oils to terminate their efforts. That left an opening for companies like TransGlobe. In 1996, the Canadian firm started negotiating for Block S-1, which had once been a Soviet license and sits in the former border area between North Yemen and South Yemen. "It took quite a long time, about two years, to negotiate the deal," says Clarkson. "There was a lot of competition. It was perseverance, contacts and maintaining our presence in Yemen that got us the deal." The block was desirable because it was in the main fairway, between Hunt's infrastructure to the north, and Russian discoveries that had been made on Block 4 to the south. Also, Shell, which took a turn on the block after the Soviets, had already made a small oil find and recorded a number of oil shows. TransGlobe was awarded 100% of the license in 1998. It then farmed out a 75% interest in the block to Vintage Petroleum, a Tulsa, Oklahoma-based independent. Vintage took over operations. "We were looking for a couple of select international opportunities where we could have a relatively modest exposure of capital but a big exposure to reserves," says Larry Sheppard, senior vice president, new ventures. "We wanted attractive fiscal terms, technical opportunities that were consistent with our proven competencies, and a political and business environment that we believed were manageable. Yemen fit the bill." Since then, Vintage and TransGlobe have made three discoveries. "We initially found a large gas-condensate discovery, which could be as large as a trillion cubic feet (Tcf) with 20- to 30 million barrels of condensate," says Clarkson. "Then we found a very shallow, 22-degree-gravity oil discovery in three different zones that flowed 300 to 500 barrels per day." While both of these finds were heartening, they weren't really what the pair was hunting for. Oil wells in the hundreds-of-barrels-per-day range are not that attractive in the Middle East, and natural gas has no market in Yemen. The third discovery, An Nagyah, was the payoff, however. "We found a nice, light-oil discovery of 46-gravity crude at a depth of around 1,100 meters. The wells flow at rates of 1,200 to 1,500 barrels per day," says Clarkson. In December 2003, Vintage and TransGlobe received their commercial declaration on the S-1 block from the Yemeni government. "Our original block covered 1.1 million acres and we outlined 285,000 acres that we put under a 20-year term for exploitation," says Sheppard. Since they began working in Yemen, Vintage and TransGlobe have shot 375 square kilometers of 3-D seismic and drilled nine wells, three of which are on the An Nagyah structure. The partners are in the midst of final arrangements for a temporary facility at An Nagyah that will come online by the end of first-quarter 2004 at rates of 2,500 barrels per day. "We'll follow that with a permanent production facility, with a capacity of 10,000 barrels per day, and a pipeline." An Nagyah's oil will be piped 18 miles to Hunt's Jannah infrastructure, and from there it will travel to an export terminal on the Red Sea. This year, the partners plan six wells on An Nagyah Field and one appraisal at the shallow Harmel Field. Following that will come another six wells on An Nagyah, and potentially some additional exploration wells. "We plan to continue drilling, and we have a number of other opportunities within our defined area that, if successful, will give us continued growth in production," says Sheppard. Intriguingly, the An Nagyah discovery is productive from a subsalt Lam reservoir, and the Harmel find, which is still being appraised, is an above-salt discovery. Both have opened up new exploration plays in the basin. The partners are also pursuing some of the classical exploration plays that have largely been developed by Hunt. Overall, Vintage is pleased with its experiences in Yemen. Its relations with the government have been good: "We've found the oil ministry to be very attentive and expeditious," says Sheppard. "We've never experienced any holdups for shooting seismic or drilling wells. From the time we were ready to make our commercial declaration, it took less than two months for it to be fully reviewed and approved." That's fast by any standard, international or domestic. The operating side of the business poses more challenges. The S-1 Block is in a harsh, difficult desert environment. And, operators must make strong efforts to maintain successful relationships with local inhabitants. The Marib Al Jawf area is closer to the mountains, and there are more issues here than in the sparsely populated Masila Basin. "We work well with the tribal groups in our area. We have not had major incidents, although there are always some issues." Security, obviously a huge concern, is manageable, he adds. "We are vigilant toward security. We have a good security plan and good security advisors, and we have the right people on the ground. They are knowledgeable and they understand the level of vigilance that they need to take personally. "All of us are absolutely convinced that we wouldn't work in Yemen if we weren't, as individuals, personally comfortable with being on the ground in the country." What does the future hold for Yemen? The country doesn't offer the potential that will attract the multinational majors, or perhaps even the largest independents, but it can be quite alluring to firms that are able to economically produce smaller accumulations. Indeed, only about 2,000 wells have been drilled within its borders, in an area the size of Wyoming and Colorado combined. Yemen truly offers meaningful opportunities for small, yet lucrative, oil discoveries. "Certainly you can make money in Yemen," says Clarkson. "The drilling depths are very reasonable and the reservoirs are world-class. By using existing infrastructure, you can find a smaller field and put it onstream for very low finding and development costs."