A Saudi Offer Big Oil Can't Refuse

Hoping for exploration rights, the majors vie for industrial deals

It's the dream of every oil executive: to get his company lucrative oil and gas rights in Saudi Arabia, which sits on the world's richest hydrocarbon reserves. Yet big oil has been largely shut out of the kingdom since the Saudis nationalized the industry in the mid-1970s. Now the Saudis are starting to soften their attitude towards foreign energy investment. They are soliciting bids from foreign companies to build infrastructure for natural gas, as well as petrochemical plants and other projects that would use the gas. The big question: Will these industrial projects lead to groundbreaking deals for oil and gas exploration?

The oil majors sure hope so. In recent days the top brass of the oil world, including BP Amoco PLC Group CEO Sir John Browne and Total Fina Elf CEO Thierry Desmarest, have trekked to Riyadh for talks with Foreign Minister Saud al Faisal, who is acting as the Saudis' point man in negotiations. In coming weeks there could be some rough jockeying for position as the champions of the American, British, and French oil industries vie for leadership roles. The companies will also badger the Saudis for better terms, otherwise the kingdom may not get as much investment as it hopes.

The Saudis have laid out three huge projects. The biggest is in the South Ghawar field in the eastern province. The other two are in the sands of the Empty Quarter and on the Red Sea coast. Total investment might come to $25 billion over 10 years, estimates Brad Bourland, chief economist of Riyadh-based Saudi American Bank. The betting in the industry is that Exxon Mobil will be awarded a marquee role: A side objective of the Saudis is to give Washington a greater stake in protecting the kingdom from predators such as Iraq.

The companies aren't ecstatic about what the Saudis are offering now--mainly opportunities to build petrochemical, power, and desalinization plants, which generally don't produce much of a payoff. And in the Riyadh meetings the companies complained that the Saudis were providing insufficient data. Still, despite grousing, few of the world's oil majors want to miss this opportunity to raise their profiles in the kingdom. "The person who says he is not interested in Saudi Arabia is either a liar or not very smart," says one industry source.

As a lure, the Saudis are providing some gas exploration deals. But the companies say that the acreage is not very attractive and they are pressing the Saudis for better properties. An industry source doubted that the companies would find it worthwhile to develop the fields for a decade. Still, he said the Saudis have come a long way. "It is an unbelievable move forward," he said. "Some day we may actually reach our real objective."

LITTLE LEEWAY. Crown Prince Abdullah, who opened the talks two years ago, would probably like to give the companies longer leashes. But he has to reckon with strong nationalist sentiments. Saudi Aramco, the national oil company, has worked hard to restrict the international companies. Exploring for oil has never been on the table. For the moment, Aramco also seems to be succeeding in largely keeping them out of gas exploration.

Still, the Saudi offerings could yet prove worthwhile as stand-alone projects. Saudi Arabia has advantages as a petrochemical center: The natural gas used in these facilities to generate electricity or make petrochemicals costs less than 10% of prices in the U.S. With little risk, the companies would probably be willing to accept returns in the low teens.

But some executives warn that unless they can make decent money they won't play. To make projects like the desalinization and power plants fly, the government will likely have to raise electricity and water rates, which are heavily subsidized. The companies also worry that some of their competitors will accept minimal returns in hopes of winning more attractive work. "I would hope that no company would look at this as a loss leader," says an oil executive. Of course, that would delight at least some Saudis.

By Stanley Reed in London

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