Message-ID: <26692747.1075843939343.JavaMail.evans@thyme> Date: Wed, 20 Dec 2000 01:04:00 -0800 (PST) From: rick.bergsieker@enron.com To: mike.mcconnell@enron.com Subject: Your Meeting with Oxy Cc: terence.thorn@enron.com, rob.stewart@enron.com, eward@naseej.com.sa, brenda.johnston@enron.com, song.shan@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: terence.thorn@enron.com, rob.stewart@enron.com, eward@naseej.com.sa, brenda.johnston@enron.com, song.shan@enron.com X-From: Rick Bergsieker X-To: Mike McConnell X-cc: Terence H Thorn, Rob Stewart, eward@naseej.com.sa, Brenda J Johnston, Song Liang Shan X-bcc: X-Folder: \Mark_McConnell_June2001\Notes Folders\Discussion threads X-Origin: MCCONNELL-M X-FileName: mmcconn.nsf I understand that you will be meeting with Dale Lawrence and Casey Olson from Oxy on Thursday, and that Terry will be briefing you on the Saudi project opportunities first thing Thursday am and will be participating with you in the meeting. After re-reading the Saudi proposals today, I offer the following thoughts and suggestions for your meeting. Terry can fill you in on more details. Background The Saudi Gas initiative was kicked off by the Crown Prince during a visit to the US in the fall of 1999. The intent was to encourage foreign investors to bring capital and technology into the country to build a privatized gas, power and water infrastructure system and to create jobs and investment opportunities for Saudis. The initiative is being led by the Foreign Minister because the Crown Prince is aware of resistance from Aramco, the Oil Ministry, Saudi Electric Co and Saudi Water Co. In spite of continuing resistance from these very powerful groups, the initiative is moving forward essentially on schedule. When the initiative was first announced, Enron tried to get onto the shortlist but was told that we would not qualify because we did not have adequate international upstream expertise. At the same time, Oxy tried to get onto the shortlist but was told that they did not have adequate downstream/infrastructure expertise. Oxy approached us to form a partnership, which we did in good faith but with no written agreement. We still have not signed an agreement with Oxy, but we have traded many drafts and are within days of executing an agreed MOU. We have been working together in good faith on orally agreed terms consistent with the draft MOU. Oxy and Enron are a good fit because Oxy shares many of the Enron values (urgency, bottom-line focus, objective is money, not necessarily booked reserves, etc.) Oxy has made it clear that they are primarily interested in upstream investment in Saudi and we have made it clear that we are not interested in upstream investment. Oxy understands the recent changes in philosophy in Enron and is ok with this, but at the same time they are worried that we may not want to put any capital in Saudi and thus could jeopardize Oxy's competitiveness in the upcoming beauty pageant. Oxy maintains that throughout the process, Dr. Irani's personal friendship with the Saudi Foreign Minister has been a big driving force in moving our proposals forward. There is probably some truth to this. However, at the same time, it is clear to both Oxy and to Enron that the Saudi bureaucracy is more intrigued with Enron than with Oxy and want to find a role for us. Since all of our presentations to the Saudis have been joint Oxy/Enron presentations, the Saudis view us as linked together. This is a huge deal for Oxy and the dream of a lifetime for Irani. They are afraid that if Enron drops out (which we have the clear right to do), the Saudis may disqualify Oxy. I believe that their fears are justified----I can't imagine the Saudis allowing Oxy to proceed alone without Enron. Proposed Way Forward We and Oxy have been shortlisted, along with several other oil companies for two projects: -Core Project 2, which is an E & P opportunity on the Red Sea coast near Jordan, combined with a gas/liquids processing plant, a pipeline, a potential power/water plant and a potential petrochemicals facility. The market area on the Red Sea coast has huge growth potential. -Core Project 3, which is an E & P opportunity in SE Saudi near the UAE border, combined with a pipeline to eastern Saudi, a liquids plant, and several potential downstream facilities. There is the potential to export this gas to the UAE/Dolphin, but it is a long shot. Terry can give you details on both of these proposed projects. Each of these projects will require several billion dollars of capital and they each have large upstream components. The marketing network potential (both within Saudi and internationally) is huge, but the dilemma is to carve out a role for Enron that fits with our corporate philosophy. I understand that Dale Lawrence has proposed to you that we tell the Saudis that Oxy/Enron want to proceed as joint partners and then settle up "behind the veil" such that the upstream capital and risk are Oxy responsibilities. I don't like this approach because the press won't see beyond the veil and will report it as Enron being a 50/50 partner in one or two $4 billion deals in Saudi. On the other hand, I want to be in these projects because the potential in Saudi is huge and the EGM spin-offs (liquids, etc.) could also be huge. I believe that there is a simple way to address both our needs and Oxy's needs. The Saudi proposals break both Core Project 2 and Core Project 3 into two pieces: -an upstream E & P and gas processing venture, under a traditional PSC arrangement with Aramco as the controlling partner and the foreign partner as operator, and -various downstream pipeline, power, water and potentially distribution companies in which Aramco will not be a participant, but that other Saudi investors may want a piece of. These downstream ventures will buy gas from the upstream ventures and will be subject to pipeline and privatisation regulatory regimes that have not yet been invented. I suggest that we propose to the Saudis that Enron and Oxy will be working as partners, but that Oxy will be the sole investor and operator for all upstream components. Enron, on the other hand, will undertake to be the developer and operator for the pipelines and downstream facilities, but will structure such projects as opportunities for various Saudi investors supported by Project financing and with IPO's as soon as possible. In structuring such projects, Enron would work with the Saudi government to develop appropriate regulatory regimes. Enron, as developer and operator, would forego the right to any equity in such projects in order to maximize the investment opportunities for Saudis but would instead cover its development costs and earn a profit via operating and development fees to the downstream ventures and success fees at financial close and/or other milestones. This approach would give Oxy the hard capital investment in Saudi that they want, while giving Enron the opportunity to earn a return on intellectual capital. It would give us the chance that we want for a dialogue with the Saudis to define the basis for a robust market-oriented system----similar to the opportunity that Enron Japan hopes to develop through working with the Japanese government. It would also give us an on the ground relationship with government authorities that control policies for the export and marketing of Saudi's crudes and liquids. We could also offer to be the exporter/offtaker for any liquids produced by Oxy. Terry and Rob are going to kick this around a bit tonight and may have a more well thought out approach by Thursday, but I wanted to get these basic thoughts to you to give you, Terry and Rob some food for thought. Rick