Saudi Arabia said that state-owned Aramco would build an oil refinery in an underdeveloped province bordering troubled Yemen, rather than private firms that had bid for the delayed project.
The Jizan refinery is far from Saudi Arabia's producing fields and is part of a wider development plan for the impoverished southern region. The kingdom had hoped the refinery would be built and owned entirely by the private sector, a first in the world's top exporter.
But the plan failed to generate interest from foreign investors, who were concerned the cost of supplying crude to the plant could make it unprofitable in the future.
"Upon King Abdullah's approval, Saudi Aramco has been instructed to quickly build Jizan refinery," a statement from the oil ministry quoted Oil Minister Ali al-Naimi as saying.
"The ministry appreciates serious effort by firms that have bid for the project's tender but since the government is able to guarantee the construction of this important development project in the Jizan province, it instructed Saudi Aramco to execute and totally fund this project."
Refineries elsewhere in the kingdom are fully owned by Aramco, or by joint ventures between Aramco and international energy firms.
Jizan, planned with capacity of 250,000-400,000 bpd, was first unveiled in 2006 as part of an industrial hub -- called Jizan Economic City (www.jazanecity.com) - aimed at creating jobs in an area that depends mainly on agriculture and smuggling activity through a porous border with Yemen.
The bidding process for the Jizan refinery project has been delayed several times.
The Saudi government prequalified eight Saudi firms and 42 international energy companies to bid for the project, SPA said.
Two consortiums bid for the project, and neither of them included foreign companies. The tender expired on Nov. 7.
"Despite their industrial experience and strong interest, none of the Saudi companies are in a position to execute such a vast programme," said Sadad al-Husseini, a former top executive at Aramco said.
Saudi industrial group Tasnee 2060.SE, Saudi Nama Chemicals Group 2210.SE and Saudi Advanced Refineries and Petrochemicals Co (ARPC) formed one of the consortiums that bid for Jizan.
Corral Petroleum Holdings AB teamed up with Jeddah-based Arabian Peninsula Co for Industrialization and Oil Services in a second consortium, sources familiar with the tender said.
"The project is not simple, it requires technology, special techniques," Saleh al-Nazha, president of Tasnee, said.
The bidders made some proposals to make the project more profitable, such as building it with an integrated petrochemical plant.
But still, the plant would have required incentives to help develop the infrastructure and discounted crude selling prices, an industry source said.
In the statement, the Oil Ministry did not say whether Aramco would build a petrochemical plant and how the crude would be transported to the refinery.
"Aramco will have less difficulty than the private sector to negotiate and secure financing, t is possible that the ministry might invite local companies afterwards to take part in the project," Husseini said.
Aramco declined to give additional comments.
"We wish the local bidders had been accommodated to become involved with Aramco, we hope the Ministry would revise its decision and give us a stake in the project," Salman al-Jishi, president of ARPC said.