* Saudi Arabia needs gas to cover domestic power demand
* Lukoil seeks to tap unconventional deposits
* Company says talks underway on new deal with Saudi
By Reem Shamseddine and Olesya Astakhova
KHOBAR, Saudi Arabia/MOSCOW, March 18 Russia's Lukoil is negotiating a deal with the world's top oil exporter Saudi Arabia to tap unconventional gas deposits in the kingdom's "Empty Quarter" desert region, the company's overseas unit said.
Saudi Arabia has kept its vast oil reserves off-limits to foreigners, but needs natural gas to help cover domestic power demand and conserve oil for export. It invited investors a decade ago to find and produce gas in the Empty Quarter region in Saudi Arabia's southeast, also known as Rub Al Khali.
But foreign companies which formed joint ventures with state oil firm Saudi Aramco to look for conventional gas, including Lukoil, Royal Dutch Shell and Sinopec, have failed to find commercially viable deposits beneath the sea of sand dunes.
So Saudi authorities are now seeking to focus the search on unconventional deposits - very deep, high-temperature reservoirs that would require more complex and expensive technologies to exploit.
"The assumptions of the initial gas exploration agreements do not exist anymore because in spite of a decade of exploration, no commercial gas discoveries have been made," said Sadad al-Husseini, a former senior executive at Saudi Aramco.
"Therefore the exploration programme could be redefined as a change to unconventional gas exploration with higher costs and new buy-back terms," said Husseini, who now owns an energy consultancy firm said.
Lukoil is still on the hunt for desert gas and is now evaluating the possibility of production from an unconventional deposit.
"This is tight gas. The negotiations are under way. No details on deal and future production plans yet," said a spokesman for Lukoil Overseas, which operates the group's foreign upstream projects. "Yes, we are hopeful and will continue evaluating drilling after signing a deal," he said.
Because such production would be more expensive than conventional output, the firm is trying to negotiate a higher price with Saudi authorities in its joint venture, industry sources said.
POTENTIAL VERSUS COST
The sources said no deal had yet been reached as further studies needed to be carried out by Lukoil and Saudi Aramco to estimate how much unconventional gas was available.
Saudi Aramco and the Saudi oil ministry were not immediately available to comment.
Husseini said: "At this time there isn't enough data to determine how much gas may be recoverable, what levels of production can be achieved, and what levels of expenditures are likely to be required."
"It appears that the decision-makers may now be thinking that since there are source rocks in the region, there may be some formations where fracking can be successful in generating unconventional gas production," he added.
The higher cost of extracting unconventional gas was not the only obstacle to production - scaling up and sustaining unconventional gas operations at a meaningful level of supply would also present major technical challenges, Husseini said.
Shell told Reuters it was not currently drilling in its Rub Al Khali venture but said it was in regular dialogue with Saudi officials, without elaborating.
An industry source familiar with the matter said China's Sinopec had suspended drilling operations in the Empty Quarter. A Sinopec spokesman could not be reached for comment.
Saudi Oil Minister Ali al-Naimi has estimated that the kingdom has over 600 trillion cubic feet of unconventional gas reserves, more than double its proven conventional reserves.
Saudi Aramco has embarked on an unconventional gas programme and has made appraisals and drilled in a few areas. (Additional reporting by Aizhu Chen in Beijing; Editing by Pravin Char)