Yemen’s Unrest and Attacks on Energy Infrastructure Destabilize National Economy

National Yemen

By Fuad Hazaea

Yemen’s economy has deteriorated rapidly in 2014 as attacks on oil pipelines and political unrest continued to drain the country’s budget and deepen its financial crisis.

Yemen’s oil revenues reached $1.58 billion from oil sales in the first eleven months of 2014, down $892 million from the same period of the year before, according to Yemen Central Bank. Yemen’s share of oil exports reached 15.4 million barrels during the same period, with a decrease estimated at $ 7.2 million barrels from the same period in 2013.

When the pipeline is attacked, the government is forced to import fuel and sell it at the domestic market. According to the bank’s records, $1.99 billion were spent on oil imports during the same period, recording a deficit of $ 410 million.

The bank blamed the fall of oil revenues on the repeated attacks on the country’s oil pipelines, which reached 31 attacks in 2014.

The pipeline that carries crude from Safer oilfields in Marib province, east of the capital, to Ras Isa oil terminal on the Red Sea was sabotaged 23 times last year.

In the eastern province of Hadramout, a coalition of Hadrami tribes carried four attacks against the oil pipeline in the province during the first Quarter of 2014. Three more attacks were recorded in the southern province of Shabwa, two in January and a third one in December. A fourth attack hit the crude pipeline in Sana’a province in March.

The attacks on the country’s oil pipelines had frequently brought the crude production to a complete halt and resulted in the leaks of large amounts of crude as insurgents prevented the authorities from fixing the damaged pipelines in some cases.

The attacks on Yemen’s infrastructure have been used by heavily armed tribes as a bargaining chip to extract concessions from the central government. More than 30 attacks on the electricity transmission grids were recorded in 2014. The restive province of Marib accounted for 74% of overall attacks on oil pipeline and 61% of electricity vandalism.

According to government figures, the repeated attacks on the energy infrastructure cost the economy $4.75bn over the two years from March 2011 to March 2013. Yemen lost about $660 million in lost revenue between January and September 2014.

Yemen’s economy depends mainly on oil revenues. According to some estimates, crude oil exports and liquefied natural gas account for 63 percent of government revenue, 90 percent of the country’s exports, and 25 percent of its GDP.

A drop in global oil prices has also contributed to widening the country’s budget’s deficit. Yemen’s gross foreign currency reserves have been in decline in 2014.

According to the Central Bank of Yemen, the foreign reserves slipped to $4.65 billion in November, the lowest level since June. With the remaining reserves the bank can only afford to cover 4.7 months of imports.

Overall, the total budget of Yemen Central Bank recorded a decline of $ 297 million by the end of November, bringing the budget balance to nearly $ 9.67 billion. According to the report, the bank had covered the importation bill of oil derivatives and basic foodstuffs during the same month with more than $279 million.

Instability and Houthi takeover

Yemen’s difficult security environment has also complicated its economic situation. The national security challenges are believed to be hindering the growth of the state’s economy.

The Houthi militias have been imposing themselves as the de facto power in Yemen since Sana’a takeover last September. The group continues to consolidate their control over Yemen state institutions.

Early December, the Houthi rebels stormed and overran the Hodeida port, the country’s second largest port. They also broke into the state-run Safer oil company in Sana’a on the same day and sacked the company’s director and his deputy.

The group is currently in control of much of states institutions, including the airport, central bank and the headquarters of the Ministries of Defense, Interior and Finance.

Furthermore, there is a growing concern that the Houthi movement advance towards the rich province of Marib would further complicate the economic situation of the country.

Speaking to Asharq Al-Awsat, the governor of Marib Sheikh Sultan Al-Arada made it clear that any Houthi attempt to take over Marib would affect the whole country as the province produces most of Yemen’s oil, gas and electricity.

The group’s use of force in seizing state institutions is weakening the national economy and has scared away several foreign institutions from pumping investments in the country, the U.S. Ambassador to Yemen Matthew Tueller warned last December.

The rebels’ takeover of the capital Sana’a and their expansion throughout the country have promoted Saudi Arabia to mull stopping financial aid to Yemen, a move that could push the country further towards economic collapse.

Saudi Arabia, which has provided an estimated $4 billion to keep the Yemeni economy afloat since early 2012, has been reviewing its economic support for its southern neighbor, according to Asharq Al-Awsat newspaper.

Meanwhile, President Abdurabu Mansour Hadi stated recently that 34 foreign oil companies had quit their operations in the country due to the deteriorating security situation.

This comes amid reports that three foreign oil companies have recently suspended their operations in Yemen over insecurity. In mid December, CNOOC Ltd’s Nexen unit said it has shut its operations at an oil field and processing facility in Yemen due to a security threat.

Few days later, it was reported that the Norwegian oil company of DNO and Dove Energy Yemen Branch, which engages in oil and gas exploration business, had suspended their operations in the country for the same reasons.

Furthermore, al-Qaeda Yemen branch announced on December that the buildings belonging to French Oil Company Total in Yemen are “legitimate targets” for their operations.

Al -Qaeda had claimed an earlier attack by two Katyusha rockets at a gas liquefaction plant co-operated by the company in Balhaf, on the Gulf of Aden. The organization claimed that the plant had been used as a base for launching drone strikes against its militants in the country.

Imminent Collapse

Yemen’s economic development has stalled since the start of the 2011 uprising with a sharp decline in oil revenues, production as well as basic services available to the population.

There are variable estimates of when the government would run out of money. Some analysts say that the country would be unable to pay salaries and provide basic services such as health, electricity, and water beyond March 2015.

In statement to the Integrated Regional Information Networks, commonly known as IRIN, Yemeni government officials and advisers made it clear that fiscal collapse is imminent. “If there is no intervention, it is not a question of if, it is a question of when,” said a Yemeni official.

According to some reports, the budget deficit is projected to reach 9.5 percent in 2015.

Although the Houthi group has been promising radical economic reforms, the financial situation of the country has worsen since the group’s rise to power in September. The rise of the Houthi rebels has also breathed a new life to al-Qaeda in the country and the number of attacks has significantly increased since then.

Economists are very pessimistic about the future of Yemen’s economy as the Houthi fighters continue to tighten their grip on state’s institutions and, in retaliation; al-Qaeda’s ferocity continues to grow.

They believe that foreign companies would refrain from pumping any investment into the country and those inside would eventually leave due to security threats. There is also a growing fear that the rebels advance on the province Marib would jeopardize the oil and electricity facilities in the province.

Economists urge that the state needs to implement a comprehensive economic reform strategy and reassume its powers and restore security in the country in order to prevent an imminent economic collapse and provide a secure environment for investments.