Saudi Arabia's feedstock challenge

03 July 2013

Faced with rapidly rising demand for electricity, Saudi Arabia is having to take tough decisions about feedstocks for its power procurement programme

Saudi Arabia’s recent decision to switch the feedstock for the planned 2,000MW Rabigh 2 power plant from heavy fuel oil to gas marks the beginning of an interesting shift in the kingdom’s power generation procurement programme.

In January, Saudi Electricity Company (SEC) awarded the contract to build the Rabigh 2 independent power plant (IPP) to consortium led by the local Acwa Power. However, in May, state oil major Saudi Aramco informed SEC that it would not supply the plant with heavy fuel oil, forcing the utility provider to change the configuration to gas. The project is now expected to be retendered in the third quarter.

The idea of prioritising gas as the primary fuel for Saudi power plants is not new. The Qurayyah power plant, which was awarded to Acwa Power in 2011, was originally planned as an oil-fired scheme, before being changed to a gas project. However, the feedstock was subsequently changed back to oil.

Policy reversals

“[With Rabigh 2], Aramco is making it clear that it does not want to keep subsidising the kingdom’s power sector with cheap oil. It is too valuable on the open market to waste on domestic power,” says a Riyadh-based source involved in the power sector.

The decision to change the feedstock for Rabigh 2 marks a reversal of an earlier policy that new power plants in Saudi Arabia had to be oil-fired. Amid a tightening of the regional gas market, Saudi Arabia’s Council of Ministers announced in 2006 that all future coastal power and desalination plants would be oil-fired, rather than gas-fired.

Aramco is making it clear that it does not want to keep subsidising the power sector with cheap oil

Source in Saudi Arabia’s power sector

Following this directive, Riyadh pushed ahead with the development of several large-scale oil-fired plants to boost the kingdom’s generation capacity to meet rising demand for industrial and domestic power. These projects included the 1,200MW Shoaiba 3 combined-cycle gas turbine plant on the Red Sea coast.

The most recent major oil-fired deal was the estimated $3.2bn contract awarded to South Korea’s Hyundai Heavy Industries to build the 2,640MW Jeddah South plant. The decision to focus on oil-fired schemes not only carried environmental consequences, but had also significant cost implications for the world’s biggest oil producer.

By 2012, the kingdom’s utility sector was burning almost 800,000 barrels a day (b/d) of liquids, which could otherwise have been sold on the international market. Aramco supplies oil for domestic power production at a rate of about $4 a barrel, while the price of Brent crude on the open market averaged just over $111 a barrel in 2012.

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

Saudi Arabia major planned power projects
 Capacity (MW)StatusCompletion date
Rabigh 2 IPP2,000Re-tender third quarter 20132016
Duba 1 IPP550Study2016
Duba 2 IPP1,700Study2017
EPC projects
Ras al-Khair power plant3,600Study2018
Ras Abu Qamis power plant3,600Study2020
Al-Rais 12,400Study2,021
Shuqaiq 12,400Main contract bid expected second half 20132,021
South Jeddah 22,400Study2,023
Shuqaiq 22,400study2,023
Ras al-Khair 23,600Study2,024
Al-Rais 23,600Study2,025
IPP=Independent power plant; EPC=Engineering, procurement and construction. Sources: SEC; MEED

However, the decision to switch the configuration of the planned Qurayyah power plant back to oil in the same year and to press ahead with Jeddah South as an oil-fired scheme the following year was evidence that Riyadh was not willing to give up on oil as a fuel source in the short term.

As a result, the change in the configuration of the Rabigh 2 plant after a preferred bidder had already been selected surprised many in the kingdom’s power sector.

“We did not expect it at all. Particularly after the Qurayyah oil scheme had been changed to gas, but then changed back,” says a member of a bidding consortium on the Rabigh scheme. “There was the viewpoint that despite what was being said about trying to invest in the gas sector, all of the major power projects would be associated with oil.”

