Despite ongoing market fluctuations, project delays and fierce competition, South Korean firms are ideally placed to capitalise on almost every aspect of the utility sector in the Middle East.
When rumours first began surfacing in 2008 that the UAE had initiated plans to build its first nuclear power plant, electricity generating companies around the world sat up and took notice. The subsequent launch of the government-backed Emirates Nuclear Energy Corporation (Enec) and the hiring of US firm CH2M Hill as the nuclear programme’s managing agent are further proof that the UAE is serious about nuclear power.
While the location, number and size of the plants it will develop has yet to be determined, as the first GCC member state to pursue civilian nuclear power, the UAE will inevitably set the standard for others.
In Seoul, the speed at which the project has been launched has set a few pulses racing.
The state-run Korea Electric Power Corporation (Kepco) has prequalified as the Korean consortium leader for the construction of the nuclear power facility, and it is up against powerful teams from France and Japan.
With tens of billions of dollars worth of work available and the chance to accelerate economic co-operation between the two countries, Kepco has high hopes for the project.
“We are very interested in UAE nuclear and are working hard together with the [Korean] government on this project,” says Young-Ha Lee, vice-president for overseas project development at Kepco. “This is a huge project, so of course it is a priority.”
Kepco will form a consortium with South Korea’s Hyundai Engineering & Construction (Hyundai E&C) to bid for the work, with construction of the first nuclear plant due to start in 2012, and the first reactor due on line in 2017.
“Hyundai Construction is well known to Middle East countries, so that [makes it] the best option in terms of the consortium,” says Lee.
Hyundai has confirmed its interest in partnering with Kepco on the deal. “We are in the Korean consortium and are very interested in the deal, although we do not know the scope yet or what type of plant at this stage,” says Jung-Mo Jang, associate director for international business at Hyundai E&C.
Korea appears well-equipped to carry out the ambitious nuclear construction project. Although it has to import almost all of its oil and gas, it is now the world’s sixth-largest producer of nuclear power, meeting nearly 40 per cent of its total electricity demand.
Kepco has been involved in building many of the country’s 20 atomic power stations, and plans to build four more by 2017.
The company’s reputation means it is also well placed for other nuclear schemes in the region. Kepco has signed a memorandum of understanding with Jordan to carry out a feasibility study for one of its first nuclear power plants.
Like Korea, Jordan relies almost entirely on imports from the region for its energy needs. It plans to tap its huge deposits of uranium reserves and build five nuclear reactors over the next 30 years.
Jordan’s King Abdullah signed the co-operation deal in December 2008 during a visit to South Korea.”We have met with the Jordan Atomic Energy Commission and the response was great,” says Lee. “We are working very hard with our government to build these relations, and we hope to conclude a firm deal some time this year.”
One of Kepco’s strengths is its access to funding, a significant advantage given wavering confidence in the Middle East’s project finance market.
“One of the strong points for us is raising funds, and the government factor obviously helps,” says Lee. “We are the fifth-largest utility in the world, but our debt ratio was 49 per cent in 2008, compared with almost 200 per cent for some European companies. So we can lend more easily.”
Kepco is currently arranging financing for its 40 per cent share in Saudi Arabia’s $2.5bn Rabigh independent power project (IPP).
It has been able to call on Korea Export Insurance Corporation (KEIC) to guarantee a $400m loan for the project after Kepco decided the interest rate offered by Export-Import Bank of South Korea (Kexim) was too high.
“Kexim’s interest rates were too high to meet our needs for the Saudi market, but KEIC is also there to support the exports of Korean firms,” says Lee. “Our target is financial close in June, and we will try our best to close the deal by that schedule. But it depends on the market situation.”
Korean companies with significant experience in the utility sector, including Doosan Heavy Industries & Construction and Daewoo Engineering & Construction (Daewoo E&C), are having mixed experiences in the Middle East.
In Libya, Daewoo was awarded the civil works package on the planned 1,400MW Tripoli West power plant, which now faces major delays because of the developers’ failure to secure funding for the scheme.
