GAS: Starting over

26 September 2003
How much difference a few months can make. Up until early June, the gas initiative was struggling, stymied by a range of political and economic issues. The two-year struggle came to a head on 5 June, when Saudi Arabia's Petroleum & Mineral Resources Minister Ali Naimi informed the US' ExxonMobil Corporation, leader of core venture 1 (CV1) - the largest of the three envisaged upstream gas projects - that the kingdom had decided to terminate the implementation agreement. By then, core venture 2 had long been abandoned, while the future of core venture 3 (CV3) was far from clear.

Fast forward three months and the talk of the day is, once again, gas. The Saudi gas rounds are not the gas initiative, but they do have all the ingredients to achieve what the original did not: they might just work.

The new strategy is simple. Break up the original scheme into its up, mid and downstream elements, and let companies focus on their core competencies. In the case of the international oil companies (IOCs), this clearly is the main, upstream element of the programme.

'The gas initiative was ill-structured from the beginning,' says an international lawyer familiar with the core ventures. 'Now the scheme focuses on the upstream element, which makes sense because this is what IOCs do.'

The first international companies that have turned out to benefit from the Petroleum & Minerals Ministry's change of strategy are the Royal Dutch/Shell Group and France's Total. On 16 July, after several weeks of intensive negotiations, the two IOCs signed an agreement with the ministry for the upstream development of non-associated gas resources in the area originally allocated to CV3. Significantly, the third partner in the original CV3 group, the US' ConocoPhillips, withdrew shortly before the deal was signed. Industry sources say Conoco's decision was officially due to dissatisfaction about the internal rate of return on offer, but the main reason might have been the conclusion of an agreement for Qatargas III on 11 July.

Whatever the reasons, Saudi Aramco came on board, forming a joint venture with the two remaining IOCs for the exploration, production and development of gas in the 200,000-square-kilometre area in the Rub al-Khali zone in the southeast. Under the joint venture agreement, Shell will assume the role of operator on the development and take a 40 per cent stake, with the remaining 60 per cent evenly split between Total and Aramco.

The three companies are now preparing to set up a project company and to hold an official signing ceremony - pending the final approval of the deal's terms and conditions by the Supreme Petroleum Council - with the Petroleum & Mineral Resources Ministry by the end of October. First exploration activities are scheduled to start in January 2004.

Even more of a surprise than the speedy conclusion of the Shell deal was the ministry's July move to invite IOCs to bid for three separate blocks allocated for the upstream development of non-associated gas reserves in the area that was originally designated to CV1. The three contract areas offered under the Saudi gas round were presented to more than 40 IOCs, invited to attend a three-day meeting in London between 22-24 July. Contract area A covers 29,900 square kilometres, area B 38,800 square kilometres and area C about 51,400 square kilometres (see map).

On 15 September, the ministry issued tender documents for the scheme to prequalified companies, among them IOCs from China, Malaysia, Russia, India, Japan, Europe and the US. The schedule that has been set for the scheme is tight. IOCs have until 31 December to access Aramco's data room in Dhahran and until 26 January to submit their bids.

Companies that were not invited to the London meeting have also been given a chance to become involved in the gas rounds, having been offered to prepare expressions of interest by 30 November. The ministry will individually qualify each of these companies as non-operators. All bids will be opened between 27-29 January, the ministry says. Significantly, under a joint operating agreement, Saudi Aramco will take a 20 per cent interest in each of the three contract areas, whether developed by a single company or a consortium. Under the same regulations, Aramco will also act as offtaker, guaranteeing the annual purchase of up to 750 million cubic feet a day (cf/d) of gas from the operators of each contract area.

So far, the post-gas initiative era has been promising. Of course, the largest hurdles and the major risk elements have been removed with the separation of the upstream from the mid and downstream portions. But there are other reasons for the smooth run. The kingdom needs gas and needs it urgently. Demand for gas feedstock is rising on a daily basis, in particular from industry. If plans for independent water and power projects (IWPPs) and new petrochemical facilities are to materialise, the kingdom cannot afford any further delays. Two years of lengthy negotiations on the gas initiative have been a drag on numerous projects already.

While the ministry is pressing ahead with the negotiations for the three contract areas, Saudi Aramco continues to move fast on its own gas development scheme. Evidence of mounting momentum can be seen in the recently-issued tender for the programme to build a straddle plant and expand capacities at the existing Hawiyah gas and Juaymah fractionation plants. Industry sources say the total cost of the scheme, which is the largest to be tendered by Aramco in 2003, could reach up to $1,700 million. Progress on the 3,800 million-cf/d straddle plant had been stalled over questions surrounding its integration into the gas initiative or not. With the old gas scheme off the table, Aramco has been quick to move on the contract to provide project management consultancy (PMC) and front-end engineering and design (FEED) services was awarded to the US' Jacobs Engineering on 9 September.

Anticipating more and new gas feedstock being developed in the east of the country, Aramco has also revived plans for the west coast. The company proposes to pump gas feedstock from the Eastern Province via one of the east-west pipelines it intends to convert from crude to carry gas.

In the Western Province, Aramco will use the gas feedstock for the construction of a 1 million-tonne-a-year ethane cracker at Rabigh refinery, which itself will be expanded. The complex will also include a propane dehydrogenation (PDH) unit at the refinery for the production of polypropylene. Total project costs are estimated at about $3,000 million. Aramco plans to carry out the scheme in joint venture with at least one foreign partner. If the plans succeed, this year could indeed turn out to be a new beginning for the kingdom's gas sector.

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