Politics key to nuclear award

18 December 2009

Price will not be the only consideration in the UAE’s choice of power plant developer

Choosing a developer for the UAE’s first nuclear power project was never going to be straightforward. The cost of the project – an estimated $40bn – means that ensuring the economic viability of the scheme is vital. But with the award of a contract now three months behind schedule, it is clear that politics is also playing a prominent role in the decision-making process.

When the UAE finally selects one of the three groups competing for the deal, it will also be making a clear statement about the value it puts in its strategic alliance with Washington, Paris or Seoul.

There is no question that, in political terms, Abu Dhabi stands to gain a great deal more from closer ties with the US or France than with South Korea. Unfortunately for the decision-makers, the economic arguments appear to point in the opposite direction.

In July, when the three groups vying for the lucrative contract first submitted their proposals to the Emirates Nuclear Energy Corporation (Enec), it was a team of Korea Electric Power Corporation (Kepco) and Hyundai Engineering & Construction that made the most competitive bid. A French consortium of Areva, GdF Suez and Total ranked second, and a US/Japanese team of GE and Hitachi was the highest bidder.

Maximising competition

Under the original project schedule, Enec had planned to shortlist two of the three bidders by the end of July and award the contract on 16 September. However, Abu Dhabi soon realised it would be to its advantage to keep all the
bidders on board and make the most of the competition between them.

Sources close to the project tell MEED that Enec would happily award the contract to the Kepco-led team on the basis of both price and technical capability. But the nuclear corporation has come under significant pressure from the government, which has urged it to give the US and French teams a chance to improve on their original offers.

“If the situation is quite transparent, then the Koreans are in the best position, but obviously politics plays a role,” says one foreign contractor based in the UAE with knowledge of the project. “In the end, will they go for a political choice or the team looking like the best thing?”

Enec has already asked the US and French bidders to revise their proposals three times since July, using the Korean team’s low price as leverage. They have complied each time, submitting ever-lower prices in September, October and, most recently, on 10 December.

As Enec has not publicly disclosed the original prices, the three groups can only speculate how far apart their bids are. Some have suggested that the Korean price is 10 per cent lower than the French bid, while others put the gap at closer to 20 per cent.

“The Korean price is very low,” says one member of the US/Japanese consortium. “We and the French team have tried to reduce our costs, but still there is some difference.”

Unable to influence the proceedings decisively, the Kepco-led team can do little but wait for a final decision. And although it is acutely aware of the political weight that its competitors carry, the group remains quietly confident. “If I were in Enec’s place and there were any final additional proposals, I would not reject them,” says one member of the Korean consortium. “If there is another good proposal, I will postpone the final decision. We are hopeful. We are the most competitive people. Nuclear power projects are always concerned with the political situation.”

The underdog position is one with which Korean companies are familiar. In the late 1990s, oil and gas clients in the region refused to prequalify them for projects, in particular on the development of process plants, on the grounds that they were too inexperienced.

It was only in 2004-05 that the perception of Korean firms evolved from their being something other than civil-engineering contractors. The shift was driven by high inflation and a tight contracting market in the GCC. By prequalifying new entrants, clients were able to exert downwards pressure on bidders’ prices.

Today, Korean contractors are a force to be reckoned with in the UAE market and have won most oil and gas contracts in the country this year. In the most recent testament to their strength, Abu Dhabi Oil Refining Company (Takreer) awarded five contracts together worth $9.6bn to Korean teams in November.

The same processes that hindered Korean firms entering the energy market are now affecting them in their bid for the UAE nuclear deal. Despite the fact that they have experience of developing nuclear power plants in their domestic market, the Koreans are an easy target for those who want to draw attention to their lack of international experience in the field.

In that context, the French and US groups look the safer bet. Indeed, it was the French team that first pitched the idea of nuclear plants to Abu Dhabi. In January 2008, Areva, GdF Suez and Total proposed building two 1,600MW reactors in the emirate and the two governments signed a bilateral co-operation deal.

Subsequent progress was swift. In April the same year, Abu Dhabi issued its official policy on the evaluation and potential development of peaceful nuclear energy.

France’s President Nicolas Sarkozy has backed the deal aggressively from the start. He is rumoured to have encouraged EDF, the world’s leading nuclear developer, to sign up to the French consortium to strengthen its bid. 

Strategic alliance

However, the group was disadvantaged by the number of companies involved and a lack of clarity over which company was leading the bid. In an effort to rectify this, EDF announced on 9 December it would co-sponsor the deal with GdF Suez, with each company taking a 45 per cent stake in the scheme. Total would hold the remaining 10 per cent.

The group also confirmed that it had signed up Areva to supply reactors, Alstom to carry out work on the conventional power portion of the scheme, and Vinci to implement the civil works.

The US’ Bechtel now appears to have been dropped from the contractor line-up. According to one source close to the project, this could give the group greater flexibility to reduce its price further as a wholly French consortium. 

Paris’s chances of winning the lucrative contract could be helped or hindered by its already strong strategic position in the UAE. In May, Sarkozy inaugurated France’s first permanent military base in the Gulf, in Abu Dhabi. A second major defence contract, for the sale of 60 Rafale fighter jets from France’s Dassault Aviation to the UAE, is currently under negotiation.

But despite the close links between Paris and Abu Dhabi, and the fact that the rival US/Japanese team was originally the highest bidder, the latter is still in a strong position. “Do not rule out the Americans,” says one international developer. 

US firms have already made an indelible mark on the nuclear project. In May 2008, Virginia-based Thorium Power signed two contracts to provide strategic advice on the establishment of Enec and the Federal Authority for Nuclear Regulation. In October 2008, CH2M Hill won a 10-year contract to manage the nuclear programme. A third US firm, Paul C Rizzo Associates, has been involved with preliminary site studies and engineering on the scheme.

Washington and Abu Dhabi only finalised an agreement to allow the US to transfer nuclear technology to the UAE on 17 December. Congress had passed the agreement on 17 October.

The delicacy of the political decision that Abu Dhabi needs to make in choosing between these groups, coupled with the size of the nuclear project – it is understood to involve four reactors – means it may decide to split the contract between two bidders. Members of all three consortiums tell MEED they would be happy to win even two reactors.

“It may be politically expedient to have two groups developing [reactors] at the same time,” says the international developer.

It is not clear whether Enec is considering this option, but technical issues could make it unfeasible. If the UAE were to divide the deal between the EDF and GE-led teams, for example, the US/Japanese team would use advanced boiling water reactors, while the French would employ pressurised water reactors.

The bidders say they hope Abu Dhabi will make a decision before the end of the year. When it does, the UAE will be taking another major step towards bringing the first nuclear reactor in the GCC on line by 2017. But it will also be cementing a long-term political alliance with either East or West.

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