JEDDAH, 14 June 2003 — The absence of an official Saudi announcement regarding the apparent end to negotiations over a multi-billion dollar gas deal did not prevent the news becoming widely known.

Crown Prince Abdullah, deputy premier and commander of the National Guard, launched the discussions in September 1998. They dragged on for five years until last week’s termination notice, which was leaked to the Middle East Economic Survey (MEES).

Even by normal standards for negotiating multi-billion dollar deals, that was an inordinately long period. It is a rule of thumb that the longer discussions take, the more likely it is that problems will arise, because so many unexpected issues are bound to crop up. In this instance, the US-led war on Iraq and questions about political stability in Saudi Arabia itself following the May 12 suicide attacks against residential compounds in Riyadh seem to have been determining factors. Crown Prince Abdullah’s economic reform policies dictated a strategy of encouraging foreign investment to diversify the Saudi economy away from its near-total dependence on oil and providing more jobs for Saudis.

In the international energy markets, the only entities capable of dealing with multibillion dollar investment requirements are the International Oil Corporations (OICs) — the companies that were bidding for the Saudi gas deal. These conglomerates could be more accurately characterized as energy and industrial companies. They are therefore ideally placed to carry out the Kingdom’s gas, petrochemical, power generation, and water desalination projects.

Like any other business venture, the IOCs would have had to look at the expected returns from their investment in such projects according to their own corporate investment criteria. Press reports have mentioned an initial Saudi guarantee of a ninepercent return against a twenty-five-percent demand by the companies. A nine-percent return would probably be an acceptable and socially responsible return; some claim this is what the Saudi negotiating team had in mind.

This, however, runs contrary to the IOCs’ corporate planning outlook. They are not known for their involvement in socially oriented business projects of whatever magnitude.

But there were claims that the companies became initially involved with the unspoken intent of extending their business to include the oil sector, now exclusively managed by Saudi Aramco. The Saudi government bought out all of the founding four major oil companies in the former Aramco. They were Exxon, Mobil, Chevron and Texaco.

Today, the four former entities have become two, with the merger of Mobil with Exxon (ExxonMobil) and Texaco with Chevron (Chevron Texaco).

This suspicion — according to the Economist magazine — led to obstacles being put up by Saudi Aramco. It was also the basis of an editorial in Al-Eqtisadiah newspaper, which referred to the Saudi oil minister’s unhappiness with the negotiating positions of the IOCs (especially ExxonMobil) and support of Saudi Aramco’s role. On the other hand, reports in the foreign media say that Saudi Arabia’s better-than-expected economic position led it to feel that a more conciliatory approach toward the companies was unwarranted.

Then there are those who ascribe the present slump in negotiations to the Iraqi situation: The “liberation” of Iraq shifted the focus of the IOCs to new business opportunities there. These would require a diversion of funds to investments with returns clearly more attractive than those offered in the Saudi gas initiative. The floating of such a scenario is nothing new in a rumor-rich industry, especially in view of the diversion of funds based on the yet-to-be-proven wild claims related to production potential of the Caspian Sea.

What this scenario does not take account of, though, is that the IOCs know full well that, while oil is paramount in the short and medium term, it is gas — a resource Saudi Arabia has vastly greater reserves of — that is the energy of the future.