France Is Onboard But Korea Is Key
BMI View: Long-term LNG supply contracts signed in 2005 between Yemen and its major customers are considerably undervaluing the country's gas resources. Price renegotiations with French companies appear to have been successful, though a new contract with Korea will be critical to boosting Yemen's falling fiscal balance.
Yemen LNG has been selling its liquefied natural gas (LNG) at prices unreflective of the current market on the back of contracts signed in 2005. The company agreed a 20-year supply obligation with Total , GDF Suez and Kogas , the latter of which buys around 50% of the country' s gas , selling LNG at prices between U S$1.50 and US$3.50 per million British thermal units (/mnBTU) . This contrasts significantly with average landed LNG prices of around US$15/mnB TU experienced in East Asia and $10/mnB TU in Europe in 2013 . As a result of losing hundreds of millions in potential income, Yemen LNG has been in negotiations with its buyers to raise prices and recently achiev ed a breakthrough. According to the state-run newspaper, al Thawra, price negotiations with French buyers of Yemeni LNG have been successful, achieving an increase to US$7.21/mnBTU as of January 1 st 2014.
|Renegotiations With Korea Remain Key|
|Yemeni LNG Trade 2012, bcm|
However, what remains unclear is whether the Korean companies will support the price hikes. Yemen delivers around 7.2% of Korea's LNG import needs, and was the country's 5 th largest LNG partner in 2012. However, Korea remains by far the largest purchaser of LNG from Yemen, accounting for around 3.6bn cubic metres (bcm) of the 7.1bcm sold by Yemen LNG in 2012 and therefore holds significant bargaining power . According to reports, Kogas has been in negotiations with Yemen LNG since late August with the Middle Eastern country insisting it should receive global prices for the LNG.
This move would be critical for the country as it would boost much needed public funds in a country being challenged by social instability in the wider region. Our trade balance data shows the positive impact Yemen LNG made to the country's economy when it came onstream in 2005. The drop in trade balance between 2007 and 2010 was largely due to decreasing oil output as well as a significant fall in the oil price. This highlights the frailty of Yemen's economy and how dependent it remains on the oil and gas sector.
|Higher LNG Income Needed To Avoid The Drop|
|Balance Of Trade In Goods 2003-2018, US$bn|
If Yemen is able to renegotiate prices with Kogas, it would add a considerable revenue stream to the country. At an increased price of US$5/mnBTU, Yemen would earn around US$450mn extra a year from its LNG sales to Korea. A price matching the US$7.21/mnBTU negotiated with Total and GDF would bring in an extra US$725mn a year. This would dramatically alter the impending deficit we are forecasting for the country as oil production continues to experience a major decline. The natural gas industry and LNG exports will therefore remain central to Yemen's economy with gas reserves of 473bcm compared to just 3bn barrels of oil.
One positive aspect which could benefit the negotiations in Yemen's favour is the increase Kogas applied to its domestic customers from August this year. In order to reduce the impact of higher LNG import prices Kogas increased the cost of domestic gas by 0.5%. The domestic price increase could signify upside for Yemen's negotiations, with Kogas already attempting to rebalance price hikes experienced in its global LNG portfolio.
We anticipate that Kogas will consent to increase the price they pay for LNG from Yemen, however due to its far larger bargaining power it will unlikely be as much as the French companies have agreed to pay. There is also an increasing LNG supply base from which to source gas, meaning Kogas could place more pressure on Yemen LNG keep prices down. While we will keep a close eye on developments between Yemen and Korea, it is likely that any new contract negotiated will not be publicised.