US companies say Saudi gas negotiations reaching critical stage

Sept. 10, 2002
US companies with interests in Saudi Arabia said Monday that it is premature to assume the kingdom has abandoned plans to allow foreign companies to develop natural gas fields.

By OGJ editors

WASHINGTON, DC, Sept. 10 -- US companies with interests in Saudi Arabia said Monday that it is premature to assume the kingdom has abandoned plans to allow foreign companies to develop natural gas fields as part of a massive $25 billion downstream development effort.

"I think it is inaccurate to assume the whole deal is lost although some of the projects may indeed be restructured," said an industry official involved with the discussions.

There has been increasing speculation that the Saudis may decide to downsize or recast their plans in light of the stalled negotiations, which have dragged on for over a year.

"We are clearly at the 11th hour on this," noted Brad Bourland, chief economist of the Riyadh-based Saudi American Bank.

Sources familiar with the talks predicted that, among the three large proposed gas projects, the one with the least amount of US participation, the $5 billion "Core Venture 3," stands the best chance of being approved first. That's because that project holds the least political and economic risk to the Saudis, according to industry and US government sources. Some analysts have speculated that the Saudis are worried about the political fallout they may suffer at home and with Arab neighbors if the US contracts are approved amid today's heightened diplomatic tensions in the region.

There is growing Arab concern that the White House may dramatically accelerate military action against neighboring Iraq, according to some Middle East analysts.

"The US has ceased to treat friendly Arab states in the (Persian) Gulf (region) with the respect and dignity they deserve," said Anthony Cordesman, a retired diplomat who spoke at a conference sponsored by the National Council on US-Arab Relations. "The US has talked in vacuous terms about democracy in Iraq while failing to try to win the minds and support of Arab intellectuals and peoples for its military actions and presence."

US officials meanwhile defended their policy in the region, saying what President George W. Bush wants more than anything is stability in the region that will in turn encourage private investment. But to reach that goal, it may be necessary to take military action, senior administration officials said recently in a wave of television interviews on the subject.

They maintained that Iraqi President Saddam Hussein poses a deep and growing threat both to the United States and the international community.

"We are trying very hard not be unilateralist," Vice President Dick Cheney said on NBC's Meet the Press. "We are working to build support with the American people, with the Congress, as many have suggested we should. And we are also, as many of us suggested we should, going to the United Nations, and the president will address this issue."

The projects
Eight foreign companies, most US-based, signed a preliminary agreement in May 2001 to develop three "core" ventures designed to direct new gas exploration and production into downstream Saudi petrochemical, power, and water projects.

ExxonMobil Corp. was tapped to oversee Core Venture One (CV1) in South Ghawar field and Core Venture Two (CV2) at the Red Sea. Other partners included the Royal Dutch/Shell Group, BP PLC, and ConocoPhillips for CV1; and Occidental Petroleum Corp. and Marathon Oil Co. on CV2.

Shell is slated to run Core Venture Three at Shaybah field in the Empty Quarter, with investment from TotalFinaElf SA and ConocoPhillips.

Oil company officials involved with the negotiations, however, have for now largely written off chances that the $5 billion second core venture will survive in its current form, while the largest project, CV1, valued at $15 billion, has a "50-50" shot under the current round of negotiations, sources said.

Both Saudis and oil companies acknowledge negotiations have taken a more serious turn. Saudi Foreign Minister Saud al-Faisal sent consortium leaders ExxonMobil and Shell a letter saying that access to its largest and potentially most lucrative fields, including the giant Ghawar field in the Eastern province, would be off-limits.

Saudi officials have indicated they want negotiations with the current players to end by October; Crown Prince Abdullah first proposed the gas developments in 1998, but since that time the projects have met with serious resistance from the state-owned Saudi Arabian Oil Co. and some members of the royal family.

Deep disagreements remain over rates of return and access to the fields. For the projects to make sense, venture operators said they must have 12-15% return on their investment; Aramco's figures for the projects were in the low to middle single digits, however.

Aramco has suggested it might reopen the bidding process later this fall; if that happens, it is assumed that industry interest will remain high despite the problems among the current parties. Supermajor ChevronTexaco Corp. is said to be waiting in the wings, as well as state-owned oil companies from Europe or Asia that may be more in tune with Aramco's management style.

Glimmers of hope
Nevertheless, companies currently involved with the core ventures all have pledged to "aggressively" continue negotiations; partners in the CV3 project, for example, are slated to talk Sept. 21-23 in Osaka, Japan, on the sidelines of a meeting of the International Energy Forum.

"It's not over till it's over," said an official with a US company involved with the project. "And we're still talking. There is a long history between us in the kingdom and we need each other. It may not happen next month, but it's wrong to write the whole thing off."

Another speaker at the Arab conference, Herman Franssen, an energy consultant and former Gulf advisor suggested that politicians on both sides could help speed the process along by engaging in "quiet diplomacy" rather than "attacking Saudi society and government in the media by prominent politicians and former government officials."