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Love is in the air

Traditionally, Valentine’s Day has never been high on my list of special days. (Perhaps sour grapes from one who rarely receives a card). It was therefore mildly amusing to read an article which stated that religious authorities in Saudi Arabia had ordered the confiscation of any products associated with the Day. Shop owners in Jeddahclaimed that for the past three years, the Association for the Promotion of Virtue and the Prevention of Vices had wiped their shelves clean of any red roses, candy and gifts, and that they were worried their goods would be confiscated again this year.

It seems Saudi Arabia is not a place for lovebirds. Neither, traditionally, has it been a place for power developers with romantic notions of securing projects in a market going through the process of encouraging private sector participation.

The need for private sector participation is unquestionable. The Saudi Arabian Government forecasts demand for electricity in the Kingdom rising from its present level of 23.6 GW to 66 GW in 2020. The sector needs an estimated $130 billion.

Yet the Kingdom has stumbled in its move to set up a market structure and legal framework which encourages private sector development. The ground rules for market investment were first set in April 2000 with the Council of Ministers Decision 169. But, with an unsuitable legal framework, the investments did not flood in.

It seemed the Kingdom had finally made a huge breakthrough with the announcement of the Core Ventures Projects in the first half of 2001. In the biggest of three deals, ExxonMobil was selected as the leader and operator for Core Venture 1 for exploration and upstream developments related to the Southern Ghawar gas field. Notably, the project included up to 4000 MW of new power generation capacity integrated with water desalination.

But talks for the three projects became deadlocked over a number of points; the key one being agreed return on investment for the projects. Saudi Arabia was offering a rate of return between 8-12 per cent, while the oil companies were pressing for 15-18 per cent.

Also in 2001, CMS Energy along with joint venture partner

A. H. al Zamil Group was chosen by Saudi Petrochemical Company (Sadaf) to build the Kingdom’s first private power project. But it then took more than two years for the equipment order to be placed for the 260 MW cogeneration project.

With little success in establishing IPP projects, in July 2002 the Supreme Economic Council passed a resolution setting out a framework for private sector involvement in developing independent water and power projects (IWPPs). Projects identified for development would serve the capital, Riyadh, as well as the cities of Jeddah, Mecca, Median and Shuaiba on the west coast, and Jubail on the east coast.

Now it seems things are finally gaining momentum. In October 2003 the Saudi electricity and water authorities announced plans to build 21 water and electricity projects in the Kingdom with an estimated total value of $13 billion. These include seven electricity generation plants worth $7.2 billion which will provide 14 000 MW additional capacity.

The Kingdom is hoping to follow the model successfully pioneered in the UAE and Oman. Under this model Saudi Arabia hopes to attract private sector investment for up to 60 per cent equity in IWPP projects, and is considering a guarantee that local Saudi companies would purchase electricity and water produced.

The plan seems to be taking shape. In December 2003, national oil company Saudi Aramco signed BOOT agreements with UK power developer International Power and local construction firm Saudi Oger, to build four cogeneration facilities in the Eastern Province of Saudi Arabia. Financing for these projects has now been successfully completed. Total equity investment in the projects amounts to $130m, of which $78m will be invested by International Power and $52m by Saudi Oger. Commenting on the deal, Philip Cox, chief executive officer of International Power said: “We are delighted to have Saudi Aramco as our new customer… this marks our entry into one of the world’s largest energy markets that has a growing demand for power and water.”

And so the private sector love affair with the Saudi power market is finally blossoming. Who knows? Valentine may yet have his Day. Even I may now have to consider it a special day, since this year a certain ‘Romeo’ received a Valentine’s card from a certain Juliette.

Junior Isles, Publisher & Editorial Director