Saudi Arabia power project provides industrial innovation

Government is pushing for private sector involvement to bridge the growing gap between supply and demand

By Tim Hennagir

Contributing Editor

Saudi Arabia is among the world`s leaders in per capita consumption of electricity, water and gas. Aggregate generation capacity in Saudi Arabia reached 20,300 MW in 1995, 86 percent of which was produced by the 10 Saudi Consolidated Electricity Cos. The Kingdom`s 23 desalination plants accounted for the remaining 14 percent (2,800 MW) of the country`s remaining power production capacity for the same calendar year. And from 1985 to 1995, electric consumption rose at an annual rate of 10.5 percent, far exceeding the Kingdom`s GDP growth rate. The increase occurred in spite of electricity, water and gas service fee increases that were part of an overall effort to stem consumption of such energy and infrastructure commodities.

For the past 25 years, the economic development of Saudi Arabia has been broadly governed by the Kingdom`s five-year economic and development plans. The first five plans emphasized the development of the country`s infrastructure, with latter plans focusing increasingly on human resource and private-sector development. The country`s sixth plan, which began in 1995, calls for an even stronger emphasis on the private sector`s role in the economy through increasing diversification of the industrial base. The sixth plan`s infrastructure-related highlights include the following goals and objectives:

– achieving full privatization of electric utilities over a medium- to long-term period as well as expanding the use of private-sector capital in financing many government projects;

– establishing new industrial parks in locations with favorable growth potential while developing necessary measures to encourage small industry business development; and

– increasing the efficiency and use of non-conventional water resources, such as desalinated water, treated wastewater and agricultural drainage water, to maintain natural water resources.

Privatization progress

Recently, the Saudi government has taken additional measures to actively encourage private and foreign investment in the electric sector to make up for a growing gap in the country`s power generation capacity needs. Recently, positive progress has been made to improve and increase private sector company involvement in power schemes developed under the build-operate-transfer, build-own-operate or build-own-operate-transfer systems. Further- more, by the end of 1996, Saudi Arabia was expected to finalize plans for its first privately funded and operated power company.

This new market app-roach for the electric sector is taking place in two Saudi industrial cities, where a joint venture between the Royal Commission for Jubail and Yanbu and US companies Bechtel Enterprises and Parsons Power Corp. is set to launch The Utilities Co. (Uco), a (US)$1.5 to (US)$2 billion investment which will boost power and water utility production. While the Kingdom is now actively involved with completing plans for this initial form of privatization, the most promising model for final implementation involves transfer of utility assets according to a lease-operate-build-transfer framework. Typically, this approach allows for private-sector investors to lease state- owned assets on a long-term basis; 25 years to 30 years is typical with a renewal option once maturity is reached. It is anticipated that such a diverse private sector financing approach being used for expansion of utilities in Jubail and Yanbu will help launch similar project schemes throughout the Kingdom (Table 1).

The Royal Commission is responsible for identifying the utility needs of the industrial and residential areas in Jubail and Yanbu, which were established by royal decree in 1975 and have a combined population of 164,000. In the last two decades, these two Saudi Arabian cities have evolved into thriving centers, which are homebases for more than 140 world-class petroleum and mineral-based industries representing the Middle East`s largest concen- tration of petrochemical and industrial installations (Figure 1).

The Royal Commission has determined an ambitious series of public utilities expansion plans for Jubail and Yanbu; the blueprint for infrastructure project improvement includes drinking and process water systems, industrial wastewater, water treatment, seawater cooling systems and electrical power. Furthermore, many industrial establishments in Jubail and Yanbu are dev- eloping plans to increase production capacity or add new projects; in total, there are at least 80 companies, 45 in Jubail and 35 in Yanbu, planning to establish new factories or business expansions with expected investments totaling about (US)$12 billion in Jubail and (US)$6.4 billion in Yanbu during the 1996 to 2003 period (Table 2).

It is expected these industrial expansions will increase non-oil exports, thereby diversifying income sources and increasing Saudi employment within the Kingdom. In order to enable the industrial companies to execute their plans, it is crucial to seek practical means that will enable the Royal Commission to provide the necessary utilities to cover their needs. Financial costs for the expansion or refurbishment of these utilities in the two industrials cities will be between (US)$1.3 billion and (US)$1.9 billion. However, energy and government officials have indicated it is unlikely that these expansions will be financed through traditional methods.

Furthermore, it would not be practical to make industrial development plans until the necessary credit facilities are available.

In accordance with the sixth development plan, the Royal Commission established a program to develop and complete the utility expansions with private-sector participation. The program is based on the following principles:

– development and establishment of a private utilities company (Uco) to supply the two industrial cities of Jubail and Yanbu with highly reliable and reasonably priced services that satisfy the future increasing needs of customers and users in these two cities;

– providing investment opportunities for the Saudi business sector, financial institutions and other investors; and

– arranging the necessary financing for the company in such a way that an agreement by principal users to purchase the utility services would constitute a basic financial security for the company`s creditors and investors and eliminate the need for government guarantees.

MOU requirements

To implement this program, the Royal Commission chose Bechtel Enterprises and Parsons Power Group and signed a memorandum of understanding (MOU) in May 1995 with the two companies, enlisting their help to develop public utilities infrastructure expansion projects in Jubail and Yanbu. The two companies, at their own expense, will study and develop the concept of financing the necessary projects for expanding, operating and maintaining existing utilities to meet the expected demands from industries and residential areas in both cities.

The initial MOU was followed by a general development agreement signed with Bechtel Enterprises and Parsons Power Group in January 1996 that defined the scope of development work to be completed by the parties. Since that time, extensive feasibility studies have been carried out and a working project team is arranging funding for the expansion. Uco is expected to have an initial capitalization of (US)$500 million, with borrowing totaling about (US)$1.5 billion to (US)$2 billion.

