GCC Insights: Saudi gas initiative highly ambitious and complex

Saudi Arabia's national gas initiative has yet to make concrete progress due to differences between international oil companies (IOCs) and the government.

The two sides held two rounds of negotiations in early August but could not agree on a course of action to move forward.

Crown Prince Abdullah revealed the gas initiative in 1998 during a visit to the U.S. In June 2001, the government granted a group of IOCs from the U.S. and Europe exclusive right to explore and process gas in three core ventures across the kingdom.

The integrated programme involves exploration and processing of gas plus power stations, water desalination plants and petrochemical schemes. Total investments are initially projected between $25-30 billion in the first ten years covering gas field development plus other downstream projects.

The gas initiative has three core ventures. ExxonMobile leads venture one, known as South Ghawar, tipped as the most prized requiring investments of $10 to $15 billion.

The American corporation likewise leads venture two in the Red Sea area, which requires outlay of $5 to $7 billion, but widely regarded as exceptionally complex in nature. Royal Dutch/Shell leads venture three in the Shaybah region, which requires investments between $5-7 billion.

At the core of negotiation is the internal rate of return (IRR). The IOCs insist on solid profitability from the gas development as well as from power stations, water desalination plants and petrochemicals.

Differences over the pricing of the new gas, the extent of acreage available and the difficulty of extracting the gas are critical points in determining the IRR.

For its part, the Saudi government is not looking for profit or commercial interest but desires a deal that does appear to be wasting natural resources. The government is reportedly offering between 10 to 12 per cent return while the IOCs are demanding 18 per cent. BP has not ruled out withdrawal unless guaranteed a fair profit margin.

Additionally, the two sides disagree on the interpretation of the seismic surveys. Saudi Aramco has estimated the areas to contain 35 trillion cubic feet. But the IOCs believe only 20 per cent of that is recoverable for commercial purposes. An agreement must be reached prior to start of drilling.

Also, IOCs point to logistical difficulties, claiming that complex geological nature of the acreage could make the production cost uneconomical.

While the Saudi side feels that it is racing against time, the IOCs like to continue their negotiations without tight deadline. It is not clear to what extent, if any, has the September 11 attack on New York and Washington adversely affected the entire project.

But Saudi authorities had hinted that unless there is a breakthrough, the possibility remains for opening the plan for fresh bids under new terms.

Crown Prince Abdullah and Foreign Minister, Prince Saud Al Faisal are the two architects of Saudi Arabia's drive to open the economy and notably the gas sector.

The push to open up the economy, as stipulated in the five-year plan extending to 2005, is partly aimed at reducing dependence on oil, which constitutes nearly 75 per cent of income, 85 per cent of exports and 35 per cent of the GDP.

Prince Saud Al Faisal has earlier revealed that Saudi Arabia "seeks to attract major and urgent investments to boost economic infrastructure, raise growth levels, provide new employment and training opportunities for citizens and attractive opportunities to employ Saudi capital."

The gas sector has not been included in the extensive negative list that specifies activities prohibiting foreign firms to invest in. Saudi Arabia General Investment Authority (Sagia) developed the list, which amongst others bars foreign investments in exploration and drilling of oil.

Saudi officials hope that the opening of the gas sector together with other liberal measures would facilitate accession to the WTO. Saudi Arabia remains the only GCC member state not admitted to WTO.