Saudi Arabia has long grappled with water supply issues. Even though the country has more non-desalination sources of water than most other countries in the region, its population of 27 million and large tracts of uninhabitable desert create a major challenge for the kingdom.

The problem is the water subsidy. The water coming out of the tap is cheap … because of the subsidies

Lawyer based in Saudi Arabia

The kingdom’s ‘turning the desert green’ approach in the 1970s and 1980s put significant strain on water resources. The scheme was aimed at developing a strong agricultural sector to ensure that the country was self-sufficient in food products.

The policy was highly water-intensive and the mismanagement of the country’s sub-surface water resources has ensured that the country continues to pay dearly for the policy today. 

Rising water consumption in Saudi Arabia

Pressure has also been exerted by a growing population, an expanding industrial base and high per capita water consumption. The latter has been attributed to subsidised water prices, which encourage wasteful usage. Until the tariff regime is changed, demand is unlikely to ease.

These factors have necessitated an extensive and sustained desalination capacity building programme in Saudi Arabia. The early projects are approaching the end of their lives and over the next decade, many plants that were built in the 1970s and 1980s will need to be decommissioned.

Anticipating a crisis, the Saline Water Conversion Company (SWCC) launched an ambitious programme of capacity building. Three new projects at Jubail, Ras al-Zour and Yanbu are set to add 523 million gallons a day (g/d) of new capacity by 2014.

The Jubail facility was completed in the first quarter of 2010 and contracts for two other schemes have been awarded. Several contracts for smaller projects and expansion schemes have also been awarded. Once complete, the facilities will afford Saudi Arabia some breathing space, but only for a short while.

In the long term, the increase in demand for water shows no signs of abating. Saudi Arabia’s population is predicted to rise from 27.4 million in 2010 to 30.5 million by 2015 and 33.5 million by 2020. The kingdom also plans to expand its industrial base, which will drive up water consumption.

“Saudi Arabia has tapped its deep aquifer to the point almost that it will never recover,” says an industry source in the kingdom. This means it has few options left but to expand its use of desalinated water.

In 1980, SWCC produced just 7.65 million cubic metres of water. In 2009, it produced more than 1,014 million cubic metres. The kingdom’s current desalinated water production represents 18.1 per cent of total global production, making the kingdom the largest producer of desalinated water in the world. But it is not just the need to install more desalination capacity, that is pre-occupying Saudi Arabia’s decision-makers.

Water conservation strategies are increasingly gaining traction. According to the Saudi Arabian Water Environment Association, the per capita water consumption in the kingdom is estimated at about 235 litres a day.

The problem is desalination accounts for the majority of Saudi Arabia’s water supply and the process is highly energy-intensive. As a result, the country uses huge amounts of its valuable hydrocarbons for the generation of power simply to provide fresh water, which is not only environmentally damaging but costly.

“The problem is the water subsidy,” says a lawyer based in Saudi Arabia. “The water coming out of the tap is very cheap … because of the subsidies, there is no conservation of either water or power.”

Private involvement in the financing of water supply projects

The tariff system also affects the way in which the private sector can participate in the financing of water supply projects. “In other places, there is a private sector that looks to an independent regulator and there is a tariff structure that creates a revenue stream for the financing. But it doesn’t work like this in Saudi Arabia,” says the lawyer.

This highlights the tension between private and publicly-procured desalination capacity. It is particularly evident in the use of renewable energy for desalination.

Saudi Arabia pioneered the use of small-scale solar power units for remote desalination facilities and it has recently said that it intends to expand the use of the technology. But industry sources say this will be difficult if subsidies remain at current levels and the gulf in cost between conventional and renewable power continues to be as wide.

In January 2009, SWCC launched a privatisation programme. A holding company was to be created and the SWCC’s assets were to be unbundled into separate assets in preparation for privatisation. The first phase of the privatisation programme was to involve selling the Yanbu Production Company, which manages the Yanbu 1, Yanbu 2 and Yanbu reverse-osmosis plants and the planned Yanbu 3 independent water and power project (IWPP).

In July 2009, the government decided to cancel the Yanbu 3 IWPP and merge it with Marafiq’s planned power and water project, which was also to be developed at Yanbu. Due to the global economic crisis, it was agreed that the new scheme would be developed on an engineering, procurement and construction (EPC) basis.

Crisis aftermath

The Yanbu 3 IWPP was not the only casualty of the 2009 financial downturn. The Ras al-Zour IWPP planned by Saudi Arabia’s Water & Electricity Company (WEC), the company established in 2003 as the single offtaker for the kingdom’s IWPP programme, suffered a similar fate. The project was cancelled when the preferred bidding consortium led by Malaysia’s Malakoff collapsed as a result of financing problems.

In a decision similar to that of Yanbu 3, the government decided to retender the Ras al-Zour project on an EPC basis. It merged the project with Saudi Arabia Mining Company’s (Maaden) planned captive power plant, which was to serve the kingdom’s first aluminium smelter.

The conversion of two huge projects from independent schemes to government procured projects is indicative of the financial difficulties and other challenges in using the private sector to take on some of the burden of water capacity building.

Nevertheless, Saudi Arabia has forged ahead with tenders for several major projects which will add a significant amount of capacity. This is a significant achievement, even if they have had to be tendered as EPC deals. The Ras al-Zour facility will have a capacity of 228 million g/d and is being built by South Korea’s Doosan Heavy Industries & Construction.

The contract for the water component of the project was worth $1.76bn. Both multi-stage flash and reverse osmosis technology will be used at the plant.

The Yanbu 3 scheme has received bids for its desalination component with a capacity of 550,000 cubic metres a day. Four bids were submitted in July by Italy’s Fisia Italimpianti, Doosan, France’s Sidem and South Korea’s Samsung Engineering with Acwa Sasakura.

Meanwhile, Marafiq has awarded a contract for another desalination project at Yanbu which will have a capacity of 60,000 cubic metres a day. South Korea’s Hanwha was selected for the contract in April.

In terms of private water capacity, the full commissioning of the Jubail IWPP in 2010 added 176 million g/d of desalination capacity. Another IWPP was developed at Shuqaiq by Saudi Electricity Company. It has a capacity of 212,000 cubic metres a day and was commissioned earlier this year.

Future strategy

The recent years of intense contracting and construction activity have now given way to a period of relative calm before new projects are proposed.

According to Thabit al-Hayabi at SWCC, the Yanbu 3 scheme is the last in the series “or maybe there will be some small ones in the future”, but not of the sizes tendered in the past couple of years.

Saudi Arabia also embraced private sector participation in water management contracts for its major cities. It tendered contracts to manage water production and distribution in the hope of improving the networks, saving money and improving efficiency. It awarded three contracts to manage water in the country’s three largest cities, but the progression of this policy is currently under review.

Ultimately, Saudi Arabia will need to keep up the pressure to ensure that it is able to meet future water demand. Curbing consumption through a hike in water tariffs to bring charges in line with the cost of production would have an immediate effect. But Riyadh is unlikely to adopt such an unpopular strategy any time soon, particularly in the context of the regional uprisings of 2011.