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This assessment was issued to clients of Dragonfly’s Security Intelligence & Analysis Service (SIAS) on 8 December 2022.
The Aden-based Yemeni government appears to be well-positioned to keep control of energy concessions and associated ports in 2023. But we anticipate that fighting for control of the sector will be a major driver of the civil conflict next year. This will very probably sustain the already severe risk of foreign companies being exposed to corruption, unclear regulations, bribery, and a highly unpredictable security environment.
Oil production in Yemen is highly unlikely to reach pre-conflict levels before 2024. This is because of damage to infrastructure, delays in government approvals, and a challenging operating and security environment preventing much-needed foreign investment. State-owned operators now account for approximately 80% of the total hydrocarbon output, compared with 40% in the years before the conflict. That output has been intermittent, and averaged about 57,000 barrels per day in 2021, compared with more than 400,000 barrels per day in the early 2000s.
We anticipate that disruption and damage to the energy sector will increase in 2023. But the Houthis will likely stop short of attacks that totally halt Yemen’s oil and gas output. This is because the Houthis appear committed to their objective of gaining a share of energy revenues, rather than simply sabotaging these. The group has repeatedly threatened and targeted oil facilities, particularly in the south, against what it calls ‘foreign looters’. The Houthis’ focus on the oil sector seems to be in part driven by higher oil prices this year and the need for such revenues to pay salaries and distribute revenues to maintain control of their territories.
Yemen’s oil sector is likely to remain largely controlled by the Yemeni government under the Ministry of Oil and Minerals in the medium term. The Aden-based government currently has authority over almost all of the country’s oil fields and ports, with the sector now dominated by local operators and Saudi and UAE firms. An agreement between the Southern Transitional Council (STC) and the Yemeni government over control and revenue-sharing in the Shabwah region and terminals in the south also appears to be holding, meaning prospective companies are very likely to have to deal with both the Yemeni government and the STC.
However, in a sign that this agreement is fragile, earlier this month the Yemeni government briefly assigned – and then quickly reversed the decision – the head of the STC to oversee operational decisions in Shabwah (in his capacity as a member of the Presidential Council). Sources tell us that the appointment decision was made after military advancements by the STC towards oil fields in the region were perceived by the Yemeni government as an attempt to seize total control; the STC currently controls oil ports in Shabwah, but not fields.
The fractious nature of security across Yemen means foreign companies will still probably need to cooperate with the STC and other local tribal groups. This is especially likely for those wishing to operate in areas in the south. Additionally, we assess that as hardline separatist factions from the STC likely seek greater economic autonomy, the risk of exposure to corruption, extortion and bribery in the Shabwah basin areas will increase. Arbitrary demands from local groups for security matters are highly likely to emerge separate to contract and security arrangements with the Yemeni government.
This unpredictable security and operational environment means we doubt the Yemeni government will be able to reverse the exit of Western oil and gas firms any time soon. This year Yemen’s upstream sector was hit by the exit of a Western firm, and a force majeure declaration by the only other one left. It appears that these decisions were tied to the persistent targeting of oil terminals and tankers by the Houthis that has disrupted operations and output. One of the firms said in a statement earlier this year that its output has fallen by 28% since 2020.
The Houthis meanwhile appear increasingly intent on sustaining their attacks on oil facilities in the south. Since the expiration of a UN-brokered truce in October, the group has launched several drone and missile strikes on port facilities and oil tankers targeting Yemeni and Saudi operations, including two off the southern coast of Oman since October. Houthis have said that such attacks will persist as long as they are excluded from the country’s oil and gas sector.
We currently doubt that the Yemeni government and Saudi Arabia will agree to Houthi (some of whose leadership is sanctioned by the US among others) demands for a share of oil revenues. This will sustain the risk of facilities in the south being further damaged by drone and missile attacks. And with the stalemate over revenue sharing likely to drag on through 2023, this would in turn motivate the Houthis to resort to larger-scale military actions, such as military advancement to Marib, the main city north of the Shabwah oil basin.
We assess that a Houthi assault on Marib remains unlikely in the near term, particularly as negotiations for a truce extension continue. Based on the group’s reluctance to advance on the city in the past year, we also assess that the Houthis are likely to continue to use the threat of military advancement as a way to pressure the Yemeni government. Sources tell us that an assault on Marib would be viewed as a last resort, albeit one that the Houthis are highly likely to be willing to exercise to gain control of oil fields south of the city, particularly if Saudi Arabia and the Yemeni government show no signs of compromise. This would further worsen the security situation for oil operations in the Shabwah region and along the southern coast.
We assess that cross-border attacks by the Houthis into Saudi Arabia and the UAE are likely to recur in 2023. In our analysis, this will be driven by wider conflict dynamics and the outcome of the ongoing and future truce negotiations. But also because the Houthis are likely to view such attacks (which have previously been successful in disrupting critical infrastructure in both countries) as an effective tactic to apply pressure on Saudi Arabia in particular, and the Yemeni government to concede their demands of oil-revenue sharing.
The risk of cross-border attacks to Abu Dhabi would become particularly acute if the Houthis advance on Marib and enter into direct conflict with STC forces. Drone and missile strikes targeting Abu Dhabi have diminished this year most likely because the STC and the Houthis have not been in direct conflict and the UAE’s withdrawal from military operations in Yemen. Attacks on Saudi oil and gas assets in Gulf waters and in the south of Saudi Arabia would also be a target in this scenario.
Image: An oil tanker departs from the Red Sea port of Hodeida in western Yemen on April 13, 2022. Photo by AFP via Getty Images.