Saudi Arabia: What Future for the $25Bn Gas Deal? the Saudi Gas Initiative, Promulgated Five Years Ago, the Symbol of the Kingdom's Economic Reform Strategy Aimed at Attracting Foreign Direct Investment (FDI) into the Non-Oil Economy, Has Collapsed. but the Ambitious Initiative Now Looks Likely to Survive in a Different Form. (Business & Finance)

Article excerpt

The $25bn flagship project, brainchild of Crown Prince Abdullah, was conceived in August of 1998, when government finances were low, as oil prices fell to $10 a barrel. The underlying aims were to allow western energy giants to develop huge unex-ploited natural gas resources and inject foreign capital and technical expertise into a new industry of power stations, desalination plants and petrochemicals complexes. This, in turn, would help diversify the oil-reliant economy, provide jobs for young Saudis (comprising 45-50% of the population) and alleviate shortages of electricity and water.

The development of an indigenous gas industry, which could support downstream activities, is key to the long-term goals of industrialisation and boosting job-creation programmes to reduce unemployment which stands at 15-20%. But the non-oil economy is not yet sufficiently robust to provide livelihoods for almost 100,000 young nationals joining the labour market every year.

Besides sitting on the globe's largest oil reserves (estimated at 262bn barrels), Saudi Arabia owns the world's fourth-biggest gas reserves (230.6 trillion cubic feet), equivalent to 4% of world total. However, the kingdom has yet to capitalise on sizeable, mostly untapped gas reserves and build facilities to expand its power-desalination capacity.

In June 2001, preliminary agreements were signed with seven international oil companies (IOCs), in the presence of King Fahd, for the development of three "core ventures". Companies included ExxonMobil, Royal Dutch/Shell, British Petroleum (BP), TotalFinaElf, ConocoPhillips, Occidental Petroleum and Marathon Oil. The planned gas exploration and development (E&D) projects--involving external participation in the upstream energy industry for the first time since nationalisation in 1975--were divided into three areas:

* South Ghawar in the eastern province, led by ExxonMobil (35%), Shell (25%), BP (25%) and ConocoPhillips (15%). This was the largest venture (costing $15bn), with rights to use Saudi Aramco's associated gas output in the Ghawar oilfield and explore for gas in the northern part of the Rub Al Khali (Empty Quarter)--an area the size of Sweden. The downstream projects involved providing four gigawatts of power capacity, 300m gallons of water a day and 2.032m tonnes a year of petrochemicals.

* The Red Sea coast, headed by ExxonMobil (60%), in partnership with US's-based Occidental (20%) and Marathon (20%). This envisaged developing proven reserves in onshore Bargan and Midyan gasfields and building power generation-desalination plants, as well as exploring for offshore gas reserves off the Red Sea.

* Shaybah area, led by Shell (40%), TotalFinaElf (30%) and ConocoPhillips (30%).

Proposed mandates were E&D in the southern Empty Quarter, developing the Kidan gas field, building pipelines from Shaybah to Hawiyah gas treatment facilities, east of Riyadh, and a petrochemical complex in Jubail.

Also, foreign oil majors were to help convert domestic utilities from oil to gas usage, thus freeing up more crude oil output for exports.

The three core projects represented the most significant opening of the Saudi economy in decades. The 'multiplier-effects' of the Gas Initiative, if fully implemented, could have generated FDI inflows of $50bn, or more, thereby creating 500,000 new jobs in utilities, downstream industries and services over the next two decades and beyond.

Deadlock

The collapse of negotiations between Riyadh and IOCs in early June did not surprise most seasoned observers.

Over the past two years several contentious issues have divided the parties including the projected rate of return on investments, the quality and quantity of gas on offer to IOCs (including access to prized gas reserves in Saudi Aramco's designated concession areas), domestic gas price, electricity-water tariffs, high corporate taxes and a lack of fiscal incentives. …