Gas Talks Could Lead to Lucrative Foothold in Saudi Arabia

The talks will center around proposals for developing the Saudis' natural gas infrastructure.
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Representatives of the leading U.S. and European oil companies will head to Saudi Arabia over the next two weeks for energy talks that could pave the way to establishing a lucrative foothold in the kingdom's natural gas sector.

Mark Moody-Stuart, chairman of

Royal Dutch/Shell

, the world's second-largest oil company, will be the first representative of 10 oil companies to meet with the Saudis when he arrives in Riyadh on Saturday for talks with the

Saudi Supreme Council for Petroleum and Mineral Affairs

.

Those talks will center around proposals for developing the Saudis' natural gas infrastructure and could lead to a deal that in the next 12 months would likely be in the multibillion-dollar range, analysts said.

For the Saudis, such a deal would allow them to capitalize on their huge untapped natural gas reserves without having to make any capital investments. They could then use some of the natural gas to satisfy local energy needs, which would free up more oil for export.

For the negotiating companies, which include

ExxonMobil

(XOM) - Get Report

,

BP Amoco

(BPA)

,

Conoco

,

Chevron

(CHV)

and

Phillips Petroleum

(P)

, developing Saudi Arabia's natural gas infrastructure would provide a consistent rate of return on a relatively low-risk project, as well as the opportunity to build their relationships with one of the dominant players in the global energy market.

"The majors would like to be involved where they can invest their capital with relatively low risk at attractive returns," said Gene Gillespie, an analyst at

Howard, Weil, Labouisse

, a research firm in Louisiana. "This type of project could offer returns in the mid teens, about 14% to 15%."

Stocks in oil and gas companies have lately been climbing back as crude oil prices have started to moderate due in part to improving refining margins. Last month, crude oil surged to more than $34 a barrel as inventories shrank and supply concerns mounted. Crude closed at $25.45 a barrel Friday.

On Friday, however, the

American Stock Exchange Oil & Gas Index

was off 11, or 2%, at 487 as the overall stock market fell sharply. (The Oil & Gas Index closed down 10, or 2%, at 487.)

Tim Evans, a senior energy analyst at

Pegasus Econometric Group

, said that under the terms of an agreement, the winning oil company or companies are likely to either operate a turnkey project -- whereby it would build the pipeline system, put the infrastructure in place and then hand it over to the Saudis for a paycheck -- or agree to perform the work in exchange for a share of the production.

By sharing in production, oil companies could benefit from selling liquefied natural gas to such importers as Japan at a time when demand for natural gas as an alternative energy source is expected to increase.

Fadel Gheit, an energy analyst with

Fahnestock

, said that within 10 years, natural gas could account for 45% to 50% of the world's energy needs compared with 40% currently. And Saudi Arabia, with its huge reserves, could become a more formidable player in the market.

"Saudi Arabia's share of the world gas supply is 2%, compared with its 10% share of the oil market," Gheit said. "They could easily double or triple their gas production."

A deal would also enable the oil companies to get in on future Saudi deals and become closer to the largest oil-producing nation in the world.

"If an oil company could get a toehold in there, you might be looking at a lot more deals in the future based on the relationship," Evans said. "It makes it easier to make a causal phone call and ask, 'What are you looking at for the next

OPEC

meeting?'"

But Evans and several other analysts fell short of saying they expected the companies to gain a piece of the country's crude oil market since Saudi Arabia has little interest in ceding any of its control over exports or pricing policy.

No matter. For the oil companies, it appears that any chance to strengthen their position in the lucrative Saudi energy market is an opportunity worth taking, no matter how limited.

As Howard Thill, a spokesman for Phillips Petroleum, said, "We're interested in going into Saudi Arabia in whatever capacity they see fit."