Power: Reviewing the situation

01 February 2002

Officials at Abu Dhabi Water & Electricity Authority (ADWEA) could have been forgiven for feeling some trepidation in the run-up to 18 January, the deadline for developers to respond to the solicitation of interest for the Umm al-Nar independent water and power project (IWPP). In normal circumstances, a strong turnout would have been guaranteed. But these were not normal times, coming just four months after the suicide attacks on New York and Washington, and only six weeks since the spectacular collapse of the US' Enron Corporation.

In the end, fears that the two events would dampen developer appetite for the first Middle East IWPP of 2002 proved unfounded. Twenty two international companies, including four from the US, responded to the Umm al-Nar inquiry. Although the figure was inflated by the presence of four engineering, procurement and construction (EPC) contractors on the list, the turnout should ensure that ADWEA meets its target of five-six serious bidders.

The Umm al-Nar experience shows the Middle East power market has emerged relatively unscathed from the US shocks. The 11 September attacks did delay financings on the Shuweihat IWPP in Abu Dhabi and the Ras Laffan IWPP in Qatar, but both still managed to achieve financial close by the end of 2001. As for Enron, its decision 18 months ago to stop bidding for independent power projects (IPPs) in the Middle East limited the fall-out from its dramatic demise. At the time of its collapse, the company had just one regional power interest, a 30 per cent stake in the Gaza IPP. This is expected to be taken on by fellow shareholder Athens-based Consolidated Contractors International Company (CCC) until a replacement operator has been found.

Nevertheless, the region is unlikely to escape completely from the Enron legacy. 'Enron will have a profound influence on the global power market for some time to come,' says Geoff Knox, director and head of power, infrastructure & mining at ANZ Investment Bank. 'Banks are now looking very carefully at the portfolio risk of developers, and especially those in the US.' The banks are not the only ones to be reviewing the situation. Rating agencies and investors alike have been downgrading their interests in a clutch of US developers as concerns mount over highly leveraged balance sheets.

The jury is still out on whether US developers will be serious players in the region this year. 'US developers have two challenges to overcome,' says a European rival. 'The Middle East is not popular at the moment in the eyes of the US public and a lot of companies are suffering on the share price. In the current climate, some boards will decide that it is best to concentrate on their core markets.'

One US developer has already done just that. CMS Energy, a pioneer of the Middle East IPP, announced in early November a major strategy shift aimed at reducing its mounting debt burden. According to the extensive restructuring programme, all its international power assets, with the exception of those in the Middle East, North Africa and Ghana, are to be sold. In addition, CMS confirmed it would not be bidding for any new regional projects, nor take on any new assets bar those in the financing stage - the Shuweihat IWPP and the Saudi Petrochemical Company (Sadaf) IPP. To emphasise the point, it announced the closure of its business development offices in Abu Dhabi and London, the two points of contact with the region.

CMS' retreat comes at a time of rising IPP opportunities in the Middle East. When the US developer first entered the region in the mid-1990s with a stake in the Jorf Lasfar project in Morocco, only one IPP - the Al-Manah project in Oman - was visible on the regional landscape. Today, five are in operation and a further nine under construction, as the result of Abu Dhabi, Egypt, Tunisia and, most recently, Qatar all embracing the concept of private power.

As the growing list of IPPs bears witness, the arguments about the merits of private power have been won in much of the Middle East. With projects such as the Taweelah-A2 IWPP in Abu Dhabi providing a strong economic case for its application, governments now display little hesitancy in pursuing the private route. The reformist zeal has also been surprisingly resolute: the days have gone when official interest in IPPs rose and fell in line with the oil price.

The change reflects hard facts. According to the latest MEED estimates, about 105,000 MW of new capacity will have to be installed in the Middle East and North Africa by 2010 at a total cost of almost $100,000 million. Given the growing and competing claims on public revenues, and an oil price that shows few signs of stability, governments have little choice but to accept any assistance they can get on the power front.

Abu Dhabi and Oman remain at the forefront of the private power drive in the Gulf. The emirate passed a new milestone in mid-December when its first IWPP - Taweelah A-2 - entered full commercial production. Two more - Taweelah A-1 and Shuweihat - are under construction, while bidding on a fourth, Umm al-Nar, is scheduled to begin in the spring.

Having closed three IPPs in 2001, Oman had been looking to press ahead swiftly with the next stage in its comprehensive power restructuring programme, the unbundling and privatisation of existing assets. However, lengthy negotiations between the government and its team of advisers over extending the advisory mandate have delayed until the third quarter the publication of the new sector law, a prerequisite for the sell-off process to begin.

Delays have also been very much a feature of Saudi Arabia's power restructuring programme. Almost three years after the initiative was launched, the programme is still some way off delivering its first IPP. Further studies are now being carried out on the proposed structure of the overall sector and Saudi Electricity Company (SEC).

Saudi Arabia's power requirements are among the highest in the Middle East, with government estimates indicating that more than 2,000 MW of capacity will have to be installed every year for the next 18 years to keep abreast of demand. The ongoing restructuring has not helped the situation: since 2000, there has been a paucity of investment in domestic capacity, with just one major contract being placed for the 760-MW expansion of the Shuaiba power plant.

Outside SEC, several new projects are at various stages of planning. Negotiations are continuing between Saudi Petrochemical Company (Sadaf) and CMS for the kingdom's first captive IPP: an energy conversion agreement (ECA) for the 240-MW plant is due to be signed by mid-2002. Also in Jubail, the recently formed Power & Water Utilities Company for Jubail & Yanbu (Marafiq) is preparing to invite consultants in February for a 2,400-MW co-generation plant, which may be implemented as an IWPP. Finally, the three core ventures in the Saudi gas initiative are proposing to build some 4,000 MW of new capacity across the kingdom.

A key obstacle in the way of the IPPs was removed in mid-January when a royal decree was issued appointing Fareed Zedan to head the new regulatory body. The appointment of the experienced Zedan to the post of governor was widely welcomed by developers as a sign of the government's commitment to complete the reform programme as quickly as possible.

Elsewhere in the Gulf, plans for private-sector involvement are more fluid. In Kuwait, the Ministry of Electricity & Water is considering applying the IPP model to the 2,400-MW Al-Zour scheme. In Dubai, a proposed 120-MW IPP for the Dubai Investments business park has been put on hold, while preliminary studies have been undertaken for an IPP at Dubai Aluminium Company (Dubal). As for Dubai Electricity & Water Authority (DEWA), it shows few signs of taking the private-sector route: in keeping with past practice, it is preparing to finance its next major project, the 700-MWstation, conventionally.

Outside the Gulf, Egypt is adopting a pragmatic approach. The 750-MW extension of Cairo North is being tendered as an EPC contract, after Cairo successfully secured $260 million of soft loans from international lenders. By contrast, developers have recently been approached to express their interest in setting up on a build-operate basis a 300-500 MW co-generation plant in Sinai. In Algeria, a major shake-up is on the cards in the power sector, following the government's decision in late 2001 to end Sonelgaz's monopoly (see page 34).

The Middle East power sector has had to overcome its fair share of 'global' challenges in the drive to install more generating capacity. In 2000, it was the scarcity of large turbines, a consequence of the booming US market. Last year, it was the shortage of reputable EPC contractors. And while 2002 is still only a month old, worries are already being expressed about a possible dearth of developers. If that turns out to be the case, then it will cap a remarkable turnaround for the regional power sector, which just five years ago was under siege by the champions of private power.

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