Suez heads off Asian challenge in Gulf power and water sector

02 October 2008
Belgium’s Suez Energy International dominates MEED’s power and water private developer rankings after winning every project awarded this year, but Japanese firms are climbing the table.

It has been a momentous year for Belgium’s Suez Energy International. The developer has won every independent water and power project (IWPP) awarded in the Gulf so far in 2008.

To put this into perspective, MEED’s rankings of the top private power and water developers shows that a total of 2,676MW of power and 110 million gallons a day (g/d) of desalination capacity has been contracted to private companies in the year to September 2008.

Abu Dhabi Water & Electricity Authority (Adwea) awarded Suez its Shuweihat 2 project in May, and in a consortium with Kuwait’s Gulf Investment Corporation, Suez successfully bid for the Addur IWPP in Bahrain in mid-August, significantly enhancing the company’s position in the UAE.

Until then, Suez had only held a stake in the Taweelah A1 IWPP in the UAE, which it acquired in 2000.

This year, the Belgian developer also won the Ras Laffan C IWPP, establishing itself in the Qatari market for the first time.

Meeting challenges

According to Suez, each project presented the company with a unique set of challenges. “In Qatar, it was a pretty long and arduous negotiation process,” says Shankar Krishnamoorthy, executive vice-president for the Middle East at Suez.

“There, the challenge lies in being able to optimise to the very end. In the UAE, we had a good engineering, procurement and construction (EPC) team: Doosan [Heavy Engineering & Construction], Siemens and Samsung [Corporation]. Samsung was pretty new to the market.

“On Addur, even though there were doubts about using reverse osmosis [technology], we decided to go with it in accordance with the request for proposals.”

Suez’s strategies were clearly effective and its multiple triumphs have propelled it into the position of leading GCC developer by power and water capacity.

It now owns 4,362MW of power capacity and 184 million g/d of desal-ination capacity, spread across 10 of the region’s IWPPs.

Last year’s leading developer by power capacity, the UK’s International Power, now lags behind Suez by a margin of 1,748MW.

On desalination projects, Suez has ousted Acwa Power Projects from the top spot and has a comfortable lead of 54 million g/d of capacity over the Saudi giant.

Asked if Suez now has enough on its hands or whether its appetite for work in the region is unwaning, Krishnamoorthy provides a confident response.

“We have been hearing the same question since we won Sohar and we have won eight [more projects] since,” he says. “There is only one project we had to miss because we could not get an EPC contractor: Yanbu.”

Expansion plans

The developer is still in the running for Saudi Electricity Company’s Rabigh independent power project, as well as the Safi coal-fired power plant and Tarfaya wind-farm projects
in Morocco.

“In terms of our resources, the worst seems to be over,” says Krishnamoorthy.

“It was an extremely challenging year for us. Are we missing out on bids? Yes, on Yanbu, but the remaining three projects continue at some pace. But I do not think we will have as busy a year in 2009.”

While the rise of Suez is undoubtedly the story of the year, the fortunes of several other developers in the Gulf market have also improved significantly.

The Ras Laffan C IWPP project was not only kind to Suez; it also facilitated the entry of a new Japanese player into the market, and the rise of two of its compatriots up the Gulf developer rankings.

Mitsui & Company, Suez’s consortium partner on the project, gained 273MW of power capacity and 6 million g/d of desalination capacity on the back of the scheme.

This has lifted its ranking from 20th for both power and water capacity in 2007 to 10th for power and 17th for water in this year’s rankings.

Mitsui’s decision to share its stake in the Ras Laffan C IWPP with two other Japanese companies has also had an impact on this year’s rankings.

Chubu Electric’s 137MW share in the project moves it up four places to 18th position. More significantly, the same stake in the scheme has brought Shikoku Electric Power into the Gulf power and water sector for the first time.

The only other shift in the order of developers was caused by another Japanese company, Sumitomo Corporation. Until this year, Sumitomo’s only success in the region was the Al-Hidd IWPP in Bahrain, which it won in partnership with International Power and Suez.

In September, the company announced it was buying a 20 per cent stake in the Shuweihat 1 IWPP from Abu Dhabi Energy Company (Taqa). The venture added 299MW and 20 million g/d of capacity to its regional holdings.

Gaining share

But the company’s assets in the Gulf could grow massively before the year is over. It is the low bidder for Saudi Arabia’s Ras al-Zour IWPP, the largest desalination project in the world.

If Sumitomo is confirmed as the winner on the scheme, its portion of the regional market will become significantly larger (see box, page 44).

The Japanese developer submitted its bid for the project in a group with Malaysia’s Malakoff International and the local Al-Jomaih Automotive Company.