“It is not an active project and it is not moving forward,” says Woo-Shin Kang, senior vice- president for overseas business at Daewoo E&C. “We have not got the green light from Gecol [General Electricity Company of Libya], so the project is being suspended for a while.”
Hyundai E&C, which won a contract to install steam turbines and carry out electromechanical works on the project, is in a similar situation.
“We face a very difficult situation because of some payments we have already made for the turbines,” says Jang. “[It is] a headache.”
Doosan, which has operated in the Middle East since the early 1970s, also faces issues on the Tripoli West project, along with a series of delays in the Kuwaiti power market.
Doosan was the sole bidder for the Al-Zour North power plant in 2005, which under Kuwaiti public sector competition rules means a contract cannot be awarded. The project has since been delayed and retendered because of changes in its configuration.
It faces a similar problem on the planned combined-cycle power plant at Subiya, which is also likely to be retendered.
“We were there first on both of these projects but there are now changes to the configuration,” says Seok-Won Yun, vice-president for overseas power plants at Doosan.
However, with Kuwait’s Electricity & Water Ministry planning to tender $11.2bn worth of power generation and desalination projects by the end of 2010, he says it is worth persisting.
“Over the medium and long term, they need a lot of [additional power generating capacity] work in Kuwait and in the region,” says Yun. “Their inventory claims are huge long term and we are waiting to capitalise.”
Other companies better known in the Middle East region for their hydrocarbons experience are also considering opportunities in the power sector. SK Engineering & Construction (SK E&C) says it will target specific projects, despite strong competition from its peers.
“There are five or six companies strong in the nuclear and power sector in Korea, and we intend to move into the market,” says Kwang-Chul Choi, president of SK E&C. “We are interested in working with Kepco, which has invited Korean contractors to work with it to build a power business overseas.”
Diversifying its commercial spread also tempts one of SK’s competitors, GS Engineering & Construction. “We started off in refineries, and then moved into petrochemicals and gas, and we also now look at power and nuclear,” says one executive at GS. “Nuclear is very big compared with a normal refinery or petrochemicals project, so there is interest from our side.”
But for companies such as Doosan, which rely on the Middle East for about half their global revenues, changing material costs and currency fluctuations are a major risk. “For the IWPP project, the developer is flexible,” says Yun. “But for engineering, procurement and construction [EPC] projects in Kuwait or Dubai, we must shoulder the price and all the risk is on the EPC contract. So many EPC players are destroyed after one or two projects.”
Yun says that it may be some time before the market becomes more balanced. “The financial crisis started in October 2008, but I think the impact on the real market is at least 12 months,” says Yun.
He says Korean contractors would like more protection from the client, particularly around fluctuating raw materials prices. “We paid a high price for steel because we could not get it on time, and now the price is coming down, which also creates a problem,” says Yun.
The management of the currency exchange rate is a significant factor for SK’s Choi when bidding for utility projects. “The Korean won has been devalued by more than 50 per cent in about a year and what this [rate] is going to be a year from now will be a significant factor in bottom-line profit generation,” says Choi.
He adds that the rapid shifts in the cost of materials also require close attention.
“Materials costs went up 30 per cent in 2008, and I do not recall this kind of fluctuation in my career,” says Choi. “These days, winning a project is more than just an engineering or construction exercise. It is more financial engineering as to who is going to win and who is going to lose when the game is over.”
Kepco’s Lee says he is keeping an eye on the threat posed by new competitors in the market, including Chinese firms. “At the moment, our competitors are Japan and France’s EdF, but in the future China will be a challenge,” he says. “It is improving fast, but it needs three to five years before it really hits the Middle East market.”
Despite the challenges, Korean firms are well placed to capitalise on almost every facet of the utility sector in the Middle East. The delay in implementing big projects is causing some anxiety for Korean contractors, but when the market improves, they will be ideally situated to substantially boost their market share.