Saudi Arabia keeping pace with power and water projects

23 March 2010

To meet a sharp increase in demand, Saudi Arabia must ensure its ambitious pipeline of power and water projects are completed on time

Due to a shortage of gas feedstock, Riyadh declared in 2006 that all future power plants built in the kingdom should be oil-fired. However, recent
plans to develop the Ras al-Zour power and water project as a gas-fired facility raises questions of whether Riyadh has its mind on feedstock policy.

The Ras al-Zour facility was originally launched as an oil-fired plant but when the project was merged with a gas-fired project to be developed by Saudi Arabian Mining Company (Maaden), was changed to a gas-fired scheme.

Since the Maaden power scheme had already secured its gas allocation from the government to support plans to build an aluminium smelter on the site, the combined project is eligible to receive sufficient gas to power the entire project.

In numbers
Portion of Saudi Arabia’s power capacity fuelled by gas70 per cent
The amount Saudi Arabia needs to invest by 2025 to meet power and water demand$270bn
The investment needed for electricity generation by 2025$80m
Sources: Electricity & Co-Generation Regulatory Authroity; MEED

Sources close to the project have indicated the facility is likely to be expanded in the near future. Around 100-200MW of additional capacity is thought to be needed as the capacity of the planned aluminium smelter has been increased.

Saudi Arabia witnessed a sharp increase in demand for electricity over the past decade, which forced Riyadh to review its policy of using gas to feed its power plants. And consumption is set to continue to climb.

Rising demand

Faced with a fast-growing population and expanding industrial base, the kingdom recently launched an ambitious pipeline of new power projects to meet the anticipated rise in demand for electricity.

Most of Saudi Arabia’s power is currently generated using natural gas as its feedstock. According to the kingdom’s Electricity & Co-Generation Regulatory Authority (ECRA), 70 per cent of the country’s capacity is gas-fired.

Steam-powered facilities represent about 15 per cent of the power mix, while diesel accounts for just 10 per cent and combined- cycle plants for the remaining 5 per cent. The government allocates its natural gas resources as it sees fit. As the country has limited access to gas resources, the allocations are carefully managed in line with Riyadh’s policy priorities. In an effort to increase the kingdom’s feedstock supplies, the government has launched plans to develop gas production specifically to meet domestic demand, which is growing at a rate of about 7 per cent annually.

Saudi Electricity Company’s ability to bring the planned projects on stream on schedule will be crucial

State energy giant Saudi Aramco, which has raised oil output capacity to 12.5 million barrels a day, is now looking to boost gas supplies by 30 per cent, to 8 billion cubic feet a day in five years. The success of this scheme is likely to affect the direction of government policy regarding feedstock.

Beyond oil and gas-fired power, the Saudi government has in the past five years shown interest in nuclear energy, both for electricity generation and water desalination. Saudi Arabia has also said it would be involved in a potential study for a nuclear project in co-operation with other GCC member states.

But there remains no real consensus on the feasibility of developing nuclear power with respect to the regulatory hurdles involved or suitability of the power source for the country once the long lead time typical for nuclear projects is taken into consideration.

Alternative sources

Saudi Arabia is also showing signs of interest in the renewable energy sector. Once sceptical of the role renewable energy could play in
the country, the government has in recent years become more open to considering the sector’s potential.

Should the kingdom incorporate renewables into its energy mix, it will probably take the form of solar power. Saudi Aramco has already made progress in this direction.

In 2009, Saudi Aramco signed a deal with Japanese refiner and solar equipment maker Showa Shell to build solar plants in the country. Aramco, which owns a 15 per cent stake in Showa Shell, signed a letter of intent on 30 June last year to study the feasibility of generating power from the sun as part of a pilot project in the kingdom.

Nevertheless, in the short to medium-term at least, traditional fossil fuels will continue to represent the primary power feedstock.

Attention is now focused on whether Saudi Arabia’s upcoming power projects will use oil or gas as feedstock. Saudi Electricity Company (SEC) has projects planned for sites in Qurayyah, Dheba and Shuqaiq, which will come online in 2015, 2016 and 2017 respectively. The first of the three, Qurayyah, will have a capacity of 2,000-2,400MW, and is to be powered with heavy oil like the 1,200MW Rabigh independent power project (IPP), which is currently under construction.

Plans to extend the oil-fired Rabigh independent water, steam and power project are also under negotiation. Should it go ahead, the 400MW capacity of the project could be expanded by an additional 400MW in oil-fired generating capacity.

The Ras al-Zour project will be built to a similar time frame as another gas-fired facility, the 2,000MW Riyadh PP11 scheme. France’s GDF Suez with the local Al-Jomaih Group has been named as preferred bidder for the PP11 facility, which will use natural gas feedstock.

Riyadh PP11 is currently progressing with financing and has attracted a host of local and international banks along with export credit agency support.

Meeting schedules

Unlike PP11, Ras al-Zour will be executed as a state-procured engineering, procurement and construction (EPC) plant. The project was originally launched as an independent water and power project (IWPP), but became a government-led project following its merger with the Maaden facility.

SEC’s ability to complete the planned projects on schedule will be crucial in ensuring that the country has the capacity to meet demand growth. Forecasts by SEC suggest that power usage will increase to 50,074MW by 2012, and to 75,155MW by 2020.

SEC has succeeded in meeting demand to date. However, as the country’s population and manufacturing industry both expand, the kingdom may struggle to ensure that available capacity keeps pace with demand.

Saudi Arabia’s population has been growing by about 2.5 per cent a year and is likely to continue expanding by about 2 per cent annually over the next decade. The kingdom’s industrial base has similarly grown by more than a fifth since 2005. By the end of 2008, 4,167 factories were operating representing an increase of 7 per cent on the previous year.

The strain on power supply is exacerbated by the low tariffs for electricity in the country. The kingdom has not changed the tariffs it charges since 2000. Keeping the price of power artificially low will continue to affect the level of power usage in the country and the economics of new-build projects.

According to research conducted by local bank Banque Saudi Fransi, Saudi Arabia’s power and water sector will require at least SR1 trillion ($270bn) of investment by 2025 to meet projected demand. In the next 15 years, Saudi Arabia’s Water & Electricity Ministry expects some SR300 billion ($80m) to be invested in electricity generation alone.

In terms of investment, the successful financing of the Rabigh IPP in July 2009 indicates a positive outlook for upcoming projects. SEC, together with the local Acwa Power and South Korea’s Korea Electric Power Corporation, secured debt from a group of local banks including Al-Rajhi, Al-Enma, Samba, Banque Saudi Fransi, National Commercial Bank and SABB.

In a separate tranche, France’s Calyon, HSBC and Standard Chartered, both of the UK, and Bank of China participated. However, it was only Bank of China that put forward a significant debt portion.

Similarly, the Riyadh PP11 plant looks set to be successfully financed with the support of international and local lenders. PP11 will be developed with half the finance provided by the private sector.

But the subsequent projects are intended to have a higher portion of the project costs covered in debt. SEC hopes to structure future projects on a 80:20 debt equity ratio. This may result in a strain on the projects as higher gearing levels have the potential to deter lenders.

Saudi Arabia needs to keep on track with its current pipeline of power projects if it is to match demand growth in the medium term. To keep pace with demand in the long-run, the country has to replenish its project pipeline at the same rate.

Even if these developments are completed on time, the kingdom’s target of a 15 per cent generation reserve margin by 2020 will probably prove to be out of reach.

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