Ever since the South Korean consortium led by Korea Electric Power Corporation (Kepco) was awarded a $40bn contract to build and operate four nuclear reactors in the UAE in December 2009, the region’s governments have been busy developing their own nuclear plans.
In April, the Bahrain government issued a request for expressions of interest to provide technical advisory services for its proposed nuclear project, while Kuwait signed a cooperation agreement with the French government, and Saudi Arabia announced plans to develop the King Abdullah City of Atomic and Renewable Energy. Its mandate would also include overseeing activities related to the future use of nuclear energy in the kingdom.
The renewed drive by regional governments to develop nuclear power projects has started a race to secure the necessary resources to realise these ambitions.
“The enormous technical, legal and financial challenges associated with these projects should not be underestimated by governments in the Middle East. In addition, with the passage of time, not only is it possible that the nuclear supply chain will become saturated, but there is likely also to be pressure on pricing and the availability of financing,” says Joseph Huse, the nuclear power group head at UK law firm Freshfields Bruckhaus Deringer.
Governments are acutely aware of the importance of timing and realise that if they are serious about moving forward with nuclear plans, they must avoid being last in the long queue of nuclear development projects in the region.
With a financial system still dealing with the impact of the credit crunch, the biggest challenge is likely to come when these mega-projects seek funding, although there are other sizeable hurdles when securing other resources and services.
Nuclear projects are big schemes to finance. Depending on the chosen technology, reactors typically have a capacity of between 1,000MW and 1,500MW. Unlike natural gas or coal-fired power plants, nuclear facilities cannot be scaled down below this based on equipment currently on the market, with the exception of small nuclear reactors typically used in nuclear submarines.
The sheer scale of the plants means the upfront construction costs are large. The South Korean team led by Kepco may have significantly undercut its rival bidders on Abu Dhabi’s nuclear plant, but the construction part of the deal is still worth in excess of $20bn, and this does not include the cost of upgrades to the transmission network that are needed to receive the nuclear power.
Traditionally governments pay for most of the initial investment in nuclear power schemes. And no nuclear project has been project financed. While wealthy governments such as the UAE, which is backed by Abu Dhabi’s oil reserves, may be able to finance nuclear projects, other countries may not be able to afford this luxury.
Once the funding is in place, construction can start, but there are only a handful of international contractors and technology firms capable of developing several large facilities simultaneously.
The enormous technical, legal and financial challenges … should not be underestimated
Joseph Huse, Freshfields Bruckhaus Deringer
If all the planned nuclear power schemes in the region move ahead at the same time, there will be a rush to hire contractors at favourable prices. And countries that end up towards the end of the queue, will face a limited selection of contractors, who will be able to inflate their prices.
Waiting for the period of increased demand to pass may afford the benefit of learning from the experience of neighbouring countries. But it would also mean waiting several decades to bring the project online because nuclear schemes take 10-15 years to complete after the planning, construction and grid-reinforcement stages are taken into consideration.
From the contractors’ perspective, the Middle East is becoming an important place for new opportunities.
Competition to build the region’s first nuclear power plant in Abu Dhabi was particularly fierce between the winning South Korean consortium, a French team including Areva, GdF Suez and Total with the US’ Bechtel Corporation and France’s Vinci, and another group comprising a US/Japanese team of GE and Hitachi. With more projects planned in the region, further rounds of competition are expected.
South Korea plans to export 80 nuclear reactors by 2030, which would take its share in the global nuclear market to 20 per cent, and Kepco has also scooped a deal to build a 5MW nuclear research facility at the Jordan University of Science & Technology.
To avoid losing out to the South Koreans again, competing contractors have indicated they may adjust their strategies to compete more effectively on price. Christophe de Margerie, Total’s chief executive, has said the company is considering the possibility of offering cheaper reactors using older technology.
At the same time, the role of inter-government agreements and export credit agency (ECA) support is becoming more vital.
France and Kuwait have recently signed an agreement “to jointly develop the peaceful use of nuclear energy”. The deal aims to give French contractors an edge in contract awards.
Danny Roderick, senior vice-president of new plant projects at GE Hitachi Nuclear Energy, says, “The biggest thing that we took out of the UAE experience was the involvement of state-owned companies backing high-risk financial commitments. As a private company, we were in direct competition with countries – not companies. We have to find better ways to use our government to provide similar backstops on projects.”
Contractors are only one side of the nuclear delivery team. Securing experts with the necessary experience to run a nuclear programme or head a regulatory agency is also difficult, as few people have worked on a series of nuclear programmes elsewhere in the world. The UAE has appointed William Travers as director general of the Federal Authority for Nuclear Regulation.
Having worked for both the US’ Nuclear Regulatory Commission and Vienna-headquartered International Atomic Energy Agency’s (IAEA), Travers brings with him lots of experience and will give a major boost to the UAE’s atomic energy programme.
Once construction is complete, nuclear facilities need fuel to operate. The UAE signed the 123 Agreement for peaceful civilian nuclear energy cooperation with the US in December 2009. In doing so, it relinquished the right to enrich uranium to use as fuel in its nuclear power plants.
In August 2008, the UAE pledged $10 million toward an international nuclear fuel bank proposed by the US-based Nuclear Threat Initiative, a non-governmental organisation.
While other states in the region are expected to use the IAEA-run nuclear fuel bank, the issue is more problematic for countries such as Jordan, that have their own uranium deposits. While Amman has signed the Non-Proliferation Treaty, it is against giving up the right to enrich uranium on its own soil. Should Jordan be allowed to enter the fuel cycle, it would benefit greatly from using its own reserves.
But even without a green light to process the raw fuel, Jordan will indirectly benefit from mining its resources, and it has already signed a memorandum of understanding with France’s Areva to extract uranium in the country.
With so many competing nuclear schemes in the region, timing is crucial in the race to develop nuclear power projects in the Middle East. The UAE has first-mover advantage and is keen to push ahead with its ambitious plan with a fast tracked schedule and a contractor that believes it can deliver on time despite the absence of a regulatory regime.
The emirates’ plans are credible. It can afford to move ahead with the project, and it has a rapidly growing demand for power. According to Abu Dhabi Water & Electricity Company (Adwec), power demand in Abu Dhabi, the largest of the seven emirates, will be 3.5 times higher than current figures by 2030.
The UAE’s growth forecasts are not unique, and most other regional governments have compelling economic reasons for developing their own nuclear power projects.
But for countries such as Bahrain, Kuwait, Saudi Arabia, Egypt and Jordan, developing nuclear power plant may be more challenging and a lot will depend on quickly moving ahead with the plans. The tendering process in Abu Dhabi last year showed international firms are keen to work on nuclear projects in the region. The problem is their appetite is limited.