* 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
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
"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
"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
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