Steve Quayle News Alerts

Sept. 9, 2002
By Bhushan Bahree and Thaddeus Herrick

— In a move with implications both for U.S.-Saudi relations and the profits of Western oil companies, Saudi Arabia has said it won’t open its most promising natural-gas fields to the companies, say people close to talks on such an opening.

THE MOVE appeared to all but end a yearlong plan by the companies to invest $25 billion in Saudi Arabia, in what was billed as a historic reopening of the kingdom’s petroleum sector. Saudi Arabia has produced all of its own oil and gas since the 1970s, when it bought out four U.S. oil companies’ interests in Aramco. Western oil companies haven’t been allowed to produce oil or gas within Saudi borders, though there is some Western ownership of Saudi petrochemical plants.

‘ABSOLUTELY NOT’
Besides drilling for gas, Western oil companies were expected, under the plan being negotiated, to build and operate large power, water and petrochemical complexes inside Saudi Arabia.

Saudi Foreign Minister Prince Saud al-Faisal outlined the kingdom’s new stance last week in a letter to the oil-company consortia, led by Exxon Mobil Corp. and Royal Dutch/Shell Group. On the key issue of opening its premier fields to non-Saudi companies, the letter “said absolutely not,’ ” according to one oil-company official.

Instead, the Saudis are offering less-significant regions for natural-gas exploration and production. But the oil companies feel these areas wouldn’t yield sufficient income to merit the multibillion-dollar investments they would have to make in desalination and other projects.

The sides haven’t begun talks on a scaled-down program. Yet the foreign minister’s letter said the Saudis want bargaining to be completed by early October, and are prepared to open the projects to bidding if necessary. With their new offer of less-desirable drilling acreage, “the deal is now either take it or leave it,” said a Saudi source.

U.S.-Saudi relations have been under increasing tension in the wake of the Sept. 11 attacks, Israeli-Palestinian violence and U.S. talk of unseating Saddam Hussein. One issue is whether the Saudis are doing enough to thwart terrorism. Another is Saudi unwillingness to cooperate in any U.S. military move against Iraq.

Still, U.S.-Saudi military relations have been on the upswing in some ways, say U.S. defense officials. For instance, the Saudis have been quicker to grant overflight and landing rights to U.S. planes, say U.S. Air Force officials.

Saudi officials say politics haven’t played any role in the gas talks. But political developments have worked against the projects, as sentiment in some Saudi circles has turned against the U.S. That has strengthened the hand of those who oppose any significant foreign presence in gas or oil production. “People in Saudi are afraid of being seen to favor Western oil companies,” says one oil executive.

SHARP CHANGE
This is a sharp change since the gas initiative was broached four years ago by the kingdom’s effective ruler, Crown Prince Abdullah. It was a way to bring the Saudis badly needed jobs and also to give the U.S. and allies a greater economic stake in the kingdom in the event of increased hostilities.

On the oil front, the Saudi move is a troubling one for an industry in need of new exploration sites. Big U.S. and European companies were willing to build and operate the costly water and other plants in return for entree to the world’s premier petroleum provinces. These included the Eastern province, home of the giant Ghawar field.

Relatively high and stable oil prices in recent years have given big oil companies plenty of free cash for investment. Exxon Mobil has some $6 billion on hand, and Shell about $4 billion. But some of the richest oil lands, such as Iraq, Libya and Iran, remain off-limits to U.S. companies because of economic sanctions. (Shell, while not an American company, has large assets in the U.S. and is cautious about antagonizing Washington.)

Established U.S. and North Sea oil areas are in decline, and new exploration zones in Russia and Africa have proved politically challenging. Oil companies have been using cash to buy back shares rather than invest in subpar projects.

Besides Exxon Mobil and Shell, the negotiations with the Saudis have involved BP PLC, France’s TotalFinaElf SA, Marathon Oil Corp., Occidental Petroleum Corp. and the two companies newly merged into ConocoPhillips. The largest of the plan’s three segments was a $15 billion project led by Exxon Mobil, with Shell, BP and ConocoPhillips as partners. It involved building a gas processing plant, doing some gas production to feed a petrochemical operation and building a string of water and power plants.

LOW RATES OF RETURN
The companies couldn’t take any oil out. Rates of return on building and operating the plants would be low. The companies’ chief hope for significant profits was to find gas cheaply-gas they would sell to Saudi Arabia or use to run the plants they had built. The companies expected eventual 15%-plus returns for the three large integrated projects.

The second of these was also to be led by Exxon Mobil, whose chief executive, Lee Raymond, has been personally involved in negotiations. Exxon Mobil, based in Irving, Texas, didn’t return phone calls seeking comment. The companies involved in the initiative, citing a confidentiality agreement with the Saudis , have declined to speak on the record about the projects. Shell was to be the leader of the third project.

While the largest companies, such as Exxon Mobil, Shell, BP and TotalFinaElf, may give up on the projects after this development, it is possible one or more of the somewhat smaller companies will try to cobble a deal together. A Saudi foothold would represent something of a coup for Occidental, Marathon or ConocoPhillips. It is also possible the talks will continue past the October date by which the Saudis hope to have them completed.

“We’d be interested in evaluating projects that might come our way,” said an executive representing one of the three smaller U.S. companies, adding that the Saudis would have to provide an acceptable rate of return.

http://www.msnbc.com/news/805420.asp