INTERNATIONAL oil companies await the government's response to their proposals for the development of Saudi Arabia's oil and gas resources, more than a year after Crown Prince Abdullah invited to them to submit suggestions for development. But the signs are that the waiting period may finally be drawing to a close. A ministerial committee set up to consider the country's energy strategy is preparing to present its evaluations to Abdullah - regarded as the driving force behind the process - by the end of October. Formal negotiations about new investments could begin before the end of the year.

The specially formed committee, chaired by Foreign Affairs Minister Prince Saud al-Faisal, is studying investment proposals from several of the world's major oil companies including the US' Exxon, Conoco, Chevron, Texaco, Mobil and Europe's TotalFina, Royal Dutch/Shell, Elf and Eni. BP Amoco remains a notable absentee.

Al-Faisal has said negotiations with international oil companies would begin as soon as Abdullah has scrutinised the proposals, but analysts expect a more tortuous process as a range of forces are lined up against them. State energy group Saudi Aramco and other powerful figures within the government, notably Petroleum & Mineral Resources Minister Ali Naimi, himself a former Aramco chief, are known to be far more sceptical about the need to let foreign developers in.

'The discussions are trundling along slowly. A first committee at the oil ministry level was very dismissive of the proposals, but the new committee is at cabinet level and is likely to be more favourable,' says an energy analyst.

International oil companies are under no illusions that they will be granted early access to the country's much-prized upstream acreage. Most would also concede that with 2 million barrels a day (b/d) oil production capacity shut in already, Aramco has no urgent need for any outside investment in exploration and development activity. The government is therefore focusing on proposals for developing the downstream, and bringing international capital and expertise into the gas and power sectors.

Since the invitation for investment proposals was first announced in October last year, the oil majors have waited on the sidelines as policy- makers fought a behind the scenes battle over the likely extent of any foreign investment in hydrocarbons. Saudi decision-makers have had to weigh the urgent need to tap outside capital to develop downstream gas, petrochemicals projects and power generation capacity against the rather humbling realisation that it will have to change a policy of 25 years standing that has limited the foreign presence to minor concessions in the Neutral Zone adjoining Kuwait. 'It's a dilemma for the Saudis. There is an obvious need to get cash, while on the other hand, there is a nationalistic 'we can do it ourselves' attitude,' says Leo Drollas of the Centre for Global Energy Studies.

At a technical level, Aramco has argued that it already has the expertise to handle the development process on its own. The problem comes down to one of cash. With Saudi domestic debts equivalent to more than 100 per cent of gross domestic product (GDP) and debt service payments reaching more than $7,000 million in 1998, the scope for raising the capital internally to develop gas is limited.

The pressure on policy-makers to speed up development of gas resources is mounting. Gas is far less developed than oil and analysts estimate that the development of non-associated reserves may need up to $7,000 million in investment. Around 300,000 b/d of oil is currently burned in power generation, which analysts say would have much greater value if it were exported as crude or refined products. The opportunity to invest in integrated gas networks may also prove attractive to the oil companies as it could open the way toeventual access to prized upstream gas development.

Analysts expect gas to figure highly in future plans, pointing to the notable absence of BP Amoco, which is less focused on gas than some of its competitors, from the field of suitors. Groups like Mobil and Shell have been more gas-oriented for some time.

Gas will also be the centrepiece of any serious attempt to diversify the economy, which is an absolute priority if growth is to be stimulated. But if commercial investment in gas is to be encouraged, its current pricing structures may have to be radically overhauled. At present, Aramco charges 75 cents per million British thermal units (m/btu), which is cheap by international standards. Indeed, one reason cited for Aramco's possible reluctance to develop gas resources more enthusiastically itself is the poor return on investment it receives with prices fixed at this level. Saudi officials say only when the price reaches 100-120 cents per m/btu will it equal replacement costs. One option that is being canvassed is to adopt a dual pricing structure, raising prices and charging users more. However, some observers caution that this might reduce investor interest in downstream activity.

Downstream investment will also be directed towards the power sector. With electricity demand growing by 5 per cent a year, the kingdom faces a financial struggle to pay for the required increases in generating capacity. According to the government's own forecasts, capital investment needs will reach $117,000 million by 2020. But attracting foreign investment will put pressure on the government to speed up reform of the electricity sector.

Plans to merge the 10 existing regional power suppliers have yet to be approved more than seven months after they were presented to cabinet and talks over the charter of the proposed Saudi Electricity Company (SEC) are understood to be proceeding slowly because of differences within government about the likely structure of the new company.

'Foreign capital may be keen to invest in power generation, but only so long as the structure is right,' says James Placke of Cambridge Energy Research Associates. 'The Saudis are doing something about the out-of- date pricing structure and they will need to if they are to ensure an appropriate rate of return on capital.' Other sectors ripe for development are refinery and desalination projects.

Notwithstanding the slow pace of the reforms, international oil companies have reason to be more encouraged about their prospects than earlier in the year. During the summer, Aramco was forced to reconsider investment proposals it had earlier rejected and there are now clear signs that Abdullah and Al-Faisal are firmly driving the policy agenda. Some analysts even argue that allowing outside operators into the kingdom could serve Aramco's own purposes, relieving the company of the need to tap the international debt market once more. They suggest that an opening to foreign companies could be made without letting foreign companies get their hands on upstream acreage. 'It's easy to overstate the differences between Al-Faisal and Aramco,' says Placke.

It is not just the cash-strapped condition of the Saudi exchequer that is pushing the reforms, however. Aramco still has ready access to international capital markets, as was shown by its renewing a $2,000 million five-year revolving credit facility earlier this year, and it has the technical abilities to complete major grassroots projects. 'Aramco has the capacity to finance new downstream projects, but the question is really whether that is the best way to do it,' says Placke. This would at least suggest that a change to the nationalist stance taken by policy-makers since 1975 - with the Saudis deciding policy themselves, while using foreign companies as service contractors - could be in the offing. 'Saudi Arabia needs more capital but knows it will have to give to get, by offering a share in the development,' says Drollas.

The ongoing negotiations with Japan's Arabian Oil Company over the renewal of its offshore concession in the Neutral Zone provide a useful insight into the direction of Saudi thinking over the development of its energy resources. Despite a Japanese offer of up to $4,000 million in financing and technical assistance for a range of projects, Riyadh is lobbying hard to extract further concessions from the Japanese government in return for a renewal of the licence, which expires in February 2000. Even though the actual size of the concession is relatively modest, producing just 160,000 b/d, the lengths to which the government has gone to link access to upstream acreage to the provision of large-scale downstream investments indicates that foreign oil companies are unlikely to get an easy ride when negotiations finally get under way.

Aramco is meanwhile continuing with a series of projects. Bids are expected during October on a planned grassroots 1,400 million-standard-cubic-feet- a-day gas processing plant at Haradh, estimated to cost $2,000 million. It has also invited bids from international companies to supply the equipment for a 90-MW power plant at Abqaiq. Bids are also expected this month on a natural gas liquids (NGL) recovery unit at the Berri gas processing plant. Progress has been slower over a proposed xylene extraction and processing plant at Jubail after contractors raised objections to the costs of the project, which is planned as a build-own-operate-transfer (BOOT) venture.

If the ideas put forward by international oil companies do win acceptance, the next round of major projects could have a very different complexion.