Singapore-based Sembcorp, the preferred bidder on Oman’s Salalah power and water project, is in talks with five Chinese banks to help fund the $1bn scheme after failing to raise enough money from Western and regional institutions.

The banks’ financial support could put the project back on track after Sembcorp regained its preferred bidder status in June. Semb-corp briefly lost its preferred bidder status in May because it lacked the finances to develop the facility, which will produce 400MW of power and 15 million gallons a day of desalinated water.

In addition to the five banks, which Sembcorp declined to name, the firm is holding talks with export credit agency Export-Import Bank of China.

The project is now significantly behind schedule. Sembcorp originally wanted to raise the money in the first half of this year, but is now asking the banks to provide letters of intent to finance the project by the end of September. Sembcorp aims to raise the money by the end of November.

Sembcorp’s engineering, procurement and construction (EPC) contractor is China’s Shandong Electric Power Construction Corporation III (Sepco III), which is also working on Saudi Arabia’s Rabigh power project. Rabigh was the first Middle East power project to have a Chinese contractor carrying out EPC work. Chinese banks are only willing to lend money if a Chinese contractor is involved with a project. Once Rabigh appointed Sepco III, several Chinese banks confirmed they would lend money to the scheme.

Sembcorp’s financial adviser is the UK’s Standard Chartered Bank. In late 2008, it agreed to underwrite $800m of debt for the Salalah scheme. However, as Semb-corp found it difficult to raise money for the project, Standard Chartered withdrew its offer.

“The deal will now be done by a group of about 10 banks, with no syndication of the debt, and one export credit agency,” says one UAE-based banker close to the deal.

Sembcorp initially approached the banks in February, at a stage when it wanted to finance the scheme with a 17-and-a-half-year loan. However, many were concerned about the long duration of the debt and declined to lend money to the project.

At the same time, Sembcorp asked Oman Power & Water Procurement Company to pay more for the electricity and water produced by the project. But instead of agreeing to Sembcorp’s request, Oman Power reopened negotiations with the second and third-ranked bidders in an effort to find a cheaper partner to develop the project.

Talks with the other two bidders led nowhere and, at the end of June, Sembcorp re-entered exclusive price negotiations with Oman Power. The project is key to Muscat’s plans to meet power demand in the south of Oman.