Open Gas Fields To Foreigners*

June 28, 2001

Saudis Open Gas Fields to Foreigners

By NEIL MacFARQUHAR

The Associated Press

The Saudi oil minister, Ali Al-Naimi, said the foreign-backed oil ventures would help create jobs for the kingdom's growing population.

RIYADH, Saudi Arabia, June 27 — Saudi Arabia radically reshaped its energy industry this month, opening potentially vast natural gas fields to foreign oil companies in an effort to jolt awake an economy that fails to provide enough jobs for the kingdom's booming population.

After a heated internal debate, Saudi Arabia abandoned more than two decades of jealously guarding the most lucrative side of energy production, the upstream operations — exploring and developing untapped sources of gas. Foreign companies are being allowed upstream, on the condition that they create cradle-to-grave systems to use the gas, including billions of dollars in downstream investments in projects like power plants, petrochemical plants and water desalination plants to serve Saudi consumers and industries.

"First of all, it is going to enhance industrialization," Ali Al-Naimi, the minister of petroleum and mineral resources, said in an interview. "We will have more power. We will have more petrochemicals. We will have more water, and we will have more fuel for industry. And no activity will be undertaken without creating jobs — it will create substantial opportunities for professional jobs, besides the normal administrative and manual jobs."

In preliminary contracts signed in early June, three gargantuan new concessions were divided among eight oil companies. Formal negotiations to hammer out specifics — including how much the companies will be paid — are set to start in July.

But Saudi Aramco, the state- owned oil company, will maintain an active presence as a partner in the three ventures, Mr. Naimi said. He said that the Aramco share would be "reasonable" and that specific percentages would be negotiated next month.

"Aramco will play an important role because of its knowledge," Mr. Naimi said. "Many of these areas have been explored on a preliminary basis to test the potential, and the potential is there. That knowledge will be brought to bear on further exploration and exploitation."

Exxon Mobil will be the leading partner in two ventures, while Royal Dutch/Shell leads the third. Taking subordinate stakes of various sizes will be BP, Conoco, Phillips Petroleum, Marathon Oil, Occidental Petroleum and TotalFinaElf. Preliminary investment in the three venture areas, which together cover territory roughly the size of Sweden, has been estimated at about $20 billion.

The Saudi Arabian gas initiative is part of a worldwide trend. Driven by the need for advanced technology and capital they cannot raise on their own, national oil companies in many countries are ceding some turf to the Western companies they once struggled to replace. In Saudi Arabia, where the 222 trillion cubic feet of gas reserves rank it fourth worldwide behind Russia, Iran and Qatar, Crown Prince Abdullah first invited the companies to submit proposals in September 1998.

Officials from the ministry of petroleum and from Aramco deny that they hated the idea. But other Saudi officials and industry executives said the entrenched state oil sector lobbied hard, and successfully, to reduce the scope of the upstream operations opened to foreign companies.

"It's natural," said one Saudi official outside the oil sector. "How would you feel if you have a monopoly and suddenly have to share it?"

Still, Saudi Aramco, which earned $80 billion last year, cannot match the financial resources of an Exxon Mobil ($210 billion in 2000 income), and supporters argued that letting foreigners risk money on exploration made more sense than further straining the hard-pressed Saudi treasury.

Tipping the balance in favor of foreign investment was the recognition that Saudi Arabia's general development is lagging, with large cities like Jidda suffering occasional rolling blackouts and water shortages.

There is also some optimism in the government that Saudi businesses, attracted to working in joint ventures with the oil giants, will bring home some of the $400 billion to $800 billion they are thought to be keeping overseas.

Some analysts argued that Saudi Arabia turned to foreign companies for the gas projects as a kind of political insurance, ensuring that the Western powers would be there to defend them. But many Saudi officials and others dismiss this, noting that having one-quarter of the world's oil was insurance enough.

Weighing more heavily is the kingdom's slow pace of job creation, it manages only about half the 100,000 new jobs needed annually to absorb new entrants to its labor market. High hopes are being placed on the oil sector and ripple-effect investments to help take up some of the slack — unrealistically high, some officials say.

There is no question, though, that the kingdom's spurting population needs more gas. Saudi Arabia uses about four billion cubic feet of gas a day, Mr. Naimi said, and meets the rest of its energy needs with oil that could be sold abroad.

By 2003, the country will be able to produce 7 billion feet daily, but that will still not be enough. Demand is expected to increase to 12 billion to 14 billion cubic feet of gas daily by 2025, meaning that unless there are major new discoveries, Saudi Arabia will use all its gas domestically.

With no export potential, analysts and Saudi officials said, the oil companies committed themselves to the gas deals and the downstream investments in the hope that later they would be allowed to explore for oil as well.

Saudi Arabia has rebuffed the idea, given that the country already has the capacity to produce 10.5 million barrels of oil a day and is only pumping 8 million.

"There is really no need," Mr. Naimi said, "and it is questionable whether in the foreseeable future there will be a need."

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