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Iraq reconstruction accelerates

Bids sought for installation of 2.5GW generation capacity.

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Iraq is seeking to increase its power capacity.
Iraq is seeking to increase its power capacity.

Iraq's Electricity Ministry is inviting bidders to undertake the construction and installation work at power plants as the first gas turbines of 72 procured in 2008 start arriving, in what will be a key test of the Ministry's project management abilities and will show where in Iraq subcontractors dare and do not dare venture.

IHS Global Insight Middle East analyst Sam Ciszuk comments on the implications.

Finally, Implementation

Iraq's electricity sector has suffered a large capacity deficit for decades, having barely been able to meet the population's minimum demands in the face of international sanctions in the 1990s or to carry out large-scale reconstruction because of the ubiquitous violence in the aftermath of the 2003 invasion. An ambitious four-year plan to rebuild and quadruple Iraq's generating capacity was launched by Electricity Minister Karim Waheed in the second half of 2007—as violence started to abate in large parts of the country—but was delayed as oil prices plummeted in the second half of 2008 while the improvement in security-related working conditions still proved too.

Launching vast reconstruction efforts on such a badly damaged power generation and supply chain is a very complex issue, requiring considerable stability, not forgetting a consistent supply of feedstock—an issue which still has to be resolved in Iraq. Lead times for gas turbines are also considerable, despite Iraq's purchase of very common and widespread technical solutions in bulk. Hence it is only now that the real push looks imminent, with eight GE turbines ordered in late 2008 having just been delivered and another 24 expected to arrive before the year is over, Laith al-Mamury, head of investments and contracts at the Electricity Ministry, told Reuters.

The first 125-MW GE turbines will be installed in the Baghdad, Karbala, and Diwaniya provinces. Eight larger Siemens turbines with a total capacity of 1,900MW will also start to be installed sometime this year in the oil and refining hubs of Kirkuk, Baiji, and Basra, according to al-Mamury, who told Reuters that about 36 companies had prequalified for the tenders—among them South Korea's Hyundai Heavy Industries, Switzerland's ABB, Canada's SNC-Lavalin, and Kuwait's al-Ghanim Company. The engineering, procurement and construction (EPC) contracts on offer are worth about US$350,000 per installed megawatt, al-Mamury said, adding that "the companies will present their bids within a month."

Feedstock Development

Upon the award and execution of the tenders for the projects this year, Iraq could have about an additional 2.5GW of generating capacity installed by around 2012, rising to 27,000MW as all the ordered turbines are installed. This means that Iraq will need to make headway with the development of its gas production capacity during a very short space of time, including rebuilding and expanding its domestic gas transport infrastructure—in many cases from almost complete dereliction.

Movement on Shell's South Gas deal, which late last week was reported to have been sent to the cabinet for approval, would be key. Initially it will gather associated gas currently being flared off, and then aims to collect the rising amounts of gas being produced alongside oil in the south. The project has been delayed for almost two years because of several controversies and uncertainty over how much gas Shell would be allowed to take from the oilfield operators, given their likely need for reservoir reinjection. Nevertheless, the more the project is seen as mainly supplying the domestic market and not exporting, the less controversial and more politically prioritised it will be. Iraq also launched its third licensing round last week, focusing entirely on offering three gas fields in different parts of the country to developers, thus further making feedstock gas volumes available within three to eight years' time.

Still, while no-one doubts that the needed gas volumes exist, the Oil Ministry and to some extent Electricity Ministry will have to co-ordinate, scope out, tender, and project-manage pipeline, treatment, and pumping station contracts for the construction of the domestic network within a very short timeframe, coinciding with Iraq's demands on the oil companies working in the country to develop its oil production capacity from about 2.5 million b/d to a massive 12 million b/d within seven years. The situation will almost inevitably result in a massive overheating of the sector, rising costs, and severe materials and skilled-labour shortages, delaying both the oil and gas side of the projects and threatening the power reconstruction effort's timeframe.

Powering Security

It is widely recognised that in order to finally secure Iraq and extend the central government's reach to all parts of the country, extending and maintaining core government services—including electricity—to all parts of the population is fundamental. Still, for contractors, working on large immovable infrastructure projects located in Iraq's most densely populated regions will be a very different security challenge to the one now eagerly taken on by the oil companies. Iraq's oilfields are in most cases located in the sparsely inhabited southern desert, and where fields in more populated and unstable areas were offered, few—if any—oil companies were willing to sign up.

The Iraqi security forces will have to issue strong guarantees of permanent security deployments around most power project areas for the foreseeable future. Nonetheless, the Electricity Ministry is still likely to face problems in securing bids for projects in some of the more unruly areas of the country, including the key Kirkuk flashpoint region and northern oil hub, despite the desperate need to extend reliable power supplies to such areas.
Outlook and Implications

It finally appears that some key electricity projects will move ahead in Iraq, able not only to power the most crucial infrastructure and oil industry installations, but actually to change the power supply situation in Iraq permanently. It will nevertheless be a tall order for Iraq to ensure that projects can go ahead where most needed from a security point of view—and perhaps even more so from an overheating-sector point of view. It is almost impossible to see all Iraq's oil, gas, and power projects being able to proceed simultaneously—especially given the absolutely massive scale of its oil projects over the coming decade. Delays and bottlenecks will be inevitable, as will rising costs and skilled labour shortages.

Still, the situation today calls for a considerable dose of optimism, with stable power supplies—albeit at a slower pace than hoped for—returning to the secure parts of Iraq and likely to be gradually extended into the more unstable parts of the country as we approach the middle of the decade. Undertaking some of these EPC contracts will be a significant security challenge for contractors, with what still exists of the domestic engineering industry likely to be working on smaller projects on the outskirts of unruly areas, while larger international outfits in the meantime strive to rebuild the power sector in the stable parts of Iraq.
 

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