), Italy's ENI (E
), and Spain's Repsol YPF (REP
) trooped up to the front of a Riyadh auditorium and signed deals to explore for gas with Saudi Arabia's Oil Minister, Ali Naimi, and Abdullah Jumah, CEO of Saudi Aramco, the national oil company.
The Mar. 7 ceremony, which lasted more than three hours, was yet another step in the gradual opening of Saudi Arabia's massive hydrocarbon resources to foreign oil outfits. The agreements, which followed another gas project awarded to Royal Dutch/Shell (RD
) in 2003, mark the first exploration and production deals signed by the Saudi kingdom with outside corporations in decades.
The three groups -- Repsol and ENI have a joint venture -- have committed $600 million to $800 million in spending on giant tracts of desert. If they find commercial deposits of gas, the amount could rise well into the billions. A Lukoil executive says if his project goes well, the total development and exploration cost might be $3 billion.
COMPETITIVE BENEFITS. Interestingly, the notoriously closed kingdom ran an open bidding process on these deals. Perhaps stung by last year's collapse of Crown Prince Abdullah's so-called gas initiative, the Saudis did a lot less micromanaging and were a lot more open.
The results seemed to please the House of Saud. One senior oil executive says the bids were much stronger than the Saudis expected. "This shows the benefits of competition," says Prince Faisal bin Turki, a gas expert and adviser to the Oil Minister. The kingdom even published the winning and losing bids. Chevron-Texaco (CVX
) was among the losers.
Industry heavyweights ExxonMobil (XOM
) and BP (BP
) stayed away. Bitterness still lingers between the Saudis and ExxonMobil, which was to have taken the lead role in the gas initiative. However, the Saudis wanted the major oil outfits to build power and desalinization plants worth billions of dollars on terms the businesses argued would produce inadequate returns. The companies also said the acreage that was being offered was unlikely to produce sufficient quantities of gas to justify the risk.
POLITICAL SIGNIFICANCE. ExxonMobil and BP both walked away from the gas initiative and didn't factor in the latest round of bidding. Shell, on the other hand, signed an early deal in 2003 that may turn out to be the best of all. Although the size of the tracts awarded on Mar. 7 dwarf some European countries, they're in turn much smaller than the area to be explored by Shell and its partner, France's Total (TOT
The kingdom said little about the symbolism of signing a raft of deals with partners other than the U.S., which developed the Saudi oil industry and has been the country's main protector. But it clearly wants to hedge its bets. Cutting deals with Europe is one way. Bringing in a company from Russia and China, a huge and fast-growing customer for Saudi crude, also has political significance. Naimi says Russian participation in Saudi exploration is likely to tighten cooperation on maintaining oil prices.
The government wants to double the country's gas production by 2025. It needs more gas to use as feedstock for their petrochemical industry, one of the world's largest, as well as water and power plants. The companies are likely to receive a relatively low rate for the gas they sell to the kingdom. But they can get world prices for natural-gas liquids such as butane and propane and condensates that are used in petrochemicals.
The Saudis stressed that these deals are only for producing gas. It's still considered too controversial for foreign concerns to have equity participation in the kingdom's oil reserves. Gas is being used as a way of introducing the concept of such participation. If they strike oil, Naimi says, it's the same as drilling a "dry hole." Reed is bureau chief in London for BusinessWeek