GCC Insights: Saudis need to sweeten gas offer

Saudi Arabia's original Natural Gas Initiative (NGI) has been all but totally terminated due to differences between international oil companies (IOCs) and the government. The authorities reportedly intend to make a new revised offer during a meeting in London later this month.

Prince Abdullah bin Abdulaziz Al Saud, Crown Prince and Deputy Prime Minister, revealed the gas initiative in 1998 during a visit to the U.S. Total initial investments were projected around $25 billion in the first ten years covering upstream, midstream and downstream projects.

The integrated programme stipulated exploration and processing of gas plus construction of power stations, water desalination plants and petrochemical schemes. The gas sector was excluded from a negative list that specifies activities prohibiting foreign investments.

In June, 2001, the government granted a group of IOCs from the U.S. and Europe exclusive rights to explore and process gas in three core ventures across the kingdom. ExxonMobile led venture one, known as South Ghawar, requiring investments of up to $15 billion.

Likewise, the American corporation led core venture two in the Red Sea area, which required outlay of nearly $5 billion, while Royal Dutch/Shell controlled venture three in the Shaybah region, requiring a fund of $5 billion.

From the onset, the NGI looked complicated in many respects. Despite several rounds of negotiations, the two sides could not agree on a course of action leading to implementation agreements.

At the core of the disagreement was the internal rate of return (IRR). The IOCs insisted on solid profitability from the gas development as well as from the required ancillary power and water desalination plants and petrochemicals projects.

While not looking for commercial gains, the Saudi government wanted to seal a deal that would not appear to be wasting natural resources. Riyadh had reportedly offered between 10 and 12 per cent return while the IOCs were demanding around 18 to 20 per cent.

Other restrictions made the gas ventures even less attractive. For example, the offer was valid only for areas of non-associated gas. Additionally, areas with proven gas reserves were off limits. Also, the two sides disagreed on the interpretation of the seismic surveys.

Saudi Aramco, which represented the government, had estimated the three areas to contain 35 trillion cubic feet of gas. But the IOCs believe only 20 per cent of that is recoverable for commercial purposes. Hence, the IOCs felt that the proposed gas acreages were inadequate. To be sure, Saudi Arabia has substantial gas reserves, nearly 230 billion cubic feet.

Also, political developments proved detrimental for American firms to commit major investments in Saudi Arabia. Some experts believe that the September 11 terrorist attacks in the U.S. complicated matters not least because 15 of the 19 hijackers were Saudi nationals.

In January and as part of moves to avoid collapse of the entire deal, the government terminated the second core venture, considered the most difficult to explore. But in early June, the first core venture, the most prized, was terminated. Thus, progress on the third core venture, regarded as the easiest of all, remained valid.

The NGI formed the flagship of Crown Prince Abdullah's reforms programme and its near collapse could undermine the entire efforts. The push to open up the economy, as stipulated in the five-year plan extending up 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.

Among others, the government had sought foreign investments in order to boost economic infrastructure and provide employment opportunities for locals.

However, in order to reach fruition, any new gas offer needs to be attractive enough to the IOCs.

The author is Assistant Professor, College of Business Administration, University of Bahrain