Catching up

Iraq is seeking bids for the installation of 2.5GW generation capacity

A woman walks past a Basra Electricity Company power plant that has seen better days.
A woman walks past a Basra Electricity Company power plant that has seen better days.

Iraq is seeking bids for the installation of 2.5GW generation capacity as reconstruction accelerates. IHS Global Insight Middle East analyst Sam Ciszuk comments on the challenges ahead.

Iraq’s Electricity Ministry is inviting bidders to undertake the construction and installation work at power plants as the first of 72 gas turbines procured in 2008 start arriving. The process 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.

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 the plan was delayed as oil prices plummeted in the second half of 2008.

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, according to Laith al-Mamury, head of investments and contracts at the Electricity Ministry.

The first 125MW 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 contracts on offer are worth about US$350,000 per installed megawatt, al-Mamury has 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 is reported to have been sent to the cabinet for approval, would be key.

Shell envisages to initially only gather associated gas currently being flared off, and then move on 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 the likely need for reservoir re-injection. The more the project is seen as mainly supplying the domestic market, and not as a means to boost exports, 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 the 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.

This will coincide with Iraqi demands on the oil companies working in the country to develop its oil production capacity from about 2.5 million barrel per day to a massive 12 million barrels 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. Even with such guarantees in place, 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 these areas.

Progress, but is it too much too fast?
It finally appears that some key electricity projects will move ahead, able not only to power the most crucial infrastructure and oil industry installations, but to actually 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, with larger international outfits striving to rebuild the power sector in the stable parts of Iraq.

Q&A: the inside view
Luay al Khateeb, executive director at the Iraq Energy Institute, spoke to Utilties Middle East on the sidelines of the Al-Tamimi ‘Doing business in Iraq’ conference.

How important is the issue of security in the quest to rebuild Iraq’s power infrastructure?
Security is one aspect but not the main aspect, because the security situation now is much better than two years ago. I would have said that the security situation will improve even more, but now with the political dynamics after the election and the stalemate continuing around the formation of a government, its going to be quite challenging.

So security remains a concern, alongside corruption, and I would also add bureaucracy to the list. You really need to have a supportive business community to sustain big projects, and make them happen. For it to happen, current legislation and regulation needs significant reform across the board.

What stands in the way of reaching the necessary levels of power generation?
Unfortunately in Iraq we do not have a master plan as such when it comes to power generation. We have the minister of oil thinking something different to the minister of electricity. Electricity generation in Iraq is very much powered by gas.

At the moment, there is no master plan for gas. There are business proposals from various companies. But when you get into the details of those they do not allocate a realistic volume of feedstock to elevate the level of production of electricity to reach the acceptable level. So far we are producing 5.5GW of electricity, whereas we should reach at least 24GW.

Are you optimistic that these targets can be achieved?
If there is a proper policy at a national level when it comes to a gas master plan, I think its possible to reach that goal in four years. If you take it of the governments hands and leave it to the private sector to secure affordable feed stock, it is possible, I’m sure. But if the government continues to control their play I don’t think Iraq will witness any development, and instead we will witness another seven years of the same.

How important is a stable electricity supply for the development of Iraq?
Quite important, because when we talk about electricity we talk about energy security for industry and agriculture and so on. We are talking about the complete value chain for the welfare of the population, not just about switching the lights on. It is about making sure that Iraqi fruits are more affordable than fruit imported from Europe, which at the moment is much cheaper than domestic produce.


Most Popular