LUKoil Expanding to Saudi Oil Fields

LUKoil joined a small club of foreign energy firms with a foothold in Saudi Arabia on Monday, announcing a deal to find and pump gas in the world's top oil-producing nation.

The project is small by the standards of Saudi Arabia's immense hydrocarbon reserves, but it creates a potentially useful new link for producer cartel OPEC's leading member with the world's No. 2 oil exporter.

Despite its growing importance as a producer, Russia is outside the OPEC fold, and has been building ties with the United States and other big energy consumers. Monday's deal follows a symbolic trip to Moscow in September by Saudi Arabia's de facto ruler, Crown Prince Abdullah.

"It gives them a good alliance with the Russians, a good base for further cooperation," said a Western oil executive in Saudi Arabia.

Saudi Arabia's oil ministry said the bids were assessed on strictly technical criteria, and that it would announce two further deals on Wednesday this week.

Part of a scaled-down version of a much larger project abandoned by U.S. giant ExxonMobil last year, LUKoil said its deal would create a joint venture with state-run Saudi Aramco, in which it would hold 80 percent and Saudi Aramco 20 percent.

Riyadh presented the three areas totaling 120,000 square kilometers last summer, in a bid to reignite investor interest in gas exploration after the collapse of much of Riyadh's $25 billion natural gas opening plan.

Saudi Aramco will be a partner in all three, which are in the South Ghawar region, and roughly cover the acreage originally offered to Exxon Mobil in negotiations that broke down last year.

LUKoil's winning bid covers Block A, a 29,900-square-kilometer area.

While Saudi Arabia's vast oilfields remain in state hands, Riyadh wants foreign investment in the gas sector to fuel rapid growth in gas consumption.

Riyadh's gas auction follows two years of direct negotiations with multinationals for three huge industrial projects that collapsed last year.

The sole survivor was a $2 billion exploration and production deal awarded to European majors Royal Dutch/Shell and Total.

Shell's project covers some 210,000 square kilometers of Empty Quarter desert, and is also a scaled down deal, a remnant of the $5 billion Shaybah venture the companies had negotiated for five years.