Sweet & Sour: Fate of Saudi gas project rests with the minister

In the last few weeks, two men have been returned to their positions in key energy ministerial posts. Ali Al Naimi kept his job as minister of petroleum and minerals of Saudi Arabia while Chakib Khelil was retained as minister of energy and mines for Algeria.

The first decision was a surprise as many observers had expected Naimi to be replaced in a cabinet reshuffle. But the decision to keep Al Naimi in the job sent a strong signal to oil markets that the kingdom's oil policy would remain unchanged - for now.

Al Naimi has pledged to defend oil prices at an average $25 per barrel, mid way between a range of $22-$28 per barrel that the Organisation of Petroleum Exporting Countries (Opec) has set as its desired price band.

That level is also one which the U.S. administration is comfortable with though both sides will deny any talk of collusion.

As holder of the world's biggest oil reserves, Saudi Arabia is in a position to adapt its production to achieve the price target even at the expense of losing market share.

But that policy will pit Al Naimi against the soft-spoken Khelil, a former senior World Bank official who is now looking to increase Algeria's pro-rata share of the overall Opec production ceiling.

In fact Khelil, whose requests for a higher quota have been put on hold for now, ordered state oil and gas company Sonatrach, which he also headed until recently, to raise oil production.

Algeria has been producing well above its Opec quota at over 1.1 million barrels per day as part of his bid to press its case for a higher share to correspond with its increasing production capacity.

But the argument has fallen on deaf ears in Riyadh. Saudi Arabia too could argue that its spare capacity also makes it eligible for a higher quota but the kingdom is willing for now to sacrifice its market share in defense of the $25 barrel, a price level Naimi has said he would defend for 10 years if necessary.

But while Saudi Arabia has relied entirely on state oil monopoly Saudi Aramco to carry out exploration and production of oil and gas exclusively without foreign participation, Algeria has achieved its capacity expansion plans through joint ventures with multinational oil companies.
But where Algeria has excelled is in its gas expansion plans.

Despite holding only 2.6 per cent of the world's gas reserves, Algeria has overcome political turmoil and anti-government violence to become one of the top three suppliers of natural gas to the European market.

Saudi Arabia on the other hand sits on the fourth biggest gas reserves in the world and has done little to exploit that wealth, much of which was flared as the kingdom focused on its abundant crude oil reserves and for years treated gas as a poor relative.

Until Crown Prince Abdullah took it upon himself to invite eight of the world's biggest oil companies to come in and exploit the gas to feed power stations, water desalination plants and petrochemicals complexes.

But whether or not this massive project known as the Saudi Gas Initiative ever sees the light of day rests with Al Naimi, whom some multinationals alledged, has been standing in the way of the project that would for the first time challenge Aramco's monopoly over the kingdom's upstream energy sector.

Failure to entice the oil majors with a decent rate of return will throw them into the arms of the new, U.S.-led administration in Iraq where the oil is plentiful and cheap to extract and its gas still untouched.

The recent suicide bombings in Riyadh may just frighten investors away from Saudi Arabia as Iraq rises from the ashes of war.

The author is Middle East editor of energy information and pricing service, Platts, a division of McGnaw-Hill Companies.