Full steam ahead

Driven by growing demand, several key power and water projects in the Middle East are moving forward at full pace. Their progress illustrates that the difficult international climate need not be a barrier to continued infrastructure development.

In December 2001, an international consortium and the Abu Dhabi Water and Electricity Authority (Adwea) announced that they had closed financing on the Shuweihat S1 power and water desalination project in Abu Dhabi. By July 2003 the first gas turbine at the plant had achieved synchronization with the grid, and the project is on schedule to achieve full commercial operation in late 2004.

The Shuweihat S1 project is the largest independent water and power project (IWPP) in the region, and is also the largest non-recourse project financing in the Middle East. It was also the first major infrastructure project in the Gulf region to achieve financing after the September 11 terrorist attacks in the USA. Its successful financing and swift progress show the determination of governments in the region to expand their power and water infrastructure, and stand testament to the commitment of the project partners to move forward under difficult market and international conditions.

This commitment is also illustrated by the fact that one of the Shuweihat project partners, International Power, also completed financing of a second major IWPP in the region just weeks after the end of major combat operations in Iraq. In July 2003, International Power announced with partners Adwea, Tokyo Electric Power Company (Tepco) and Mitsui & Co., that it had reached financial close on the acquisition and expansion of the Umm Al Nar power and desalination plant in Abu Dhabi, UAE.

International Power owns a 20 per cent equity interest in Umm Al Nar, a gas fired plant with a capacity of 850 MWe and 162 million Imperial gallons/d (MIGD) of desalinated water. The project consortium will operate and maintain this plant, and will also develop a new gas fired power and water desalination plant on the same site. The plant is located close to Abu Dhabi city.

The Shuweihat S1 plant, located 250 km west of Abu Dhabi city, is a 1500 MW, 100 MIGD (455 million l/d) power and desalination plant that will enter full commercial operation in August 2004. International Power and CMS Energy share equally a 40 per cent equity stake in the Shuweihat project, while Adwea owns the remaining 60 per cent.

Global strategy

Umm Al Nar and Shuweihat are both key projects in the Gulf region and form part of International Power’s global business strategy: to develop, own and operate power generation assets in three main areas ” North America, Europe and the Middle East, and Australia. This geographic balance, says International Power, helps it to counterbalance regional market cycles.

While some regional power markets are in a depressed or stagnant state, the Middle East is one area where opportunities exist. This is largely due to the rapidly growing demand for electricity and water, particularly in the Gulf states and the Arabian peninsula. The Emirate of Abu Dhabi, for example, has a growing population (estimated at 7.6 per cent in 2002) and a rising standard of living. As a result of these factors and government policy to encourage agriculture, the demand for power and water has been growing robustly in recent years and is forecast to maintain this strongly upward trend for the foreseeable future.

The downturn in the US market and the withdrawal of many US power companies from the international scene are benefiting companies such as International Power. “Initially we found that there were a lot of American companies that were competing against us [in the Middle East],” says Aarti Singhal, communications manager at International Power, “but most of the companies that were exploring overseas investments now have financial problems and major liquidity issues so they are going back home and selling their overseas businesses. There is much less competition now.”

Siemens Power Generation will equip the Shuweihat S1 power plant with five V94.3A gas turbines
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International Power also maintains a very disciplined approach to its investments, a factor that has allowed it to be successful in a difficult global market. “All of our investments are based upon solid principles of understanding the technology, understanding the costs and understanding the value that will be created so that we can make a sensible return,” says Ken Teasdale, director of operations and engineering at International Power. “That discipline that we have was perhaps lost by other companies in their scramble for growth and lead some of them to withdraw from the market.”

Countries like the United Arab Emirates also fit International Power’s investment strategy in terms of their stability and outlook. “There are a number of elements that we tend to look for,” says Singhal, “and these countries match that with their stability, the fact that they are very open to Western investment and their good sovereign ratings.”

In addition, the market structure and privatization models followed by key countries in the region are attractive to project developers. IWPPs are generally backed by long-term contracts which provide security for developers and financiers alike. “All these plants in the Middle East are supported by very robust long-term power and water purchase agreements (PWPAs), which bring earnings security as the PWPA is a government-backed payment mechanism.” says Gary Crump, operations and engineering implementation manager of International Power.