The company will lease some of its electricity production assets from the Saudi government. According to recent business press reports, Parsons and Bechtel are expected to take a 20 percent stake in Uco, with the Royal Commission of Jubail and Yanbu having a 20 percent holding.

The remaining percentage is likely to be split between main power and water consumers and private investors. The Royal Commission, Bechtel and Parsons have formed a working team to complete the following steps within the next few months for the utility company project:

– The working project team will take the necessary steps to establish the utilities company, which would expand, operate and maintain current and new utilities based on a lease agreement.

– A utilities company`s lease agreement is scheduled to be signed between the Royal Commission and the utilities company obligating the utilities company to manage and operate com- prehensive utilities services.

– The working team shall negotiate with the primary users on tariff principles to agree on the means for determination and payment of the tariffs. These principles will be used as a basis for tariffs charged to the remaining industrial users in the industrial cities of Jubail and Yanbu.

– The working team shall arrange the necessary funding for the expansion, including loans, capital and utility company`s income. The Royal Commission for Jubail and Yanbu, Bechtel and Parsons shall participate to establish Uco in addition to other investors, which will include some of the main users in the two cities.

After arranging the necessary financing, the role of the working team in developing the project will terminate, and the new company (Uco) will assume all its responsibilities through its board of directors. At this point, the utility will begin its management of existing utilities, which will be expanded. These facilities will be secured and required to render reliable and high-quality services at a proper cost and in accordance with the accepted practices by similar international utility companies. The utility services provided must utilize and be consistent with prudent, competitive bidding with financially sound and experienced firms. Equipment supply and elements of engineering and cons- truction services will be competitively bid under an umbrella lump-sum turnkey contract with comprehensive completion and performance guarantees by Bechtel and Parsons.

Royal Commission Chairman Prince Abdullah Bin Faisal Bin Turki Al-Abdullah Al-Saud recently provided a progress report on the new cities` utilities venture at the October Middle East Infrastructure Development Congress in Dubai. According to his remarks at this event, Uco will be expected to operate within applicable government regulations and will take into account national objectives, including the expansion of the Saudi Arabian work force and economy. Additionally, Uco will strive to undertake its industrious expansion program by providing equity and raising financing for expansion on a non-resource basis. Repayments of loans will be secured through long-term offtake agreements on a so-called “no-harm” basis with end users of electricity.

At the end of the lease and concession period, utility facilities shall be transferred completely to the Royal Commission at no cost or any other financial obligations. Prince Abdullah also stated that local private sector and other international partners would join Uco`s shareholding and that the company would eventually become a joint stock company through such participation.

Prospects for major power projects in Saudi Arabia are expected to gather interest in the year ahead; a likely element of additional privatization efforts would be the separation of generation and distribution elements of the electric sector into separate entities.

This development would make the power generation element of the sector a profitable but expensive target in terms of energy infrastructure, but an attractive business prospect for future stock market trade. The private-sector financing for utility expansion at Jubail and Yanbu is a promising new addition in the country`s efforts to develop new power projects.

Saudi electric sector update

Saudi Arabia is increasing its power generation capacity to keep up with surging demand, but price reforms and foreign investment will remain vital to expansion plans throughout the country`s electric industry. Sector demand is close to maximum with more than 7 percent annual growth expected the remainder of the decade. Energy shortages have been so acute that during the summer of 1996, state-owned oil company Saudi Armaco was forced to reduce hard currency crude exports to supply power producers with extra fuel.

Peak electrical consumption in Saudi Arabia will reach about 23,000 MW by the end of the decade, increasing from some 17,000 MW in 1994 and 1995, according to projections made by the Ministry of Planning in the country`s Sixth Five-Year Plan (1995-2000). To meet these levels, the ministry is planning to increase power generation capacity in the year 2000 to 25,273 MW from 18,238 MW consumed three years previously.

Currently, there are 11 power expansion projects being implemented by the various electric companies under government supervision, with two projects being pursed by private sector companies for self-consumption. As these projects come on line in the next five years, the Kingdom`s power generation capacity will be boosted by 5,500 MW.

The 2,400 MW Ghazlan-2 project is a significant part of the government`s expansion scheme. Last July, an international consortium led by Japan`s Mitsubishi Heavy Industries won a (US)$1.1 billion contract to build the station. Saudi Consolidated Electric Co. East (SCECO-East) will raise one-third of the project cost through an international commercial loan. A group of regional and international banks will syndicate a 10-year loan of (US)$500 million to partly fund the project; Gulf International Bank, the Bahrain-based banking unit of the Gulf Investment Corp. of Kuwait, is one of five banks mandated to syndicate the loan. Other underwriters are Saudi French Bank, Chase Manhattan Bank, National Commercial Bank of Saudi Arabia and Saudi British Bank.

Another major Saudi power project is the massive Shuaiba power station; the main tender for this plant calls for the supply and installation of five, 350 MW steam units, a jetty and accommodations at a location 75 miles from Jeddah. A second tender involves the construction of a 380 kV overhead transmission line and a 380/110 kV substation. An award for this project initially was scheduled for the end of 1996. SCECO-Central has also initiated plans to construct a 1,200 MW power station near Riyadh. Saudi American General Electric is the main contractor for this (US)$1.6 billion project, which is due for completion in 2000. GE also won the contract for the (US)$640 million, 600 MW expansion of the Rabigh power station. Finally, a contract for SCECO-South`s planned (US)$1.2 billion, roughly 1,000 MW expansion at Shuqaiq was pending at year`s end.

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