Gas shortage sparks switch to coal

26 November 2009

Gulf statesare building a series of coal-fired power plants to cope with rising regional electricity demand

A series of proposals to build coal-fired power plants in the Gulf have been drawn up in response to a regional shortage of gas. As a result, the region’s governments are having to create a supporting infrastructure for coal-fired power stations, as well as reach pricing agreements to import coal from around the world.

Oman’s plans to build a coal-fired independent water and power plant (IWPP) took a step forward with the signing in September of the technical and financial advisory contracts for its 1,000MW Duqm project.

“Coal prices now are moving for just as many inexplicable reasons as gas and oil”

David Price, editor, Steam Coal Forecaster

Australia’s WorleyParsons won the technical consultancy deal, while Netherlands-headquartered KPMG was appointed financial advisor to the scheme. The award of the legal advisory contract is expected to follow by the end of November.

It remains to be seen whether this facility, scheduled to start up in 2015, will be the first coal-fuelled power and desalination plant to be built on the Arabian Peninsula, as similar plans are under way in the UAE.

As of October, the Ras al-Khaimah Investment Authority was further ahead in the process than Oman, having already appointed advisers for its coal-fired power project.

Project delays

A request for proposals had been expected to be issued in February 2008 for the first phase of a complex at the emirate’s port, Mina Saqr, that could ultimately house 4,000MW of generation capacity, but that has yet to happen.

One source close to the scheme tells MEED the project appears to have been put on hold due to the global financial crisis. “We have not done any work on that project for several months now, but obviously we hope to get a call any day giving the go-ahead,” says the source.

Elsewhere in the UAE, the government of Ajman signed a $2bn agreement in July 2008 with Malaysia’s MMC Utilities for the construction of a 1,000MW coal-fired plant. MMC has since completed a feasibility study for the project, but Ajman has yet to decide whether to proceed with the scheme.

The study found that technically it would be possible to build the facility in the emirate, but there were regulatory and environmental challenges that needed to be addressed first.

In late 2008, Dubai approached Germany’s Lahmeyer about conducting a feasibility study for a coal-fired plant, but it has not yet decided whether to pursue this option, and the study has never been done.

The choice of coal as feedstock for these plants marks a significant departure for the region, which has traditionally relied on gas for power generation, and to a lesser extent -liquid fuels. But it is part of a wider trend in the Gulf towards diversifying energy sources as gas becomes less available – the result of lower oil production, which reduces the supply of associated gas.

Gas demand from the utility sector in Oman is predicted to exceed its allocation within the next five years. The sultanate’s Oil & Gas Ministry has allocated 19.5 million cubic metres a day (cm/d) of gas for power and water production. But the sector’s gas requirements are forecast to reach 20.2 million cm/d or more by 2015.

While the situation in the UAE is slightly better, the volumes of gas available for power and water production are expected to be sufficient for only 20,000-25,000MW of power generation capacity by 2020. Forecasts made prior to the global financial crisis predicted power demand in the Emirates would exceed 40,000MW by that date.

“Coal is a gap-filler for Oman,” says Jim Leith, project manager in the sultanate for Worley-Parsons. “It buys them time before a decision on nuclear has to be made. Oman is probably unique in that it hasn’t got a big window in terms of time.”

Coal-fired power generation will throw up a host of challenges for Oman and the emirates that they have not encountered before with gas-fired projects.

Foremost among these is the need for additional infrastructure. For example, they will need to have access to a port with bulk-handling capabilities, install coal-conveyor systems and ash-disposal facilities, and set aside land for storage.

“The problem for Dubai is where do they bring coal ashore,” says one UK-based power industry consultant. “They have very little [undeveloped] coastline left, but you need massive coal-unloading facilities. Oman, however, is well positioned for coal. Its eastern coastline has deep water and there is not a lot of development along there.”

Then there is the matter of choosing reliable suppliers able to provide coal of sufficient quality. “Because coal is imported, you have to import on fairly long-term contracts so you need to understand other countries’ political risk, as well as being careful with the coal specifications,” says the consultant.

With close links to the Gulf, Australia, Indonesia and South Africa are seen as the natural choice as suppliers of coal.

The government of Ras al-Khaimah has already taken steps to guarantee its long-term access to coal by investing in a 30 million-tonne-a-year (t/y) coal mining project in Indonesia’s East Kalimantan province, where it is also funding the construction of a railway network and coal jetty to facilitate exports to the emirate. The railway is due to be completed by 2012.

Indigenous supply

Oman does have its own coal reserves. Studies conducted in the 1990s estimated that a site near Al-Kamil in the southeast of the country contained about 120 million tonnes of coal, of which 20 million tonnes was recoverable using surface mining techniques. This would support a mine capable of producing 535,000 t/y for about 35 years.

It is not yet known whether this coal field will be exploited for the Duqm project – there are concerns over the high sulphur content of the coal – but the Omani state is expected to be responsible for the fuel supply for the plant.

“The Oman plant at the moment is an IWPP so the interface for fuel transfer is going to be at the boundary of the power station, as it is with gas-fired power plants,” says Leith. “So there will be a national purchasing agency for coal, and it will be in its interests to have multiple sources where it can purchase the coal that meets a defined specification.”

One of the major attractions of using coal as feedstock is its abundance. According to the World Coal Institute, proven coal reserves are estimated to be able to last 122 years at the current rate of production, compared with 42 years for oil and 60 years for gas.

Traditionally, coal prices have also tended to be lower and less volatile than those for other energy sources. But this has changed in recent years, with the price of coal frequently mirroring the wild swings in other commodity markets, driven by short-term speculation.

Coal prices peaked at $167.59 a tonne in July 2008, dropping to $60 a tonne in September 2009. This is significantly more expensive than at the start of the decade, when prices did not rise above $30 a tonne between 2000 and 2003.

“So much paper trading goes on these days, and some of the traders are hanging coal onto other drivers [like oil prices],” says David Price, editor of the Steam Coal Forecaster report published by coal industry analyst the McCloskey Group.

“Coal followed oil for much of last year. Subsequently there has been a disconnect, but for a long time we were sitting there trying to work out why oil was governing a coal price when there isn’t any switchover between the two. Coal prices now are moving for just as many inexplicable reasons as gas and oil.”

While coal may be an available feedstock for decades after oil and gas runs out, it is the most heavily polluting of all the commonly used fossil fuels, and coal-fired power plants require a much larger upfront capital investment than gas-fired facilities. Yet as a proven technology, coal offers the Gulf states a viable alternative to oil and gas, generating power on a scale that renewable technologies cannot. For example, Oman’s Duqm plant will generate 1,000MW of power, compared with about 100MW that will be generated by the planned Shams 1 solar power plant in Abu Dhabi.

In time, coal-fired power generation could also contribute to enhanced oil and gas recovery programmes, providing carbon dioxide to inject into fields to maintain pressure, in place of natural gas or water.

As an IWPP, the Oman project is unlikely to use carbon capture and sequestration techno-logies, which would be prohibitively expensive as they are still at an early stage of development. But with gas availability becoming increasingly tight, coal is likely to play an important role in the region in future.

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