Building the friendship pipeline

25 January 2002

When news emerged that Iran was to export water to its Gulf neighbour Kuwait, two questions were immediately asked. Could a transnational project of this size work in the Gulf, where cool neighbourly relations have prevented closer co-operation in the past? And, how can a country such as Iran which has suffered repeatedly from water shortages, export water, instead of using the resources for its own needs?

London-based Gulf Utilities (GU) is the company that has set out to answer these questions. Specifically set up for the project, GU and its two regional partners, Iran's Energy Investment Company (EIC) and Kuwait-based Gulf Water Company (GWC), have embarked on one of the most ambitious missions in the region: the construction of a 540-kilometre cross-border pipeline to transport water from the Karkeh dam, 200 metres above sea level in western Iran, to Kuwait.

'The key to this project is the dam,' says Brian Hendry, chief executive of GU. 'The fact that water runs down a river in Iran is not by itself enough to generate a project like this. What makes the project doable, bankable and acceptable is the security of the reservoir, which lies behind the dam structure.'

With a reservoir capacity of 5,600 million cubic metres of water, the Karkeh dam is the third largest in the world. The hydroelectric dam generates 400 MW of electricity and provides water for agricultural irrigation. In 2005, 200 million gallons a day of water will be pumped through the proposed pipeline to Kuwait. While this is a significant volume, it represents just 0.6 per cent of the water flow from the dam.

Even so, the fact that Iran plans to export water has attracted some domestic criticism. Says Hendry, 'One of the political problems we had to deal with when the project featured in the Iranian public domain was that many provinces, notably in the northeast and southeast, were suffering severe water shortages. But it is self-evident that the area where the water is in surplus is an extremely long distance away from the drought areas.'

Difficult terrain between the dam and northern regions prevents the construction of a pipeline to the provinces that have been experiencing drought, Hendry says. Instead, he argues that drought in these areas will be better combated by allocating the revenues from Kuwait to local schemes.

Different considerations have come into play on the Kuwaiti side. Before the 1990 invasion, Kuwait toyed with the idea of importing water from Iraq. Those plans foundered on what turned out to be valid security concerns.

Kuwait is water self-sufficient following years of heavy investment in desalination projects; it also taps groundwater resources. However, with domestic demand rising fast, additional volumes will be required in the future.

' We have made it clear that we were never seeking to replace desalination with this project,' says Hendry. 'We always understood that any country must have its own strategic capacity to meet its requirements. The pipeline is going to be complementary to desalination.'

The tariffs for the imported water will be substantially below the cost of desalination, based on a 30-year concession, Hendry says. There is also a strong environmental case for the scheme. The highly condensed salt sludge discharge from regional desalination plants is already beginning to affect the marine life on the Gulf coastline. In the long run, projects such as the Iran-Kuwait pipeline could lead the way for similar schemes in the region by limiting desalination plant discharges. At the same time, water quality in Kuwait's aquifers is deteriorating, as a result of over-extraction leading to seawater intrusion.

' In the initial stages, we suggested, some of the water coming from the pipeline may be injected back into the aquifer,' Hendry says. 'There are some cost implications, but the alternative of continuing to extract is just not thinkable.'

Away from strategic and environmental considerations, geopolitical developments in the region have been a key factor in GU opting to push ahead with the scheme.

'The time is right for this project,' says Hendry. 'When we were first approached by EIC some years ago, the political climate was becoming right for rapprochement. So we carried out the feasibility study to see whether we felt, at a realistic level, that this project was really economically and financially viable.'

The outcome of the feasibility study has been positive and GU has since pressed ahead with the project at several levels - with some changes to the schedule.

'Since February 2000, the programme is about six months adrift due to political events in Iran and Kuwait, and 11 September. However, all project steps are occurring in the right sequence and project completion is expected in 2005,' says Hendry

Having already signed exclusivity agreements with Iran and Kuwait, GU is now looking to move on to the next stage. It is preparing to sign a memorandum of understanding (MoU) with the Iranian government, which will pave the way for the start of negotiations on water export. An MoU is also due to be signed with the Kuwaiti government, which will allow for detailed documentation to be submitted. In addition, the two governments are preparing to issue an inter-governmental accord, confirming their interest in the project. All three agreements are expected to be signed by March.

With the agreements in place, GU is hoping to tie up other key issues before the end of the year. ' It will probably take six months to conclude project documentation, to get the contracting parties on board and to firm up the project financing,' Hendry says. 'Towards autumn we could be in a position to announce the project proper.'

GU has carried out briefing sessions with several international contracting companies to keep them abreast of developments. The intention is to sign up a consortium of contractors which, as well as building the project, may also take an equity stake in the development.

Once the contracting party is appointed, the company will focus fully on financing the estimated $2,000 million scheme. Says Hendry, 'We are not yet in a position to tie ourselves down and we would not expect bankers at this stage to give us what I would call commitments. That would be better done once we have signed up with the contractors.'

The initial financial plan proposes a 75:25 debt/equity package, with the debt to be covered from several different sources, backed by cover from international export credit agencies. 'We have had initial expressions of interest from a wide variety of debt providers, including Islamic funds and Eurodollar financing,' says Hendry. 'The likelihood is that we will seek debt from a variety of sources.'

On the equity side, Kuwaiti and Iranian private finance will each account for 35 per cent, leaving 30 per cent available for international interests. GU' s partners, EIC and GWC, are both expected to become equity partners in the project.

Hendry says he expects nothing less than strong interest from Iranian, Kuwaiti and international investors to acquire stakes in the scheme. 'There ought to be a queue for people looking for equity. It is an attractive and well founded project. Water increasingly will become a tool of peace in the region and Iran wants to be seen as a good neighbour. In reality, this is a pipeline for friendship.'

Oliver Klaus

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