A victory for Sumitomo has been a long time coming and the developer’s position is characteristic of a market that is dominated by a handful of strong incumbents.

“There are a couple of new winners but not new players - for example, Sumitomo on Ras al-Zour,” says one industry source.

“Sumitomo has been trying like crazy for a long time, but it has only ever won on Al-Hidd. This is the first time Sumitomo has come out as the leader.

Otherwise the market is split between the same players, and has been for a while. In Qatar and the UAE, the winners are Suez, International Power and Marubeni, and that is it. In Oman, the tendency is to seek out cheaper players, so there is room for newcomers.”

However, it is Suez that continues to dominate the Omani and Bahraini private power and water markets. And the company’s triple wins elsewhere in the region this year have shaken up MEED’s developer rankings.

In the UAE, Suez has replaced Singapore’s SembCorp in third position and now lags behind Marubeni by only a small margin. And while Marubeni has maintained its lead position in the Qatari market, Suez now owns the second-largest portfolio in the country.

Key fact


Amount of power contracted to private companies in the first eight months of 2008

Upcoming projects

There are more awards to come in the private power and water market this year. Saudi Arabia’s Water & Electricity Company is evaluating bids for the world’s largest desalination plant: the Ras al-Zour independent water and power project (IWPP).

Japan’s Sumitomo Corporation is the low bidder for the scheme. Oman Power & Water Procurement Company is also assessing the three proposals submitted for its Salalah IWPP.

Saudi Arabia will also receive bids for two projects before the start of 2009. In November, companies will submit proposals for Saudi Electricity Company’s first independent power project, at Rabigh.

A month later, Power & Water Utility Company for Jubail & Yanbu (Marafiq) will receive bids for the Yanbu IWPP.

Meanwhile, Abu Dhabi Water & Electricity Authority (Adwea) is considering a proposal from Japan’s Marubeni Corporation for the planned Shuweihat 3 IWPP.

Adwea approached Marubeni and asked the company to match Suez’s price on Shuweihat 2 for the contract to develop the authority’s next IWPP.

However, many industry observers say Adwea will ultimately have to resort to issuing an open tender for the project.

“It would be impossible for someone to match our tariff on Shuweihat 2 because it happened when the banking market was not doing as badly, and there has been no relief on the EPC side [since],” says Shankar Krishnamoorthy, executive vice-president for the Middle East at Belgium’s Suez Energy International.

Financial turmoil prompts project concerns

Developers continue to be affected by engin-eering, procurement and construction (EPC) resource and equipment shortages. This year, several companies were forced to pull out of projects after the prequalification stage, having failed to secure contractors to join their bidding group.

While only a few developers have been so negatively affected by the problem, all cite the issue as a concern.

“The challenging issues for us remain equipment supply and EPC contracting capacity,” says Paddy Padmanathan, president and chief executive officer of Saudi Arabia’s Acwa Power Projects.

“EPC resources are less of an issue - there are new experienced players that are emerging. So the EPC issue is one that we can manage, but equipment is a big problem because of schedules. Turbine and boiler shops are all solidly booked until 2012.”

New contractors have moved in to fill the gap in EPC resources. South Korean firms have already established themselves in the market and Chinese companies are set to follow suit.

“Traditional EPC contractors such as [Ger-many’s] Siemens and [Japan’s] Toshiba Corp-oration are getting selective,” says Hiroshi Toyoshima, president of Japan’s Marubeni Europower. “Therefore, the major players have become the South Koreans.”

In addition to the contracting resource worries that they have faced for some time, developers are anticipating a new problem.

Ongoing turmoil in the money markets has left developers questioning the future of project finance deals in the Middle East.

“A problem that has not really featured in a significant way yet, but I dare say will, is the continuing turmoil in the financing market,” says Padmanathan.

“While the region is awash with cash, it is cash of the wrong currency. It is struggling to produce dollars and equipment is bought from around the world, so part of the capital expenditure is in dollars.”

The financing on Suez Energy International’s projects has been fully underwritten, but the banks are likely to find it difficult to sell down their debt in a syndication.

“The challenge is obviously there given the condition of the financial markets,” says Shankar Krishnamoorthy, executive vice-president for the Middle East at Suez.

“However, our bids were submitted on the back of solid underwriting commitments from banks. And we expect the deals to close as scheduled.”

The assumption among developers is that banks will grow increasingly risk averse when it comes to project finance. “Two years ago, banks were aggressive and would provide finance to any project,” says Toyoshima.

“Now they have become very careful. The appetite is in projects structured like Adwea, Qatari and Omani projects. If the client wants to do something new and challenging, it will not be so easy.”

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