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Saudi Arabia: Foreign Concerns Make Deals to Search for Gas

by Simon RomeroNew York Times
March 7th, 2004

Saudi Arabian officials said on Sunday that they were seeking to strengthen ties with China and Russia after allowing energy companies from those countries to be among the first foreign businesses to explore Saudi natural gas reserves in more than three decades.

The Saudi contracts are with Lukoil, one of Russia's largest oil companies, and Sinopec, a large Chinese oil and gas producer. They were signed here on Sunday after protracted talks with several large American energy companies had collapsed over differences on terms and amid perceptions of a more distant relationship between Riyadh and Washington.

"There is no question cooperation in the economic field has the secondary benefit of increasing total cooperation," Ali al-Naimi, the Saudi oil minister, said after signing the agreement with Lukoil. Russia is the largest producer of oil among nations that are not part of the Organization of the Petroleum Exporting Countries.

Efforts by Saudi Arabia, the world's largest oil producer, have been exceptionally fruitful within and outside OPEC, with the price of oil climbing to more than $37 a barrel, the highest since the eve of the Iraq war. High oil prices in 2003 allowed Saudi Arabia to deliver its strongest economic performance since 1981, with its economy growing more than 6 percent over the previous year.

Still, Saudi Arabia, even as it remains OPEC's most pivotal member, has been slow in developing natural gas reserves, in contrast with neighbors in the Middle East like Iran and Qatar. In discussing the Sinopec contract, Abdallah S. Jum'ah, the chief executive of Saudi Aramco, the energy company controlled by the Kingdom of Saudi Arabia, emphasized the need for greater foreign investment in gas production.

The relationship with China, the largest importer of crude oil from Saudi Arabia, is "vital and thriving," said Mr. Jum'ah. He also said that Saudi Aramco expected to own a 25 percent stake in a Chinese refinery project controlled by Sinopec.

Saudi Arabia also signed gas contracts on Sunday with two European companies, ENI of Italy and Repsol of Spain. These added to an agreement last year with Royal Dutch/Shell and Total of France to develop other gas projects. The European deals came after a $15 billion proposed gas project led by Exxon Mobil, the largest American oil company, fell apart last June.

While Exxon Mobil and other American companies remain active in Saudi Arabia's petrochemicals and refining industries, the demise of the earlier gas deal highlighted important differences between the Saudi government and American investors. Problems emerged over financial terms and Saudi requests for companies to operate power plants and desalinization projects as well as search for gas. The deal was also scrapped amid growing security concerns after the bombing last year of Western enclaves in Riyadh and as Saudi Arabia's traditionally close ties to the United States have come under increased scrutiny domestically and abroad.

"It is newsworthy that no U.S. companies have been successful in the tender and perhaps more significant that none of the successful bidders have a substantial current portfolio or recent track record in the Middle East," Iain Brown, an analyst at Wood Mackenzie in Edinburgh, said in a report.

Saudi Arabia last year scaled back its ambitions for the gas contracts, limiting them to exploration and production in the Empty Quarter, an expanse of shifting sand dunes in the nation's south. But only one American company, ChevronTexaco, bid, and it did not win a contract.

Energy analysts remain skeptical as to whether the latest agreements, which initially are expected to attract roughly $800 million in investments, will result in any significant increase in Saudi gas production.

With a fast-growing population of about 24 million, Saudi Arabia badly needs more natural gas to meet energy demands. Although it has the world's fourth-largest gas reserves, it has no immediate plans to export gas, leaving it lagging behind countries like Indonesia, Qatar and Algeria that are feeding growing markets in the United States and Europe.

Mr. Naimi, the oil minister, said he expected domestic demand for natural gas to double by 2025 to about 14 billion cubic feet a day.

Plans to increase gas output could also be a sign that Saudi Arabia expects oil prices to remain elevated and easier to sell abroad, since using gas to fuel power plants would free additional oil for export. Saudi Arabia produces roughly 8 million barrels of oil a day and uses about a sixth of that for plants that otherwise could be fired by gas.

In a sign that Saudi Arabia is concerned about finding employment for its citizens, officials at Saudi Aramco said the new gas projects were expected to create 35,000 jobs directly and 150,000 jobs indirectly. Saudi Arabia is struggling with efforts to alleviate unemployment, trying among other things a program called "Saudization" to reserve jobs held by foreigners for Saudi citizens.

Regardless of the outcome of its gas projects, Saudi Aramco signaled Sunday that it expected to emerge from the entire process with a stronger grip on the nation's oil and gas industries. Despite attracting financing from partners in Russia, China and Europe, Aramco officials said they had no plans to let foreigners explore Saudi oil reserves.

"In the end this was a national oil company battling for turf and global influence," said Walid Khadduri, the editor of the Middle East Economic Survey, a weekly newsletter based in Cyprus specializing in the oil business. "They are showing that they won."





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