Suddenly, the Saudis Want to Close Some Deals

By Stanley Reed in London

If you want to see how the overthrow of Saddam Hussein in Iraq may be changing the Middle East, you need look no further than the breakthrough gas deal signed by Royal Dutch/Shell Group and Total Group in Saudi Arabia. The accord is the first to allow foreign companies to explore and produce gas since the industry was nationalized in the mid-1970s. It goes a long way toward salvaging a high-profile effort to bring in the companies that Crown Prince Abdullah had announced five years ago.

Squabbling between the companies and the Saudi oil bureaucracy had just about killed Abdullah's initiative. Not only was this a huge embarrassment for the kingdom's de facto ruler but it was also a disaster for Saudi efforts to attract other foreign investment -- which the kingdom badly needs to provide jobs and sustenance for a fast-growing population. Saddam's demise turned up the pressure on the Saudi royal family to score some successes. The toppling of the Iraqi dictator turned a spotlight on the shortcomings of neighboring leaders, and it meant that Iraq would soon become a competitor for the oil companies' capital.

Rumors flew that the Crown Prince would sack Saudi Oil Minister Ali Al-Naimi, who is considered skeptical of foreign involvement, in a May cabinet shuffle. Instead, Al-Naimi was retained and given a freer hand -- but with the understanding that he would have to produce results.

After five years of dithering, the dapper Minister has moved fast. Al-Naimi streamlined the cumbersome process that had just about doomed Abdullah's initiative. The Saudis were trying to force the companies not only to explore for gas but to build giant power, water, and chemical plants -- all in three packages estimated to cost $25 billion. The Saudis were also micromanaging the whole deal, even deciding which companies had to be partners with others.

Al-Naimi separated gas activities from the downstream albatrosses. After several weeks of talks, he scored his first success. On July 16, the Saudis awarded a consortium -- led by Shell and including Total and the national oil company, Saudi Aramco -- a 200,000-square-kilometer area in the remote Empty Quarter to explore for gas. Shell has a 40% stake, while Total and Saudi Aramco each hold 30%. Al-Naimi turned Saudi Aramco from a potential obstacle to a supporter of the deal, persuading the company to take the stake allocated to ConocoPhillips after the U.S. company dropped out just an hour before the signing. ConocoPhillips said the deal didn't meet its profit criteria. In another sign of big changes afoot, Aramco will pay its way rather than get a free share because of its position. "After a few years of negotiation, it was obvious that there must be a different way of doing business," Al-Naimi told reporters in London on July 21.

He is also no longer demanding that the companies make enormous commitments in return for the privilege of limited access to Saudi hydrocarbons. Instead, Shell and Total have agreed to spend around $200 million over five years on exploration -- not tens of billions. If they find nothing, they can walk away. While there are only limited data available on their acreage, the geology resembles Shell's successful concession in Oman, which produces about 2 million barrels per day of oil.

The companies are getting the kind of deal that non-OPEC countries offer but that has not been available with some big Gulf producers. They will sell whatever gas they find, and can report the reserves on their books -- something they can't do in Kuwait and Iran. While it is difficult to gauge profits, the companies expect they will be 15% or so -- the low end of what they consider acceptable. Although the deal does not include oil, the companies suspect that down the road they might be able to produce and sell any oil that they find -- now taboo in Saudi Arabia. Thus the upside gains could be huge.

If so, Shell and Total will have a headstart. Exxon Mobil Corp., the other big player in the gas talks, didn't come to an agreement with the Saudis, leading to questions about whether it misread the Saudis' new attitude. But Al-Naimi is giving them another shot. He held a conference in London on July 21-22 to offer up three more blocks in the 30,000- to 50,000-square-kilometer range. "It is going to be the most transparent process you can have," he declared. That would be quite a shift indeed.

Reed covers the Middle East.

Edited by Rose Brady

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