Oil Minister Ali Naimi was sceptical of the need for foreign investment

The report said that Exxon Mobil, the US oil giant, was told on Thursday that a proposed $15bn (�9bn) scheme to develop gas reserves in the South Ghawar field would not be going ahead.

Two $5bn projects involving gas production for petrochemical, power and water desalination plants are also now thought unlikely to proceed.

The three schemes - under discussion since 1998 - had been viewed as the most significant foreign investment openings in Saudi Arabia for decades.

They were promoted by Crown Prince Abdullah, the country's de facto ruler, and Foreign Minister Prince Saud al-Faisal and taken as a sign that Saudi Arabia, traditionally cautious in policymaking, was making a bold attempt at economic reform.

Disagreement

But opening Saudi oil and gas to foreign investment was a sensitive issue domestically and known to have its opponents, including the oil minister, Ali Naimi.

A former boss of the national oil company, Saudi Aramco, Mr Naimi was of the view that investment from outside was not needed.

When he was reappointed to his job in a cabinet reshuffle last month, Western oil executives suspected the worst.

There had also been disagreement over how much gas investors would have access to, and what represented a "fair" rate of return for the required investments in parallel industrial projects.

Not logical

"Saudi Arabia has cancelled the Exxon-led deal for South Ghawar effective 15 June," Reuters quoted a Saudi industry source as saying.

Reuters also cited US sources close to the negotiations as saying cancellation notices had been received by the companies involved.

Exxon and its partners in the project - Shell, BP and ConocoPhillips - have been bound by strict confidentiality clauses and all declined comment.

Robert Mabro, president of the Oxford Institute for Energy Studies, said the deal's collapse was not surprising.

"Saudi Arabia's mistake was not to design the initiative in a logical way from the beginning.

"And the companies appeared to be willing to do things - such as water desalination - which were not in their core business. It was surprising they did not display sufficient political sense and finesse."

Badly needed

Saudi Arabia has more than a quarter of the world's proven oil reserves and substantial undeveloped gas reserves.

But exploration and production has, since nationalisation in the 1970s, been entirely in the hands of state-owned Saudi Aramco.

Foreign investment in oil and gas has been limited to joint venture oil refineries and related activities such as petrochemicals manufacturing.