A key project recently commissioned by Suez in Oman has won numerous awards for its financing package. PEi explores how the Sohar Independent Water and Power Plant has shown how governments and companies are working together.
There is little doubt that business in the Middle East is on the brink of booming, if indeed it is not already there. Trade and financial centres have been steadily building, while new awe-inspiring developments such as the Sports City and Palm Islands in Dubai will provide a further boost to momentum in the tourism and residential sectors.
However, these extravagant developments cover what is still very much a developing region. The pace of development is what is causing the greatest challenge to those looking to promote building of new infrastructure. As fast as new and heavy industries such as aluminium smelting and steel works can be attracted to the region, in order to continue the development, power and water needs to be there at the same time, if not sooner to help speed up secondary industry development until it meets the tertiary ambitions.
Unable to provide all of the necessary finance, expertize and technologies, many countries in the region are looking to foreign-based companies for assistance. With the potentially huge rewards on offer, interest is high. However, foreign companies are demanding greater security and clarity as safeguards for their investments. The proof of efforts made by countries in the region is already becoming apparent, with many starting to carry out extensive industry reforms, unbundling and privatizing departments to provide a more transparent framework in which to work.
These reforms and the rapid rate of growth are making conditions increasingly favourable for Independent Water and Power Plant (IWPP) project developers. One project that recently entered operation in Oman has won numerous awards for its innovative approach to financing. The Sohar IWPP is 50 per cent owned by Suez and 50 per cent owned by five other parties – National Trading Company., W.J. Towell & Company., Zubair Corporation., Sogex, and the Ministry of Defense Pension Fund, which each own 10 per cent.
A recent announcement by the Abu Dhabi Water and Electricity Company (ADWEC), that it was to revise upward its energy demand forecast is another clear indication that that regional demand growth continues to increase. Previous estimates had projected growth to be at around eight per cent in Abu Dhabi, but it is now likely to be above this figure and remain so for the next decade.
Keith Miller, head of ADWEC’s planning and studies department said at a conference in March this year: “We expect Abu Dhabi electricity demand to double in the period 2008-2013.”
At the time of the presentation, figures from ADWEC estimated that the system peak demand would grow from 4680 MW in 2006 to 7333 MW in 2009. Demand was expected to reach 12 590 MW in 2015 and 14 226 MW in 2020. Growth in water demand was estimated to be less dramatic.
In Oman specifically, peak demand is set to grow on average by seven per cent over the next seven years, according to the Oman Authority for Electricity Regulation. The same trends are being seen throughout the region. The US government’s Energy Information Administration (EIA) estimates that electricity consumption in the entire region will grow from 471 000 GWh in 2003. In 2010 it will reach 681 000 GWh, before climbing to 782 000 GWh in 2015, 872 000 GWh in 2020, 955 000 GWh in 2025 and 1 million GWh in 2030.
Figures for growth like these prove just why companies are keen to cultivate the region’s power market. Dirk Beeuwsaert, CEO of Suez Energy International, said: “We feel it is of utmost importance to be firmly present in the Middle East. The region is one of the fastest growing energy markets in the world resulting from a steep development of industrial projects and ambitious real estate ventures. Local energy demand forecasts from 2008 to 2013 show an impressive upward curve with more growth to come.”
There is no set project finance structure that is common throughout the region as each market has dictated its own agenda. Build Own Operate and Transfer (BOOT) and Build Own and Operate (BOO) are starting to emerge as preferred options with other conditions attached by each country to tailor it to their own needs. For example, in Oman, a company awarded a BOO contract, will have to be listed on the stock market. The scale of many of the projects and huge amounts of finance required mean that projects must have a solid power and water purchase agreement (PWPA) in place as well as some form of guarantee. The structure of the PWPA contracts vary from country to country along with the guarantees. Some ask for a certain rate of return, others for a tariff.
The restructuring of the power sector, which took place in May 2005 has facilitated the development of the IPP market in Oman, according to those involved with the Sohar project. The sector has been unbundled, creating, among others, the Oman Power and Water Purchaser, the Oman Electricity Transmission Company, and the Authority for Electricity Regulation. This clearer division of responsibilities is felt to have given external parties the confidence to invest in the market.
Marc Josz, Regional Manager of Suez Electricity International Middle East Asia, a business division of Suez, says: “Oman has established a track record in attracting the private sector to invest and operate in its power and water desalination sector.” He continues: “The region offers an investor-friendly environment characterized by long-term power and water purchase contracts, with US$ secured returns. The well-developed legal framework and the long-term off-take contracts for electricity and water made it possible already to obtain a limited recourse project financing.”
The $550m of financing necessary for the Sohar project was finalized in November 2004 and involved a large number of international banks and lenders. The level of equity in the project is 25 per cent. Omani law dictates that 35 per cent of the shares in the Special Project Vehicle must be offered to the public in 2008 by an Initial Public Offering (IPO). The shares will be floated on the Muscat Securities Market.
Located 20 km north of Sohar in Oman, the IWPP is part of the Sohar Industrial Port Area, a $10 billion development dedicated mostly to the petrochemical industry. The 585 MW and 150 million litres of potable water produced each day will be sold to a single buyer, the Oman Power and Water Purchaser under a 15-year PWPA. The state-owned company will then transmit the electricity to the country’s three distributors via the network operator (the Oman Electricity Transmission Company).
Figure 1. The power side of the Sohar plant will generate 585 MW
The Operating and Maintenance company created for Sohar, is owned 50 per cent by Suez and 50 per cent by Sogex. The main contractor is Suez Global Contracting & Construction Company, which is 100 per cent owned by Suez. Doosan Heavy Industry and Construction of Korea, is the contractor for both the power and water islands. The power island will consist of three Siemens SGT5-2000E (formerly V94.2) gas turbines and three Doosan HRSGs. Completing the mix of company technologies, a 220 MW condensing steam turbine is to be provided by Alstom.
Figure 2. The assembly of the 220 MW steam turbine
The desalination process is based on four evaporators of multistage flash technology utilizing low pressure extraction steam from the steam turbine. The Industrial Port area has a common sea water pumping station consisting of 48 chambers, six of which are allocated to the Sohar IWPP. The system returns an efficiency of 1m3 of potable water from 10m3 of sea water.
Figure 3. The water side will of the Sohar plant will provide 150 million litres of potable water each day
Construction started in early 2005 and the desalination plant will start operating at the end of 2006. Although commercial operation is scheduled for 1 April 2007, the plant has been available for early operation in open cycle since the start of April this year. The plant will stop its early commercial production at the end of September for final conversion to combined cycle and commissioning. By the time the plant enters full commercial operation there will be 100 people on site and under its contract, SOMC will have to increase the number of Omanis employed at the plant to 90 per cent of the total within ten years.
The apparent success of this project in what is a burgeoning market should serve as a template for the future. Sharing of responsibilities, risk and profits combined with a more transparent and developed working infrastructure has won this project many awards before it has even started generating. If this model of sharing does continue, companies can rest assured that with the rate of growth and the scale of ambition, there will be plenty to go round.