ConocoPhillips decides to opt out

Fahd al-Frayyan

Royal/Dutch Shell and Total on Wednesday won the first western oil company rights to Saudi Arabia's huge energy reserves since the kingdom nationalised them in the 1970s.

The Saudi Press Agency, Shell and Total announced the gas development deal covering 200,000 square km (77,000 square miles) in the southern part of the vast Empty Quarter in the heart of the desert nation.

The agreement is a scaled down version of the $5 billion Shaybah project that Anglo-Dutch Shell and its French partner Total have been negotiating for over five years, and will be seen as a coup for the European giants over their US rivals, who have made less progress in the Middle East.

It comes barely a month after Saudi negotiators terminated talks on a separate $15 billion gas project with a consortium led by Shell's arch-rival, the world number one Exxon Mobil.

Exxon Mobil and Saudi Arabia could not agree on financial terms, and large parts of the contract are to be re-tendered in London next week.

Shaybah originally included pipelines, power plants and water desalination projects. These will now be retendered separately.

No value was given for the scaled-down deal, but analysts put it at about $2 billion.

Shell will have 40% of the project, which it will lead.

Total and state company Saudi Aramco will have 30% each. ConocoPhillips, which was involved in the original Shaybah negotiations, decided not to join in, Shell said.

The project is not large by the standards of Shell and Total, which as the world's second and fourth largest oil companies make capital spending commitments of over $10 billion each year, but it offers them an upstream foothold in the world's biggest hydrocarbon reserves.

``It's positive from a strategic point of view and may be better without the downstream stuff because they weren't really interested in that anyway, but there will be question marks over whether they are getting a good return,'' said analyst Jon Wright of Citigroup.

Large oil companies typically expect to get a return on their investment of about 15%, but analysts say other deals that foundered in the negotiating stage did so because Saudi Arabia was offering only 12% or less.

Oil Minister Ali al-Naimi called the news ``an important step and strong beginning in the area of global investment in the gas exploration and production operations in the kingdom ordered by Crown Prince Abdullah.''

The head of Shell's core oil and gas division, Jeroen van der Veer, called the deal with the world's top oil and gas nation ``historic''.

``This agreement is an important breakthrough,'' he said.

``Shell, on behalf of the consortium, is naturally proud to be part of this historic moment.''

Total's executive vice president of exploration and production, Christophe de Margerie, added: ``This agreement constitutes an important step in Total's strategy in the Middle East.''