DAMMAM, 16 May 2004 — The gas sector comes under intense focus for the next two days at a major conference that started here last night.
The sector has come a long way since the launch of the gas initiative. When the $25 billion gas initiative with the global oil majors was shelved last year, the internal rate of return on investment and the quantity of gas available on the offered acreage were reported to be the major sticking points between the two sides. The three core venture projects offered at the time, CV1, CV2 and CV3 were spread over an area 440,000 square kilometers — the largest area in the world ever earmarked for hydrocarbon investment.
But negotiations between the oil majors and the Saudi negotiating team became bogged down on issues affecting profit margins such as taxes and the price companies could charge for electricity and water sales. Saudis were initially reporting on a single digit IRR, whereas the oil majors were looking toward a considerably higher rate of return on their investment. But that could have meant a surge in prices for Saudi consumers, negating the very basis of the decision to allow foreign companies to invest in the sector. Saudi Arabia was not willing to let that happen.
Another sticking point between the two sides was reported then to be the quantity of gas available in the offered concessions and over the lifespan of the contract. Some reports then indicated that the Saudi negotiating team wanted its potential partners to invest in areas with “high gas potential” and not only aim for areas “with established gas finds.”
Some also said that political considerations weighed heavily on the negotiations. In the immediate aftermath of Sept. 11, the US oil majors felt disinclined to invest heavily in this region. There were also reports that in view of the developments in Iraq some of the US oil majors felt they were better off investing in Iraq, perhaps at much better terms than they could have achieved in the Kingdom. In any case the talks collapsed.
In order to overcome the problems, the government split apart downstream and upstream projects, thereby apparently taking care of the issue of rate of returns to a great extent. A number of other takers were meanwhile waiting in the wings.
While it is not clear yet how the issue of the gas available in the offered areas was reconciled with the newly selected foreign partners, the fact that a number of other global energy companies signed for the project itself indicates that a satisfactory solution was reached. The gas conference in Dammam thus provides an ideal opportunity to understand the viewpoints of both the Saudi Oil Ministry and the oil majors who are investing in the upstream gas sector in the Kingdom.
