Saudi gas projects likely to be repackaged

By OGJ editors
WASHINGTON, DC, June 10 -- Saudi Crown Prince Abdullah's quest to dramatically expand foreign investment in Saudi Arabia through a $25 billion natural gas development plan will not move forward in its present form, industry sources said.

Foreign companies still are expected to play a key role in advancing the kingdom's domestic energy agenda, but the gas development plan is not likely to be on the kind of grand scale first proposed in the fall of 1998.

Negotiations between state-owned Saudi Arabian Oil Co. and multinational oil companies concerning a key part of the "Saudi Gas Initiative" ended earlier this month. Saudi Aramco is expected to announce Sunday that it will essentially start over.

"The SGI was the biggest gas project on offer anywhere in the world, and its demise will be a blow to Saudi Arabia's energy objectives as well as the wider effort to attract foreign investment into the kingdom," said Simon Wardell, energy research manager for World Markets Research Centre.

Almost 4 years ago, the prince initiated talks with foreign companies, most US-based, on pursing three "core" ventures designed to leverage the country's plentiful natural gas production into Saudi petrochemical, power, and water projects.

The prince, then and later, stressed that more lucrative upstream oil fields were off limits, but companies anticipated that helping the Saudis develop gas for domestic markets might pave the way for broader investment later
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After a series of protracted discussions, eight foreign companies were selected to move forward. At a May 2001 ceremony in Jeddah, ExxonMobil Corp. was formally tapped to oversee Core Venture One (CV1) in South Ghawar field and Core Venture Two (CV2) at the Red Sea. Other partners included Royal Dutch/Shell, BP PLC, and Phillips Petroleum Co. for CV1 and Occidental Petroleum Corp. and Marathon Oil Co. on CV2. Shell led Core Venture Three at Shaybah field in the Empty Quarter with assistance from TotalFinaElf SA (now Total SA) and Conoco Inc. (now ConocoPhillips).

Final deals were expected to materialize a few months later. But that timetable proved unrealistic because of geopolitics and fighting within the Saudi royal family.

In recent months Saudi oil minister Ali al-Naimi made it increasingly clear he had support from key members of the royal family to start the whole process over. Saudi Aramco is expected to court non-US companies, most notably from Russia and China, which may be more comfortable with the lower returns the kingdom is demanding, analysts and oil company sources said.

June 5 letter
Al-Naimi sent a June 5 letter to ExxonMobil, giving the company 10 days notice that its preliminary agreement signed in May 2001 will be terminated. Given that CV2 has been essentially a non-starter for over a year, it is expected all the core ventures may be abandoned.

"Negotiations have been deadlocked for months, with oil companies refusing to budge on their demands to have greater access to Saudi's most promising gas fields and a guaranteed rate of return far higher than that on offer. The Saudis were equally refusing to budge, and a final offer was submitted to oil companies last month," Wardell noted.

Looking ahead
While the gas projects in its current form may indeed be dead, multinational oil companies are likely to place new bids when the Saudis decide how they want to proceed.

"The SGI projects are central to Saudi Arabia's energy plans over the coming decade and the government will not abandon it's aim of attracting foreign investment to realize these goals," Wardell said. "Re-tendering the projects and breaking them down into smaller parts could reduce investor risks and attract more bidders, and this is almost certainly what the Saudis will now attempt to do."

Wardell suggested that Saudi Aramco's action might come as somewhat of a relief to both sides.

"The disappointment, and possibly some relief, will be shared by all parties," he said. While the companies involved will be unhappy to see gas infrastructure developments fall apart, "the terms being offered were simply not what was initially expected," Wardell said.

The potential for massive investment in Iraq also was a factor that multinational oil companies could not have known in May 2001 when serious negotiations with the Saudis began.

"The solace of potential oil development in Iraq will also keep them from being too disappointed by the failure of the SGI," Wardell said. The Saudis had seen the decision to go with multinationals more used to high risk, high return projects as a mistake, he added.