Junior Isles, Managing Editor
It has been a long time coming, but at last the stage is set for the boom everyone has long been expecting in the Middle East. Some 25 years after nationalization, the Kingdom of Saudi Arabia, by far the biggest power market in the region, has reopened its upstream petroleum industry.
Last month saw ExxonMobil and TotalFinaElf awarded contracts worth a total of $25 billion for lead roles in developing Saudi gas projects. In the biggest of the three deals, ExxonMobil was selected as the leader and operator for Core Venture 1 which covers exploration and upstream developments related to the Southern Ghawar gas field. According to ExxonMobil, Core Venture 1 will significantly expand the Kingdom’s gas, power, water desalination and petrochemical infrastructure.
Notably, the project includes up to 4000 MW of new power generation capacity integrated with water desalination. And this is just part of a bigger picture which will see the Kingdom rapidly expand its power sector to replace retiring plant and meet expanding demand for both electricity and water.
Saudi Arabia plans to add in excess of 34 000 MW between 2000 and 2023. With the Kingdom moving towards a gas driven economy, 24 000 MW of this total will be in the form of gas fired combined cycle generation located at 16 sites.
The investment climate is also ripe. According to Mohammed Ibrahim Al Molhelm, Director General Saudi Arabia’s Electricity Corporation Planning Department, SR438 billion ($116 billion) is required for its electricity sector. Private sector participation is being encouraged for generation and transmission. This accounts for more than 80 per cent of the total investment requirement. Some 54 per cent will be required for generation alone.
Saudi Arabia’s approach to the market also seems to be well thought out. There was an interesting conference in Riyadh in October last year called “Opportunities in the power sector in the Kingdom of Saudi Arabia” with some memorable comments from Prince Abdullah Bin Faisal Bin Turki Al Abdullah Al Saud. Prince Abdullah outlined the Kingdom’s approach to the electricity sector and its desire to make doing business straightforward: “The main thing we are looking for are IPPs. But we have more stop signs in business than on Saudi streets. All of these stop signs stop flow and only pedestrians can operate: we don’t want pedestrians.”
He did, however spell out that “Saudi will not blindly follow what others have done. We will not take the easy option and sell-off the [power] sector. The government looks after the lives of people and their basic needs, no matter what the cost to the government. We could have gone into a massive
sell-off programme in ’93/94 but didn’t.”
The ground rules for market investment were set in April last year with the Council of Ministers Decision 169. This will see the removal of government subsidies and promote sector transparency.
Saudi Arabia will adopt a single buyer model with the Saudi Electric Company controlling transmission. Over the next ten years, this will evolve into a competitive pool system with the Gulf Cooperation Council as the backbone.
However, according to Steve Davis of law firm LeBouef Lamb, Green & MacRae there are still a few open issues. “…There needs to be a one-stop shop for approvals. Will SEC be allowed to develop generation? Water and natural gas pricing will also be crucial to the development of the power sector…”
Indeed there are still some open issues but Saudi Arabia does seem to have a carefully planned, long term approach. This will eliminate many of the uncertainties that have plagued other markets that have privatized and deregulated. The Kingdom has determined where generation will be sited and the size of plant at each site.
At the same time, plans for transmission expansion are also in place which will avoid some of the transmission constraints we have seen in the US, and are potentially there in Europe.
And finally, the fuel is there to drive this expansion. There is no shortage of gas supply and with the sector now open to investment, the outlook is bright. The western oil majors must feel good to be back after a spell out in the cold; and their re-entry should instil confidence into potential investors in the power business.
Word on the street is: it all looks good in the ‘hood (that’s neighbourhood).