Gas initiative enters critical phase

08 February 2002

International oil companies (IOCs) are entering a critical stage in their negotiations with the government to complete agreements in principle on the gas initiative. Because the 2 March provisional deadline falls immediately after the Eid al-Adha holiday, both sides are working to affirm their commitment to specific elements of the scheme by 16 February.

Crown Prince Abdullah and Foreign Affairs Minister Prince Saud al-Faisal are working harder than ever on the initiative to solve the remaining issues of contention, Western oil executives say. Both sides are optimistic that the programme will go ahead as planned, but say the deadlines are more flexible than has been reported.

The major issue that stands unresolved is the quantity of available gas and its production cost. Based on preliminary seismic surveys, the IOCs and Saudi Aramcohold different positions on the gas reserves in the three concession blocks. The IOCs are understood to have said they would not normally drill on the basis of such survey results. They claim the gas will be expensive to drill and transport due to its location in complex geographical structures far from downstream destinations.

Other areas of negotiation are the tax regimes, said to be as high as 85 per cent in the event of major gas finds, and Aramco's stake in the gas production. Joint ventures are expected to be formed, in which the state company would take a 10-20 per cent share.

Downstream, Saudi Basic Industries Corporation (Sabic)is understood to have scaled down its ambitions for a major stake in the three planned worldscale ethane crackers. It is set to take minority stakes in the projects, which are also expected to raise equity from the domestic stock market.

Plans for the construction of power and water plants as part of the initiative are firming up. In-kingdom sources say core venture 1 will include an independent water and power plant (IWPP) of 2,000 MW and 150 million gallons a day (g/d). Core ventures 2 and 3 will each contain an IWPP of about 1,100 MW and 75 million g/d. Each venture is also expected to include development of a major petrochemical project.

Negotiations on the petrochemicals, power and water projects are progressing smoothly. Feedstock has been guaranteed by Aramco at a rate of $0.75 a million BTU until the ventures can use their own gas. The sources say the government has also guaranteed offtake commitments and the potentially expensive transmission of power and water.

But all sides want to see the full, integrated project move ahead. 'Until we see the gas we produce feeding petrochemical and power plants we run, it will not be the true gas initiative,' says a Western oil executive.

ExxonMobil Corporationof the US is the lead investor in core ventures 1 and 2; the Royal Dutch/Shell Groupis the leader on core venture 3.

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