Financing Shuweihat

The PWPA for Shuweihat was signed in July 2001 and will run for a 20-year term from the project commercial operation date in August 2004. Under the agreement, the Abu Dhabi Water and Electricity Company (Adwec) will buy electricity and water from the plant on a capacity payment basis. The contract also includes energy payments to cover variable costs such as fuel, so that changes in the price of gas can be passed through to Adwec. The fuel pass-through element of this is adjusted to account for plant efficiency.

The presence of such long-term contracts and a proven project structure helped CMS and International Power clinch financing for the Shuweihat project. The financing structure comprises a $1285 million 20-year term loan and a $351 million equity bridge facility. The term loan includes a $250 million Islamic tranche arranged by Abu Dhabi Islamic Bank. Lead arrangers for the $1.6 billion construction loan package include Abu Dhabi Investment Company, Barclays Capital, Citibank, Credit Lyonnais, HSBC, Kreditanstalt fur Wiederaufbau, National Bank of Abu Dhabi, Royal Bank of Scotland, Sumitomo Mitsui Banking Corporation and The Bank of Tokyo-Mitsubishi.

International Power achieved financial close on Umm Al Nar in July 2003
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The Shuweihat S1 project is being constructed by a consortium of Siemens and Fisia Italimpianti under an engineering, procurement and construction (EPC) contract. Siemens is responsible for the power island while Fisia will construct the desalination portion of the plant (see pages 51-53 for more information on the desalination plant).

The plant will consist of a 1500 MW gas fired combined cycle power plant and desalination facility built on a greenfield site close to Jebel Dhanna. Siemens Power Generation will equip the plant with five V94.3A gas turbines, two 251 MW backpressure steam turbines, heat recovery boilers and associated equipment. Siemens Power Transmission and Distribution will supply power transformers for the plant.

Steam from the power island will supply heat to the six 16.6 MIGD (75 million l/d) multi-stage flash desalination units to produce potable water. Adwea is responsible for constructing the power and water networks to connect Shuweihat to Abu Dhabi city and other areas.

PB Power, acting as the owner’s engineer on the Shuweihat project, announced recently that the first gas turbine at the project achieved synchronization with the Abu Dhabi network in June 2003 ” just over 12 months from the first pouring of concrete on site. The project will enter commercial operation in phases, with the first power units initially supplying electricity to the grid in open cycle mode before being converted to combined cycle and the commissioning of the water island.

Shuweihat will be operated by Shuweihat O&M LP, a 50:50 joint venture between CMS Generation and International Power under a 20-year operations and maintenance agreement. The operating company has signed a gas turbine maintenance contract with Siemens.

A complex project

Construction work on Shuweihat is progressing on schedule, and the project partners expect to be able to reach commercial operation in accordance with the contractual timetable. Work on Umm Al Nar is just beginning, however, and it is a complex undertaking, says Teasdale.

A new power and desalination plant will be built at Umm Al Nar
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The plant consists of a power island commissioned between 1978 and 1984, and a water island consisting of 18 desalination units. The plant is capable of producing 805 MWe and 162 MIGD (737 million l/d) and will be operated by International Power, Tepco and Mitsui until 2008. The power island and the bulk of the water island will then be handed over to Adwea ” which holds a 60 per cent equity stake in the project ” for decommissioning.

While operating the existing plant, the project partners will also construct a new gas fired power and desalination plant at the site. This will consist of a combined cycle power plant equipped with five GE 9FA gas turbines and two steam turbines, and two multi-stage flash desalination units. This new plant will have a capacity of 1550 MW and 25 MIGD (110 million l/d). Construction is due to start in the third quarter of 2003 and commercial operation is scheduled for mid-2006.

Once commissioned, the new plant at Umm Al Nar will incorporate seven of the newest desalination units operating at the existing plant, taking the total desalination capacity of the new plant to 94.5 MIGD (416 million l/d). As with Shuweihat, power and water from the plant will be purchased by Adwec under a 23-year PWPA.

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