In my last ‘Frontline’ I concluded with the following comment: “Come February, we are likely to have a clearer picture of the effect of the global credit crunch on project development in the GCC.” Well, here we are in March and the credit crunch has morphed into a full-blown recession in most major economies around the world and growth forecasts for GCC countries have been slashed.
Yet despite the deteriorating economic circumstances, their remains optimism in the region’s energy industry that the current conditions are just a short-term setback and that long-term requirements for power and water will drive forward projects, albeit at a slower pace over the next year or two.
That appeared to be the mood at the recent POWER-GEN Middle East conference in Bahrain, where some 2100 industry professionals gathered to debate the strategies and technologies needed to meet the growing demand.
The message was that project finance will be more difficult but that investment must be maintained in order to avoid a supply crunch. A conference report from the Bahrain event appears on page 16 of Middle East Energy.
Even so, the short-term problems in securing acceptable contracting and financing terms are real and are manifesting themselves in project delays. Difficulties in finalizing debt finance has forced Bahrain to extend the deadline for banks for submit commitments for its next IWPP at Addur.
In neighbouring Saudi Arabia, the bidding deadline on the Marifiq extension has been extended as has the deadline on Phase II of DEWA’s P project in Dubai. Despite these difficulties, managing director Saad Al Tayer recently confirmed that DEWA is still planning to raise water production by 20 per cent by the end of 2009, while electricity capacity would reach 6676 MW from 7287 MW by the year-end.
The financial crisis will put further strain on the IPP and IWPP model that has served the region so well over the last decade but that had already been feeling the pressure in recent years.
The size of projects has been growing inexorably which means that putting together a finance consortium has become harder and harder. Liquidity soon runs out when projects are slated in the $1.5 – $2.5 billion range, which is now not uncommon.
More innovative and alternative financing options involving public funds are being considered by utilities in the region.
“It is difficult to arrange long tenure of debt now and it maybe necessary to reduce the tenure to five years with a re-financing at that point,” said Nigel Thompson, a partner with lawyers Baker Botts, based in the UAE, at the Bahrain conference. “This would mean all parties sharing in the re-financing risk.”
Another alternative is to break projects down into more manageable chunks. “The current conditions require a reassessment,” said Thompson. “Maybe a phased approach is required as we have seen before in previous economic cycles.”
For those planning projects, the advice from the banking fraternity is to sort out project finance a soon as possible. “It is important to deal with the liquidity issue as early as possible in the project timetable, as this will have a big impact on the procurement process,” said Andrew Treble, HSBC’s head of Export and Project Finance in Saudi Arabia.
The saying goes that ‘every cloud has a silver lining’ and for some, these tougher times may present an opportunity to pursue projects on more advantageous terms. This will only be the case for straightforward projects supported by real underlying demand but in these cases, the wider availability of contractors, labour and parts coupled with lower commodity prices, this mzy a good time to launch a project.
It was encouraging to see quite a number of exhibitors promoting renewable energy technologies at POWER-GEN Middle East, including wind turbine manufacturer Vestas. The decision by Abu Dhabi to set a goal of seven per cent of its energy from renewable sources by 2020 and to invest in the Masdar sustainable city (see report on page 10) has set a new benchmark for the region. There is no doubt that the Middle East is blessed with some of the best solar energy resources in the world. If ACWA Power Project’s CEO Paddy Padmanathan is right about solar technology being able to compete on equal terms with fossil fuel within five years, the power generation picture may look very different in the future.
In a region more noted for its devotion to fossil fuels, the provision of information on green power alternatives is clearly valuable, given that one Vestas representative was asked by a visitor to explain exactly what fuel was used to power their wind turbine!