Downturn delays utilities capacity expansion in the Gulf

26 June 2009

Power and water projects are being put on hold across the region as utilities providers lower their demand projections in the wake of the credit crunch, and developers struggle to secure funding.

The power and water industries may not have been spared the effects of the global financial slowdown, but the critical importance of the infrastructure they provide has made them more resilient than many other sectors, particularly in the Gulf.

Although demand for power and water has slowed, it is still growing and new capacity must be built across the region.

“There will be four types of projects in the Middle East: projects that must go ahead, downsized projects, delayed projects and cancelled projects,” says one international developer working in the Gulf.

In most countries, the economic slowdown has led utilities companies to revise their demand growth projections downwards. Dubai, which has been hit hard by the downturn, is expected to lose as much as 20 per cent of its population over the next year, which will have a significant impact on the emirate’s electricity demand.

As a result, utilities that until recently faced huge pressure to bring new capacity on line quickly now find themselves in a position where they can delay or reduce the scope on some of their projects. Changing engineering, procurement and construction (EPC) costs have compounded the effect, by giving clients an additional incentive to delay schemes to take advantage of falling prices.

“The whole situation is giving utilities a bit of a breather,” says Bob Bryniak, chief executive officer (CEO) of Abu Dhabi-based Golden Sands Management Consulting, which specialises in the power and water industry.

In February, Dubai Electricity & Water Authority (Dewa) deferred the bid deadline for phase 2 of the P Station power and water plant at Hassyan by six months to September 2009. It scrapped a previous tender for the project because it deemed the prices too high.

Similarly, Kuwait’s Electricity & Water Ministry felt it could afford to delay its Subiya power and water project by retendering it in late April. 

But while EPC prices have come down, the economic climate has made financing private projects more difficult, as banks have become less willing to provide long-term loans.

Belgium’s Suez Energy International opted, for example, for a nine-month bridging loan on its Shuweihat 2 independent water and power project (IWPP) in Abu Dhabi in December 2008. It also sought to sell half of its stake in Shuweihat 2 to Japan’s Marubeni Corporation, to allow it to tap into funds from Japan Bank for International Co-operation (JBIC).

The credit crunch has pushed interest rates on loans to new levels. In December 2008, debt on Shuweihat 2 was priced at 300 basis points over the London interbank offered rate (Libor). Only four months earlier, the commercial bank debt on the Ras Laffan C project was priced at 150 basis points over Libor.

Higher margins, however, may not translate into higher overall costs. “Interest rates are higher, but the base rate is lower, so the total cost is about the same,” says Paddy Padmanathan, president and CEO of Saudi Arabia’s Acwa Power International. “But because EPC prices have come down, we will end up with lower tariffs than in 2007 and 2008.”

So far, Saudi Arabia appears to have been the country in the region that is least affected by the project finance shortage. The preferred bidder group for the Ras al-Zour IWPP, led by Japan’s Sumitomo Corporation, succeeded in raising $4.5bn in long-term finance, thanks to $1.5bn in debt from local banks and $2.5bn from JBIC.

Privatisation setback

Not all government intervention in the kingdom’s power and water sectors has been well received, however. Although the Sumitomo group was able to find the necessary debt for the Ras al-Zour scheme, its consortium struggled to raise the required equity.

What followed was an unprecedented setback to Saudi Arabia’s power and water privatisation programme. Riyadh opted to abandon the IWPP approach on the scheme and implement it using a conventional EPC model instead.

Private projects outside the Gulf are likely to face similar problems with financing. The first to come to market will be the Bizerte independent power project in Tunisia and the Safi coal-fired power project in Morocco.

Morocco has pioneered the use of coal feedstock in the region, but others could soon follow. Over the past year, Dubai, Ras al-Khaimah and Oman have all announced plans to develop coal-fired facilities.

But it is nuclear energy that is set to change the Middle East’s power landscape forever. Despite the credit crunch, Egypt, Jordan and the UAE are all making significant progress towards developing nuclear power programmes. The UAE has come the furthest and plans to select a developer for its first facility in the third quarter of 2009.

Meanwhile, Jordan is evaluating bids for a site study for its first plant, and as part of its nuclear power programme, Egypt awarded a consultancy contract to Australia’s Worley-Parsons in May.

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