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
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