Massive reserves opened to international development.

Saudi Arabia's hydrocarbon reserve levels are not normally the kind of thing that causes much anxiety in the oil-rich "Kingdom" itself, the world's top crude producing nation. With enough oil reserves in the ground to leave all its rivals gazing with envious eyes at its predicted reserve levels in several decades time, the Kingdom is however not resting on the laurels that nature has gifted it.

It is gas that is occupying the thoughts and long-term planning of the Kingdom's Cabinet and Ministry of Oil & Mineral Resources.

The opening up of its prized upstream natural gas sector has become something of a matter of pride to the Saudi leaders following several years of stale and eventually failed negotiations over the much-heralded Saudi Gas Initiative, an integrated investment scheme coupling upstream gas exploration and production with downstream utilities and petrochemicals investments led by ExxonMobil and Royal Dutch/Shell.

Last summer, Shell and Total SA finally won the rights to set up a joint venture with the state-run Saudi Aramco to explore and produce gas in the southern deserts of the Empty Quarter (Rub al-Khali in Arabic).
The deal was the first to emerge from the defunct gas initiative. Several others had collapsed after the Saudi government and three foreign consortia could not agree commercial terms.

It stemmed from a slimmed down version of the US $5 billion Shaybah venture that Shell and Total had been negotiating for 5 years. The Shaybah project originally included pipelines, power plants and water desalination projects, which will now be tendered separately.

Shell and Total, however, held on determinedly to eventually salvage their exploration-only deal. As a result, they will be the first western oil companies issued E&P rights since the Kingdom nationalized them in the 1970s. The project could see up to $2 billion invested to develop an 80,757-sq-mile (209,160-sq-km) block in the southern part of the desert. Shell will hold 40% of the project, with Total and Saudi Aramco holding 30% each.

Under a new income tax bill, foreign firms investing in the natural gas sector will pay taxes of 30%-85%, depending on the companies' internal rates of return.

Shell/Total's success paved the way for others to follow, with Russia's Lukoil, China's Sinopec and a partnership of Italian oil company Eni and Spanish oil company Repsol now following suit.

The link up between Russia and Saudi Arabia in particular is of great significance, as the agreement forges the first substantial upstream link that could pave the way for increased co-operation between the two oil superpowers.

Based on the results of the open tender, Lukoil was granted the right to conclude an agreement with the Saudi government to explore and develop natural gas and gas condensate deposits in Block A.
To implement the project, a joint company involving Saudi Aramco will be established within a month, with Lukoil holding an 80% stake.

A 40-year concession agreement for Block A, which covers nearly 11,582 sq miles (30,000 sq km), is expected to be signed this month.

The oil ministry said the bids were assessed on strictly technical criteria.

However, China is equally as important a player as Russia. The winning of a contract by China Petroleum & Chemical Corp. (Sinopec) to explore and develop gas fields in Block B south of the Ghawar oil field was expected. As with the Lukoil deal, Sinopec will set up a joint venture company with Saudi Aramco. China's second-largest oil producer will own 80% of the venture, with Aramco again holding 20%. Block B measures some 14,672 sq miles (38,000 sq km).

However, this contact is believed to cover an initial period of only 10 years for exploration.
The last of the trio, Eni/Repsol, will partner under the same 80/20 terms with Saudi Aramco to explore and develop gas reserves in Block C, a 20,077-sq-mile (52,000-sq-km) area in the Empty Quarter.

"Saudi Aramco is very pleased to have another opportunity to partner with international oil companies," said Saudi Aramco President and Chief Executive Officer Abdullah S. Jum'ah. "We look forward to putting forth our best efforts to leverage the Kingdom's natural resources. We recognize the importance of natural gas to the future of the country, and it's gratifying to see ourselves participate in this endeavour," he added.

Saudi Arabia needs these new gas projects to fuel power plants and water desalination stations and to increase production of petrochemicals as it expands economic development beyond pumping crude oil.
Domestic demand for gas is growing in the kingdom by 3.7% a year. Saudi Arabia's total proven reserves currently stand at 230 Tcf, but these are set to increase as a new wave of exploration sparked by this latest batch of agreements gets underway this year.

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