July 15, 2003	Tuesday	Jumadi-ul-Awwal 14, 1424

RIYADH, July 14: After negotiations on the two other projects of the $25 billion Saudi gas initiative were officially terminated with the US oil major ExxonMobil, all the hopes were pinned on salvaging the third project, with the European Royal Dutch/Shell. The Middle East Economic Survey in its Monday edition has reported that negotiations on core venture 3 (CV3) of the $25 billion gas initiative had also been finally abandoned after the two parties failed to reach a conclusion on the terms of development.

A letter to this effect has reportedly been sent to Royal Dutch/Shell last week informing it about the Saudi decision to terminate the talks, after it “became apparent that Shell’s final proposals, which concentrated exclusively on the gas exploration aspects of CV3, fell outside the final Saudi offer of September 5, 2002.”

CV3 revolved around exploration activities over a large area in Rubi al-Khali’s (Empty Quarters) blocks 5-9 and 82-85. Shell was allotted a 40-per cent stake in CV3, whereas the minority partners ConocoPhillips and TotalFinaElf S.A. were awarded 30 per cent each.

It has also been reported that Saudi Arabia now is focussing on re-launching the gas initiative in smaller parts. International tenders would be launched within the next three months for power and water projects worth $4.8 billion separate from the exploration concessions, as was done initially. MEES said the Saudi government planned to tender four main power and water projects at Shu’aiba and Shuqaiq on the west coast and two additional projects on the east coast within the next three months. In view of the growing gap between the production and the projected usage of the utilities, the Kingdom needs to move fast on these projects. The gap between generation and projected consumption is rising steadily and the Kingdom needs to invest billions of dollars, to the order of $20 billion, into its utility sector over the next decade or so.

Later this month the Kingdom is holding a road-show in London to brief possible participants on the re-designed and revamped Saudi gas initiative. Some 50 oil companies have been invited to attend the presentation on July 22. The Saudi government seems determined to move ahead with its plans to attract private investment into upstream gas and downstream power and water sectors.

Total initial investments in the three core venture projects were projected around $25 billion in the first 10 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 US 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.

At the core of the disagreement between the international oil majors and the Kingdom’s negotiating team 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.

Riyadh had reportedly offered between 10 and 12 per cent return, while the IOCs were demanding around 18 to 20 per cent. 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 US complicated matters.

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 remained valid.