The board of Saudi Electricity Company (SEC) is to hold a meeting in early June to deliberate the revised award of the contract to build the 2,000MW Rabigh 2 power plant, after the recent decision to run the plant with gas rather than heavy fuel oil.

This is the latest sign that Riyadh is committed to its decision to no longer supply oil for power schemes, which it feels can be more lucratively exported.

“Aramco has realised that crude oil is wasted on power production, it can be sold at higher prices on the market and can be turned into higher margin products,” says an energy source in the kingdom.  

A consortium led by the local Acwa Power was originally awarded the contract to build the Rabigh 2 power plant in January. However, a decision in early May by Saudi Aramco not to supply the plant with heavy fuel oil (HFO) resulted in SEC changing the configuration to use gas.

Since making that decision, the client has been in negotiations with Acwa Power to deliver the plant to the new specification. According to sources in Riyadh, SEC is still expected to award the project to Acwa, despite the switch to gas.  

This has angered some of the other bidding consortiums, who believe that due to the changes to the project, the contract should be retendered. As a result of the change in fuel, the plant’s $2.2bn development cost is expected to drop significantly, to less than $1.5bn.

“The project has been changed and so the prices submitted will be invalid. They [consortiums] believe the project should be put out to the market for new prices,” says a source familiar with the project.

According to sources in Riyadh, due to the rising demand for power, SEC could not afford the time it would take to rebid the project with the changed fuel source. However, the other consortiums, which had participated in the bidding process believe that they would be able to complete the project for the planned commissioning date of 2016, even if the tendering process was repeated.

Aramco first made its intention to limit the future supply of oil to domestic power plants clear in late 2011, when Saudi Aramco’s chief executive officer (CEO), Khalid al-Falih, announced that the state oil major was focusing future investment on conventional gas reserves and expanding downstream refining rather than increasing oil production capacity.

The economic reasons for reducing the use of oil reserves for domestic power consumption are clear. Aramco supplies oil to developers for domestic power production at a rate of about $4 a barrel, with the price of brent crude on the international market averaging just over $111 a barrel in 2012.

However, Saudi Arabia has changed fuel allocations in the past, and then subsequently gone back to oil. The Qurayyah power plant, which was also eventually awarded to Acwa, was originally envisaged as an oil-fired scheme, before being changed to gas, and subsequently back to oil.

Despite the kingdom increasing domestic gas production in recent years, it will need to step up efforts if it is to meet rising demand. Conservative estimates from within the kingdom say demand for gas in the kingdom is growing by at least 5 per cent a year.

“Gas production has increased in the Saudi Arabia, but it is not enough to cope with the growing demand as the kingdom pushes ahead with industrialisation efforts,” says an energy analyst in the kingdom.