A game of consequences

Last month saw the annual gathering of power and water industry professionals at POWER-GEN Middle East at the Bahrain International Conference & Exhibition Centre, where over 400 delegates attended the three-day conference. It was noticeable how all around the event, the conversations were about ongoing plant construction and realistic business and project opportunities – a sign of just how much activity in power and water there is in the Middle East right now.

The World Energy Council has put the requirement for additional power demand in the GCC countries at 100 GW over the next ten years and these countries have already committed $100 billion to power sector investment.

The region is also desperate for more water resources and already accounts for 60 per cent of the world’s desalination capacity. In 2006 the GCC spent $4 billion on desalination technology and this is forecast to increase to $8 billion by 2012.

In the Gulf region alone, there are currently 15 projects of over 500 MW under execution, six of which are scheduled to have installed capacity of 2000 MW or more. On top of that, there are five IWPPs (1100-2400 MW) out to tender, three IPPs (1200-2000 MW) at a similar stage and some 15 utility-owned projects of 500 MW or more. That is a lot of business to be absorbed by the limited number of developers, EPCs and equipment suppliers available.

This growth in demand must be set against the background of a worldwide boom in construction and infrastructure development with many regions competing for that attention of the same providers. The USA is seeing a revival in project opportunities including large coal fired plants and activity is up across Asia not to mention the goliaths of India and China. China’s yearly capacity addition of 70 GW is more than the current total installed capacity in the Middle East.

All this activity is having consequences. The cost of most construction materials has soared in the last couple of years with steel and copper prices having doubled within 20 months.

Hans-Dieter Martin, CEO of United Infrastructure Developers said, “Pressure from EPCs to drive down component prices has forced some manufacturers out of business. The number of medium and large gas turbine manufacturers has been reduced from around 15 in the 1980s to no more than five today.”

EPC companies are now in the driving seat as to how best to allocate their limited engineering resources. They can afford to be choosy about the clients they work for, the proposal on offer and the supply and execution schedule. The upshot is that some customers have been unable to attract enough contractors to proceed with their tender. Projects have had to be delayed or scaled back in some cases.

Execution schedules for combined cycle power plants are now in the range of 30 months and it is normal for manufacturing slots for major components to be reserved.

“A combined cycle power plant with large heavy-duty gas turbines selling for $400/kW in the mid-1990s will now be more than double that and desalination plants sold for less than $5 per imperial gallon some years ago are now offered for $7 or more,” says Martin. It now seems likely that the increasing cost of raw materials and equipment and the scarcity of reliable developers are going to result in the first project with a price tag of $3 billion or more in the not too distant future.

The current state of the market is giving rise to opportunities for new participant to emerge. In the Middle East, local contractors are increasing evident in tenders and projects awards and are growing in experience and reputation. Utility companies are becoming more willing for local contractors to take on the role of Turnkey EPC. In order to get projects off the ground on an acceptable cost basis, alternative approaches to implementation are being considered, such as separating the power and water island contracts in IWPPs, restructuring of offtaker agreements and specifying projects based on performance and market availability of components.

The current conditions will not apply indefinitely and the natural cycle will take another turn, but the immediate prospects are for a continuing hard market.

Against this background, regional governments must find a way to ensure power and water development continues apace in order to sustain their planned economic development and meet the expectation of their growing populations. The innovations and new ideas that are emerging from the local market will be vital in contributing to this goal.

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Nigel Blackaby,
Associate Editor

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