* High costs, low returns of Empty Quarter gas search
* Development terms the problem-sources
* Shell says talks with Saudi government continue
By Reem Shamseddine and Amena Bakr
KHOBAR/DUBAI, March 7 (Reuters) - Royal Dutch Shell is set to pull out soon from a joint venture that has searchedfor gas in Saudi Arabia's Empty Quarter for years, due todisagreements with the government over terms, four industrysources familiar with the matter said.
The gas search has been a top priority for Saudi Arabia asit struggles to keep pace with rapidly rising domestic demandfor energy, but the shale revolution has opened up morelucrative opportunities for energy companies elsewhere.
At least three foreign firms have already abandoned theirsearches for commercially viable gas deposits beneath the sea ofsand dunes that cover south east Saudi Arabia.
Shell has stuck it out longer in its South Rub al-Khali Co.(SRAK) joint venture with state-run Saudi Aramco, after findingsmall quantities of gas in the Kidan area.
But the relatively high cost, low return of developing thechallenging deposit in a country where gas sales prices arefixed at a fraction of probable production costs looks set todrive Shell away too.
"Shell has been wanting to pull out of the Empty Quarter fora while, and now they have decided to take this step but ithasn't been formalised yet," a Gulf-based industry sourcefamiliar with the matter told Reuters.
Aramco's insistence on buying the gas from the internationalfirms at just $0.75 per million British thermal units (mmbtu),at a time when gas buyers in east Asia are paying theirsuppliers over $17/mmbtu, makes further foraging for gas veryunattractive for international oil companies (IOCs).
Two other industry sources with knowledge of the projectsaid Shell had decided to pull out after failing to reachagreement with the government on development terms.
"They didn't reach an agreement with Aramco and theywithdrew," another industry source close to the project said.
A spokesman for Shell declined to say whether the companyhad decided to pull out of the SRAK joint venture, saying thattalks with the government continued.
"Shell is in regular dialogue with officials at the Ministryof Petroleum and Mineral Resources and our joint venture partnerSaudi Aramco," he said.
A Saudi industry official also said talks between Aramco andShell were ongoing.
"Shell has not withdrawn and has not applied to withdraw,"the official said.
A withdrawal of Shell after nearly a decade partneringAramco in SRAK, would follows Italy's Eni and Spain's Repsolabandoning their futile searches for gas in the Empty Quarter in2012.
France's oil major Total was initially a partner in theKidan project, however discouraged by the poor results the firmabandoned the project in 2008 selling its 30 percent stake backto SRAK.
BAD TERMS
Saudi Arabia has kept its vast and highly profitable oilreserves off-limits to foreigners, but needs gas to help coverdomestic fuel demand and conserve oil for export. It invitedinvestors in 2003-2004 to find and produce gas in the desert inSaudi Arabia's southeast, known as Rub Al Khail.
When the IOCs signed up to search the desert for gas, theglobal gas supply outlook was tight and prospects for new findslimited.
But a boom in shale gas production across North Americasince then has radically altered the global gas supply outlookfor decades to come and opened up many new prospects for IOCs inother countries that are easier to tap.
Kidan, near the remote 750,000 barrel per day (bpd) Shaybahoilfield, has high levels of deadly hydrogen sulphide making ittougher and more costly to produce.
And the terms they agreed with Aramco were so poor that theonly way the international partners could make a profit was tosell condensate - a light oil - at international market pricesto cover the cost of development, analysts say.
Last year, Aramco's CEO Khalid al-Falih acknowledged thechallenge of low gas prices in Saudi Arabia, saying they do notmake some of the more difficult gas deposits in the EmptyQuarter economic.
"The withdrawal of Shell was highly expected by everyone inthe industry because of two reasons, first the empty quarter isreally empty and second if they discover gas Shell would only beable to cover 50 percent of its research costs from therevenues," said Kamel Al Harami, an independent Kuwaiti analyst.
"All these oil majors have now realised that the cost ofbeing in the Empty Quarter is really not worth it, and thisshouldn't be a surprise for Aramco because it was reallyexpected," said Al Harami.