Press reports of recent months have had the initiative pinned into a corner, broadcasting stories of insurmountable differences between the two sides. Increasingly frequent off-the-record briefings have nudged key areas of disagreement into the limelight.

But the fundamental message coming from both camps is clear: the political will is stronger than ever to seize the initiative and make this project a firm success. Crown Prince Abdullah and Foreign Affairs Minister Prince Saud al-Faisal are working overtime to see the negotiations through. Influential Western and Saudi sources have confirmed to MEED their belief in the scheme and insist that all outstanding issues can be resolved soon.

If proof is needed of the two sides' commitment, it can be found in the money already spent by the IOCs and in the importance of the proposals to the kingdom. Of the two leading IOCs, the US' ExxonMobil Corporation has reportedly spent some $150 million setting up in the kingdom and has taken several floors in Riyadh's space-age Faisaliyah tower, while the Royal Dutch/Shell Group is understood to be spending around $30 million a month on the projects.

Equally important is the news that Saudi Aramco, which will play an active role in all three core ventures, is moving forward with its own investment in support facilities for the gas initiative.

The pressure is on. 'This project represents massive investment into the kingdom and is vital for our economy,' says a senior Saudi source. 'Besides, it has the names of the crown prince and the foreign minister on it. We need to have an initiative that will not only prove sound in five years' time, but will look good now.'

The implementation agreements involve the fiscal and regulatory terms of all projects in the three core ventures, which are expected to involve an initial investment of at least $25,000 million. They are to be followed by the project agreements, which will be more detailed and based upon engineering feasibility studies and project finance. This phase is to be concluded six-nine months after the signing of implementation agreements.

The level of flexibility in the 2 March deadline is greater than has often been asserted. A letter from Petroleum & Mineral Resources Minister Ali Naimi to the IOCs in January reportedly stated that negotiations could not be allowed to drift beyond that date. However, Western sources say they expect agreements to be made in principle by the deadline and envisage a more detailed conclusion around mid March. 'But there won't necessarily be a big signing ceremony,' says one. 'They're all big boys and do not need to wave paper to the crowds.'

The most pressing issue is the 15 per cent internal rate of return that the IOCs aim to achieve, in which the deciding factor is the upstream element of the programme. The two sides have different perceptions, both of what was originally put on the table, and of the quantity of gas now on offer.

Western oil sources say that non-associated gas reserves in Aramco concession areas formed a part of the kingdom's initial offer. All Aramco gas reserves are now strictly off-limits to IOC upstream production. However, it is envisaged that Aramco gas will be made available for the early stages of the downstream elements of the initiative.

Of more substance is the interpretation of initial seismic surveys. Industry sources say the IOCs can only confirm the presence of 20 per cent of the 35 trillion cubic feet reportedly estimated by Aramco. Until further drilling is conducted, the top negotiators must decide which interpretation of the data is more convincing. Concessions must be made, but both sides are eager to avoid appearing weak too soon, while wishing to maintain a realistic approach.

The IOCs have made issue out of other logistical difficulties. They claim their gas will be uneconomical compared with that produced by Aramco. The complex geological nature of their acreage will increase the base production cost, they say, while the distance between the blocks and the downstream elements of the scheme will add further expense. Such issues will shape the agreements on Aramco's upstream stake, expected to be 10-20 per cent of profits, and the tax regime, which could move as high as 85 per cent if profits soar.

Downstream, the projects are flowing more smoothly, but tricky waters have still to be navigated. The three core ventures are expected to include two desalination plants of 150 million gallons a day (g/d) and one of 75 million g/d. Another, of 40 million g/d, has yet to be confirmed. Also under consideration is one 2,000-MW power station and two 1,000-MW power stations. Worldscale ethane crackers are to be built at Jubail and Yanbu, with a total capacity of 3 million-4 million tonnes a year.

Saudi sources say Aramco has guaranteed to supply gas for downstream elements of the scheme at an initial rate of $0.75 a million BTU until the IOCs can produce their own. They also say the government has guaranteed to offtake power and water for the lifetime of the project and to cover potentially expensive transmission costs. But the finer details of these arrangements have still to be hammered out. Executives at the IOCs say they appreciate that it will be difficult to secure cast-iron guarantees over the lifetime of the proposed projects. More important to them is the assurance that the basic financial structure will be sufficient to ensure the possibility of a strong profit margin.

The roles of Saudi Basic Industries Corporation (Sabic), the Saline Water Conversion Corporation (SWCC) and Saudi Electricity Company (SEC) must all be further defined. Sabic was understood to have been seeking a share as high as 50 per cent in the petrochemical elements, but is expected to settle for a smaller stake. SEC and SWCC are expected to participate without an equity share. However, other investors, both foreign and domestic, could be offered holdings in downstream ventures.

Sabic's share is most likely to come in the form of joint ventures with its existing affiliates. Saudi Petrochemical Company (Sadaf) is a strong contender to participate based on its existing ethylene capacity and the fact that Shell owns a 50 per cent stake in it. The same logic applies to two companies in which ExxonMobil is the joint venture partner: Al-Jubail Petrochemical Company (Kemya) and Yanbu Petrochemical Company (Yanpet). The IOCs are understood to be pushing for more control over the marketing aspects of the proposed new companies. With the existing ventures, Sabic tends to have the last word on marketing issues.

The cut and thrust of negotiations reflect more sweeping changes in the kingdom. Reforms in foreign investment policy, taxation, company and markets regulations, and the power and water sectors underlie the whole process. The recent establishment of a power regulator and the rapidly approaching formation of a dedicated water ministry have given added momentum to the initiative.

'The formation of the electricity regulator is a big step forward for us,' says one IOC official. 'It gives us an agency to interface with on the big questions that matter to all private utilities. The sooner the water ministry gets going the better. We all want to know what tariffs will be for both products.'

The gas initiative negotiations have acted as a catalyst for the reform process. Fareed Zedan, governor of the new power regulator, and Abdullah al-Hussayen, the head of SWCC, have both confirmed that the initiative has provided templates for the reform of their own sectors. 'The negotiations have explored many issues common to all private water projects,' says Al-Hussayen. 'As such, they cast a light upon many aspects of future projects with the private sector.'

The complexity of the gas initiative is completely unprecedented in both conception and scale. 'It doesn't bother me that some deadlines may slip, because this initiative involves lots of money, lots of companies, lots of ministries and lots of projects,' says a senior Riyadh-based economist. 'The unique nature of the proposals means that every aspect takes a lot of discussion. From hydrocarbons production - off-limits for foreigners for two decades - to economic decisions all along the value chain there are tough choices. It practically equals in size all foreign investment here over the last 25 years. I can't see it not going ahead.'