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One of the poorest countries in the Arab world, Yemen has also suffered from repeated internal crises and civil wars, most notably the bloody 1994 civil war between the north and the secessionist south. Although the war was brief, the cost has been high – a brutal 15-year clampdown by the government of President Ali Abdallah Saleh in Sana'a on the south risks provoking a new conflict. Tensions have risen in recent months and without a comprehensive solution the country could plunge back into crisis. The sectarian nature of the rivalry – President Saleh and most of the elite are Sunni, whilst many southerners are Shia – complicates matters further, given the growing danger that the country is becoming a haven for al-Qaeda militants.

Building local capacity, using the oil industry as a starting-point, will be critical to building long term development, and the government has been keen to assert its authority through an aggressive “Yemenisation” program. But the process is hardly straightforward. Firstly, Yemen's poverty compels the government to strike hard bargains with foreign oil companies, over local content and over contracts more generally. Secondly, the legacy of the civil war greatly complicates debates over oil ownership: most resources are located in the secession-minded south, adding another, local, level to local content debates. Many southerners accuse the north of stealing oil revenues and excluding southerners from business circles. Thirdly, the dearth of existing local capacity makes many IOCs unwilling to commit themselves wholeheartedly to the Yemenisation policy.

Perhaps realising that the oil revenues which underpin President Saleh's patronage networks will not last forever, the government is becoming increasingly assertive in local content matters. In late 2006, then-Oil Minister Kahlid Bahah was “no longer negotiable” as it had been in the 1990s. There is increasing pressure for foreign firms to shut down 'kitchen offices' and establish a real presence in Yemen rather than operating outside.

The country has been embroiled in a long-running feud with YEPC, an alliance formed between Exxon and Hunt Oil. YEPC's concessions were terminated by Yemen's parliament and its operations taken over by the Yemen state oil company in 2005. YEPC filed for arbitration, but lost the case in October 2008, shocking oil industry figures working inside Yemen. This suggests that the government is quite willing to resort to old-fashioned expropriation and resource nationalism if it feels entitled.

As well as employing and training locals in order to develop local capacity, the government is also keen to encourage assistance to local educational institutions, in order to develop a generation of skilled engineers and managers. A flagship example is the scholarship program introduced by Nexen, the Canadian firm, in 1998, which offers four-year placements at Calgary in Canada for promising Yemeni students in “disciplines critical to the country's economic growth and development”. Although impressive, only 100 scholarships have been granted since the program began. Without a promising economic and industrial landscape to return to, however, there is a risk that these students may simply become members of Yemen's brain drain.

One of Yemen's great hopes is the Balhaf gas liquefaction plant, which opened in June 2009. The project, led by Total, is the largest industrial initiative in Yemen, with a capacity of 6.7 million tons of LNG per year. It is also a substantial contributor to local employment – thousands of jobs have been created during the construction phase and it will have a core workforce of 600 (although the company does not specify how many of these will be Yemenis).

Most significantly, the initiative includes a dedicated Yemenisation element, defined as “a programme for gradual replacement of expatriate personnel by Yemeni nationals.” Skills development and transfer will be an ongoing process which will enable Yemenis to take over key operations, and the company has committed itself to a preferential hiring policy for locals and a number of training programs and institutes.

The Balhaf operation acts as a model of good practice in a country which lacks a local content law. A Yemenisation Law has yet to materialise, meaning that local content provisions in PSAs are often ad hoc and that informal pressures - rather than legal requirements - drive the relationship between the government and IOCs. Without a legal framework, local content in the Yemeni context lacks definition beyond a desire for ownership. A bill is expected to pass through parliament at some point, but it is likely to be distorted by the country's internal political struggles – defining how much control the federal government maintains over oil revenues is likely to muddy the waters, slow down progress and complicate matters further for foreign investors.

Useful Links

Yemen Labour Laws

Nexen Local Content Policy