Saudi Crown Prince Abdullah's quest to dramatically expand foreign investment in his country through a $25 billion natural gas development plan will not move forward in its present form. But multinationals still are expected to play a pivotal role in advancing the kingdom's domestic energy agenda, although perhaps not on the grand scale envisioned 5 years ago.
Abdullah's ambitious plan was to give foreign companies, most US-based, access to the country's vast natural gas fields if they also took a stake in Saudi petrochemical, power, and water projects. Lucrative oil tracts were off limits, but foreign companies were drawn to the prince's "Saudi Gas Initiative" anyway. Executives reasoned that if they agreed to develop gas for domestic markets, it could later pave the way for broader investment, maybe even oil, someday.
Changing circumstances
Protracted negotiations began in 1999 and eventually led to a formal May 2001 signing in Jeddah. Final deals were supposed to materialize a few months later. But the timetable proved unrealistic thanks to geopolitics and Saudi royal family infighting. Over time, most of the Saudi royal family decided it was a mistake to negotiate with multinationals that were more accustomed to high-risk, high-return projects, according to Simon Wardell, energy research manager of London-based World Markets Research Centre.
Oil companies also became disillusioned, arguing that what the prince first promised was not what the state-owned Saudi Arabian Oil Co. later put on the bargaining table. Companies said they could not explore for gas where they wanted, and the downstream project returns were too low to justify the massive investment needed. Then as talks dragged on, the lure of Iraq made it easier to walk away.
New directions
Over the past few months Saudi Oil Minister Ali al-Naimi has made it increasingly clear he has the royal family's support to start the whole process over. And when the next round of bidding does come, Saudi Aramco is expected to have far more control over the negotiations.
Last month Aramco terminated discussions with ExxonMobil Corp. over a $15 billion development deal involving South Ghawar field, Core Venture One. Another proposed ExxonMobil-led venture in the Red Sea, the $5 billion Core Venture Two, is also essentially dead.
A third $5 billion proposal involving the huge Shaybah field in the Empty Quarter may still be salvaged according to those close to the Royal Dutch/Shell Group-led project.
Analysts anticipate that with the exception of Shaybah, Aramco will favor state-owned companies seen as more receptive to accepting the lower returns the kingdom is demanding. Naimi himself helped validate that prediction in a June 26 Olso visit: he personally invited Norway's Statoil ASA and Norsk Hydro ASA to make bids. Naimi is expected to preside over a July 22 prebid meeting in London in which 50 companies, including US-based multinationals, will be offered upstream gas tracts to develop without being forced to consider corresponding downstream domestic projects.
