Delay Saudi Gas Projects*
[Reviewed]

February 19, 2002

Long-Awaited Deal Over Petroleum

In Saudi Arabia Still Faces Barriers

By BHUSHAN BAHREE and JAMES M. DORSEY

Staff Reporters of THE WALL STREET JOURNAL

A historic reopening of Saudi Arabia's petroleum industry to Western investment is proving harder than anticipated to negotiate.

Nearly nine months after signing preliminary agreements in a much-publicized ceremony in Jidda, the Red Sea port city, talks between officials from Saudi Arabia and the three winning consortia have reached an impasse. The disagreements are over access to natural-gas fields and key financial terms that would apply to anticipated investments of about $25 billion in the integrated projects. A March 2 deadline for the final implementation agreements is now in danger of being missed, much as a Dec. 16 deadline was, despite high-level efforts to break the deadlock.

"We're ready to sign an agreement, but it must provide for the proper rates of return," said one senior company official who is familiar with the negotiations. "The rate of return is the make-or-break issue," said another company official.

These people, and others familiar with developments, said the key outstanding issue was how to apportion reasonable rates of return in the various individual investments that go to form the integrated projects. These projects involve exploring for and pumping natural gas, and using the gas to produce chemicals, generate electricity and desalinate water. The companies, including Exxon Mobil Corp. and Royal Dutch/Shell Group, insist that when taken together, each integrated project should yield returns of between 16% and 18%.

There are other unresolved issues, including the adequacy of the acreage being offered for exploration and the extent of the participation by Saudi Arabia's national champions like Saudi Aramco, the state petroleum company, and Saudi Basic Industries Corp., the petrochemicals company.

On Monday, Saudi ministers led by Prince Saud al-Faisal, the country's influential foreign minister, were due to meet in Los Angeles with Lee Raymond, chief executive of Exxon Mobil, which was chosen to head two of the three consortia for Saudi gas projects. People familiar with the situation said the meeting also was expected to be attended by Saudi Arabia's ministers for oil, finance, planning and industry. They said that the ministers weren't gathering in Los Angeles exclusively for talks with Mr. Raymond, but also to meet with Prince Saud in California, where the foreign minister maintains a private residence and where he now is for medical reasons.

Both Mr. Raymond and Phil Watts, chief executive of Royal Dutch/Shell, have held meetings with important Saudi officials in the past month. Shell leads the third consortia to develop Saudi Arabia's gas resources.

Despite the impasse over terms, neither side is showing any sign of walking away from the prestige projects. Indeed, both Saudi and oil-company officials say the disagreements aren't unusual in negotiations involving such large projects.

"Discussions are continuing and, not surprisingly, they are quite intense because we are talking about major, major investments from molecules to electrons, from the upstream gas through the distribution to downstream projects," Shell's Mr. Watts said at a news conference earlier this month. "That's taking time; whether or not it will slip past the March date that was announced in December I wouldn't like to speculate at this moment," Mr. Watts said.

The assessment from Saudi Arabia is similar. "The companies have their demands, and the state has its demands," Ali Naimi, the Saudi oil minister, was quoted yesterday as saying by the Middle East Economic Survey, a weekly with close knowledge of the region. "We are trying to sort out these demands into an agreement," Mr. Naimi said. "I don't call this a dispute."

Still, more than three years have now passed since Crown Prince Abdullah, the de facto ruler of Saudi Arabia, first broached the idea of massive Western investments that would help diversify the kingdom's economy and tie it even closer to those of the U.S., for long a crucial political ally, and Europe.

Saudi Arabia is the world's largest oil producer, with about one-quarter of the world's proven oil reserves. The kingdom has been unable to wean itself from heavy reliance on revenue from oil exports, whose value fluctuates with oil prices. Faced with relatively low oil prices since the Sept. 11 terrorist attacks in the U.S. and a slowdown in the global economy, the Saudi government anticipates a budget deficit of about $12 billion this year despite a 20% reduction in planned spending. The Saudi population is growing at 3.5% annually, and the economy already is unable to provide jobs for nearly a third of its rapidly growing male population.

The crown prince, who has made his country's economic problems a priority, may now have to step in to ensure an agreement with the oil companies, people close to oil companies said. He has got a lot riding on these projects, including his reputation as an economic reformer, they said.

Write to Bhushan Bahree at bhushan.bahree@wsj.com1 and James M. Dorsey at jmdorsey@attglobal.net2

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