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Future Perfect?

The Saudi government is keeping a close eye on local infrastructure

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ANALYSIS
ABB's Engineer Mahmoud Shaban.
ABB's Engineer Mahmoud Shaban.

Project financing has been tough in the last year, but government intervention has kept Saudi Arabia’s utilities sector looking on the bright side

Most observers would agree that it’s been a bit of a rocky 2009 for the Saudi utilities sector, although as we approach the end of the year, several key developments are suggesting that the future for the Kingdom’s megaprojects still remains strong.

A simple review of the country’s social and economic data shows that massive opportunities and challenges lie in store for those companies that have the experience and the know-how to provide the feedstock for the GCC’s biggest economy. The Saudi market is substantial by any indicator; a population of 25 million – which is double the rest of the GCC combined, a land mass roughly the size of Western Europe, and a level of consumption that accounts for almost half the total generation capacity in the six-nation bloc.

Put simply, the central government, state utilities and the private sector are facing a tough task to keep up with a demand for electricity and water consumption that has not been curbed even by the
global recession.

“The increase in power consumption coupled with the building of the new economic cities will mean that – conservatively speaking – Saudi Arabia will be posting single-digit increases in demand in the next five to ten years,” says Eng Mahmoud Shaban, sub-region manager Arabian Peninsula and region divisional manager – power systems MEA for power giant ABB.

Even taking into account the economic boom, the geographical spread of the country and the rising population, there are a number of other challenges that face the Kingdom. From a manpower perspective, despite the government’s ‘Saudisation’ plans, the demand for a skilled workforce is ever rising.

“With the demand for skilled technical staff, it is becoming increasingly necessary for us to look overseas for employees,” explains ABB’s Shaban. “The quality of Saudi graduates in the electrical field is excellent, but there aren’t enough to go around. ABB is, however, fortunate in that we do attract a good number of Saudi graduates year-on-year.”

Alongside skill shortages, there are some concerns that investment in the sector is still falling short of the rising demand. This has manifested itself most recently in the series of blackouts this summer that blighted the key industrial hub of Jeddah.

To SEC’s credit, however, this summer has seen a slew of activity as the company fights to stem the tide of increasing consumption. During September, SEC approved US $2 billion worth of contracts to boost power generation and transmission in the country, all part of the firm’s wider plan to add 13,000MW between now and 2012, and 25,000MW by 2018.

According to Kuwait Financial Centre “Markaz”, SEC is estimated to have roughly $20 billion in projects in the next three years. The firm has issued a second sukuk, which could provide as much as $1.86 billion, and it has also recently secured a 12-year $1.1 billion loan from two international export credit agencies.

Saudi Arabia is hoping that its sizeable investment in the inter-GCC power grid will help offset, to a degree, its rising demand. The plan is that the cost of electricity generation can be lowered by eliminating the need to build large generating stations, which in turn would mean that the GCC states could import or export electricity during seasonal or peak periods. However, given that the countries involved share summer seasonal peaks in demand, and that Qatar announced earlier this year it had no excess capacity to sell to Kuwait this summer, it remains to be seen how effective the plan will be.

Yet another change that the Saudi utilities market is attempting to undertake at a difficult time is privatisation. “At the moment, that’s a huge issue for us,” explains Samer Mazloum, deputy general manager of WETICO. “Saudi Arabia started off by privatising the water sector, and while electricity has been privatised, it’s still subsidised by the government. Now we are looking at privatising the developing BOT projects for developments in the utilities sector. The problem that has occurred over the last year or so is that world economy has left some issues for those considering investing in and developing Saudi Arabia’s infrastructure.”

A review of some of the biggest projects currently being undertaken by the Saudi utilities sector (see top 10 Saudi megaprojects on page 21) shows the trend that has hit the local market this year. With financing scarce, two huge developments – the Ras Al Zour and Yanbu IWPPs, which had a combined estimated value of almost $10 billion – hit the buffers in April and June this year respectively. Those contractors that had already been named on the developments, such as Sumitomo and Malakoff, were ejected and the Kingdom’s government took the projects under its wing.

“One of the main drivers behind the government decision to step in was undoubtedly the urgent need to get these projects up and running,” says Dion Tenhorn, managing director of Veolia Water Solutions & Technologies Saudi operations. “But I would consider this option to be a one-off and certainly not part of a trend away from the IWPP model.”

The government decision to step in has been matched by a significant boost for the utilities sector this year. According to “Markaz”, Saudi Arabia earmarked 16% of total capital spending (around $9.35 billion) on the water, agriculture and infrastructure segment, a staggering 25% increase over the previous year. This explains why some lesser projects, as well as the IWPPs, have stayed on track.

“We saw a lot of projects this year that we didn’t expect, such as the Najran STP development” says WETICO’s Mazloum. “And this is where the government has put the market back on track.”

A by-product of the government move to stabilise the sector is the resulting confidence it provides to external outfits. As Saudi Arabia cannot afford to let its power and water projects slide down the national agenda, firms operating in the country can be reassured that their investments are safe.

“Any company that invests in the Kingdom is definitely going to have a fair chance to develop its business, because if things don’t progress perfectly on the privatisation front, the government is always there to back up the local companies,” adds Mazloum. “Stability of investment is an issue that every company needs, and it’s definitely here in Saudi Arabia.”

The analyst view

Historically, peak demand has increased at an estimated CAGR of 5% over 2000–07. Power consumption in the country is expected to grow 4–6% over the next five years. Assuming standard rates for transmission & distribution (T&D) losses and plant capacity utilisation, Saudi Arabia would need to add 9,782–19,219MW of new capacity to meet the likely growth in demand by 2020. The Kingdom would need to spend US$15 bn over the next four years to meet the expected growth in power consumption. Currently, projects that would add around 14,400MW of capacity have been announced in Saudi Arabia. This includes projects by SEC, IPP ventures, IWPP ventures, and projects by Saudi Aramco, Tihama Power Generation Company, as well as Marafiq.

This excerpt is taken from Markaz’s July report on the GCC power sector

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