Economists are also unsure of the reasons behind Aramco’s sudden decision to refuse to supply oil to scheme. “It is either a case of Aramco keeping wraps on the gas that they have, or they have a new opinion on the value of releasing oil onto the international market,” says an economist in Riyadh.

Gas production

The decision to move away from burning oil for power generation has raised the question of whether the kingdom can develop adequate gas supplies to cover the shift.

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

Although Saudi Arabia’s gas production has increased in recent years, exploration efforts will need to be stepped up to meet rising demand. Conservative estimates say demand for gas in the kingdom is growing by at least 5 per cent a year.

The estimated $800m Midyan non-associated gas project in the Western Province is an example of how Aramco is boosting gas exploration efforts.

The scheme involves the development of the non-associated onshore Midyan gas field to produce 75 million cubic feet a day (cf/d) of gas and 4,500 barrels a day (b/d) of condensate for a 20-year period. The output will be transported by pipeline to a power plant in the coastal town of Duba, 135 kilometres southwest of the field.

Midyan progress

In May, Aramco awarded the engineering, procurement and construction (EPC) contract for the Midyan scheme to India’s Larsen & Toubro, with the project scheduled for completion in 2016. The area has several other small non-associated gas fields that are also expected to be exploited to provide gas for power generation, following progress with the Midyan project.

In addition to stepping up exploration, Saudi Arabia is considering plans to build a liquefied natural gas (LNG) receiving terminal on the Red Sea coast. This would enable it to increase gas supplies to meet the sharp rise in domestic and industrial demand. MEED reported in April that Aramco is expected to commission a study to look at the viability of building a terminal at a Red Sea port.

“Aramco will be looking at all the possibilities of securing gas. An LNG terminal is not the most cost-effective method of boosting gas supplies, but would ensure a supply of gas while it looks into exploration efforts,” says the economist.

Following Rabigh 2, SEC is working on two further IPP projects, the Duba 1 and Duba 2 schemes, both of which will be located on the northwest Red Sea coast. The Duba 1 IPP will have a capacity of 550MW and is scheduled for commissioning in 2016. The much larger 1,700MW Duba 2 IPP, planned for completion in 2017, was announced in early 2013. No further details on the scope or configuration of the plants are expected to be released until the closure of the Rabigh 2 deal.

In addition to the two Duba IPPs, SEC is planning several power plants to be procured under traditional EPC contracts. These include the proposed Shuqaiq and Al-Rais schemes.

With a growing population and an expanding economy, Saudi Arabia faces a huge challenge to build new electricity generation capacity. Peak power demand is forecast to rise from 48,367MW in 2011 to 75,000MW in 2020 and to 123,000MW by 2032, according to the Electricity Co-Generation Regulatory Authority. The kingdom currently has 57,440MW of installed capacity. With the need to more than double generation capacity over the next two decades, the question of feedstock will be a critical issue for Riyadh to resolve.

In addition to traditional thermal schemes, the government is also pushing ahead with plans for nuclear and renewable power projects.

Nuclear power programme

In February, the King Abdullah Centre for Renewable and Atomic Energy (KA-Care) launched a white paper detailing the initial phases of an ambitious renewables programme that aims to contribute 54,000MW by 2032. Under the plans proposed in the white paper, developers will be invited to bid on 20-year power purchase contracts. The first phase of the renewables programme will be split into three tendering rounds, which will procure a total capacity of 7,000MW.

In September 2012, KA-Care appointed a group of advisers to work on plans to develop a 17,000MW nuclear programme by 2032. The group includes US management consultancy Oliver Wyman, France’s BNP Paribas and the local Riyad Bank.

The group is currently advising KA-Care on how to proceed with the nuclear programme, which may involve constructing up to 16 reactors across the kingdom.

The launch of the ambitious renewables and nuclear programmes and the decision to switch feedstock for proposed thermal plants shows that Riyadh is aware of the need to maximise returns from its precious resources, while boosting the country’s generation capacity. Executing those plans, however, will be a huge challenge.

Key fact

Aramco supplies oil for power production at $4 a barrel. The price of Brent crude averaged $111 a barrel in 2012

Source: MEED

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