Saudi Arabia still keen on gas investment

Saudi Arabia is still seeking investment in its mammoth gas sector in excess of $ 20 bn despite the death of its original mega gas initiative that could have attracted the world's biggest oil companies.
The kingdom's oil minister and analysts said they expected more agreements to be finalised with foreign firms to hunt for gas in the vast Rub Al Khali (Empty Quarter) desert following the signing of two major contracts with a group of foreign firms involving concessions exceeding 300,000 sq km.

Oil Minister Ali Al Naimi said all projects envisaged in the now-defunct Gas Initiative that was floated by Crown Prince Abdullah bin Abdul Aziz in the United States nearly five years ago would be carried out.
"All projects included in the initiative will be carried out and all the investments, or even more, will be achieved," he said after signing separate gas deals with Russian, Chinese, Italian and Spanish firms in Riyadh.
"We are currently involved in exploration while associated projects involving electricity and water desalination will be presented in the form of international tenders according to a timetable... we are also in the process of presenting petrochemical projects... I think that all these gas ventures and associated projects will result in investments exceeding $ 20 bn."

The agreements with those companies involve exploration and production of gas in a combined area of 120,000 sq km in the arid Rub Al Khali, which Naimi said might contain massive gas reserves. The contracts are the second landmark gas agreements signed with foreign firms since the world's dominant oil power floated its famous Gas Initiative in 1998.
The first deal was struck late last year with a consortium led by the Royal Dutch-Shell Group and it could involve investment of nearly $ 2.5 bn on an area of 210,000 sq km, more than 20 times the area of Qatar. After more than two years of haggling over details of the investments in the Gas Initiative, Saudi Arabia decided last year to abrogate an initial agreement with a consortium led by Exxon and Mobil companies involving an investment of up to $ 15 bn to develop its huge oil reserves of more than 6 tcm.

The investment is part of the original Gas Initiative involving pumping of $ 25 bn to develop gas resources and set up associated industries, including domestic distribution of gas supplies, petrochemicals, and desalination plants. But a joint report by the Abu Dhabi-based Arab Monetary and the Organisation of Arab Petroleum Exporting Countries said investments in subsequent projects could far surpass those funds as they could reach $ 150 bn in the long term.
Saudi industry sources said a final agreement with the US companies had been bogged down by differences on the expected return from those ventures and other issues, including the real size of the gas reserves in those fields.

"Exploration for gas will last 10 years under those agreements and production will be for at least 25 years and a maximum period of 40 years... operations began on March7 and hopefully production will start in 2010 in association with Aramco, which owns 20 % of these projects," Naimi said.
"These companies were selected after strong competition and we hope they will make high profits... as for the quantities of gas, such projects need a lot of work because it is a vast area... no one can determine what is there but according to independent sources, the Rub Al Khali contains immense deposits of non-associated gas and this will make it a very attractive area for investment."

Saudi economists said they believed the Kingdom's decision to revise its Gas Initiative by fragmenting it would strengthen its bargaining position with international firms. They noted that the Saudi government had veered away from direct negotiations in the original initiative and resorted to inviting bids after presenting gas projects at a conference in London last year.
"The initiative was re-presented and re-engineered... this means the government can negotiate better and make its own conditions in the tenders which it is expected to present to those firms," Saudi economist Ihsan bu Hulaiga said.
"Our expectations are that $ billions more will be attracted despite the cancellation of that initiative... in practice, the initiative is still there but in a new form, which includes smaller projects instead of mega projects... the coming period will see the signing of fresh deals with international companies and by this the Saudi government will ensure the materialisation of the initiative."

Bu Hulaiga said development of the Saudi gas sector is decisive as it will enable the country to face a rapid growth in domestic consumption caused by a steady expansion in industry and other sectors, high population growth, economic diversification programmes, and the kingdom's gradual switch to gas.
"Without developing our gas wealth, the country's industrial sector will be smothered... we already have industrial investment in excess of 240 bn riyals ($ 64 bn) covering 3,500 factories with an output value of more than 70 bn riyals ($ 18.6 bn) a year... besides, the power generation sector is also rapidly growing and will require at least 5 bn cfpd of gas in 2020."

Official Saudi projections expect the gas ventures to boost growth in the gross domestic product by between 1.5 and 2 % annually in the medium and long run as they are set to generate numerous other projects.
Such a momentum is needed to offset volatile oil sales that have largely upset the Kingdom's economy and created deficits in the budget and current account in most years since the end of the oil boom in early 1980s.