Shell Inks Key Parts of Saudi Gas Deal

Shell and Saudi Aramco earlier this week initialed the shareholders agreement for a gas exploration and development project worth $2.5 billion to $5 billion. "A major portion of the commercial framework is ready," a Shell executive close to the negotiations said.

Shell holds a 40% equity stake in the company that will explore for gas in Saudi Arabia's "Empty Quarter" along with Aramco, which has 30%, and Total. Both sides expect board and government approval in time for a final signing mid-November.

The executive declined to give details of the terms, but said the contract covers offtake agreements, parental company guarantees, arbitration and tax regime.

One sticking point had been the price Aramco would pay for any gas produced from the fields. The government heavily subsidizes water and electricity - the area of the most gas use - and sets gas prices at 75 U.S. cents a British thermal unit, well below market rates.

But the executive said Shell would recoup any losses on gas by selling highly profitable and costly associated condensates at export prices. "Gas pricing won't have an impact," he said. "The value of the deal is in the price of liquids."

Boosting gas supplies is a pressing issue in the kingdom where it's a chokehold on the domestic petrochemicals industry.

The kingdom also needs gas to feed new desalination and power plants. Cities suffer from regular brownouts and water shortages because of a massive population boom in the past decades.

Last July, Aramco and Shell announced a breakthrough deal allowing foreign firms back into the upstream sector since nationalization 30 years ago.

The project included what was left of an ambitious $25-billion three-part, integrated gas, power and water desalination plan that fell apart because of a mix of politics and economics.

The Saudis repackaged the deal, stripping out the upstream exploration from the downstream utilities and have offered the remaining blocks for bid. But some still question the chances of the new project working because there are no proven reserves in the blocks being offered and there's little political will to increase water or electricity prices to help lure investors in downstream utilities.