Rod Morrison: The first question, to get the ball rolling, is the opportunity presenting itself in the next year or two in the power and water market in the Gulf region. What is the realistic size of the opportunity? Is that driven by actual demand and low capacity rates in the region? And where do you think the best opportunities lie in each country?
David Wadham: I think the market as it stands now is over the next couple of years looking busier than it has done for some time in terms of projects coming to the market. I think post-Lehman was a definite slowing down in the number of projects, if not launched, projects certainly that would achieve financial close. I think now across the GCC and the broader Middle East region, we’re probably tracking 10 or so projects I guess, which is more than we have in some time; 10 projects that might be RFPed in the next 12 months or so. So that’s really quite a significant volume of projects.
In terms of where they are, there is obviously the heart of the GCC and we’ve got Abu Dhabi, Qatar, Oman, the countries that have long-established IPP, IWPP programmes. But I think what we’re also beginning to see as a trend is that the IWPP model is broadening out again and we’re starting to see potentially new countries such as Kuwait; Dubai’s looking to launch an IWPP programme; and some new entrants as well - Syria is looking to be an IPP area and also Egypt after a decade or so of moving away from the IPP model is coming back.
So we see a significant volume of projects coming up in some established, but in some new jurisdictions as well. And I think it’s clearly driven by a genuine growth in demand. If you look at ADWEC’s figures for 2009, I think they showed an 11% growth in peak demand capacity on power, slightly less on water. And I think ADWEC is projecting, through to 2030, a tripling in peak demand growth on the power side, slightly less on water - but there is clearly still growth there, being driven a lot by the industrial projects and some of the mega residential projects as well.
Ravi Suri: Well, I support what David said, there’s a huge demand. I will roughly put it at about US$15bn to US$20bn that is needed next year. The conventional markets that are going to be need financing are Abu Dhabi, Oman and Saudi Arabia. Kuwait is coming out with a new IPP programme, as is Egypt. There’s also a lot of activity in renewables. There is going to be solar and a lot of waste to energy also, which is going to follow the IWPP model to a great extent. So the level of activity is significant and I think 2011 is going to be far more than 2010 or 2009.
Rod Morrison: Does the US$15bn to US$20bn include the nuclear?
Ravi Suri: No. It’s conventional.
Sachin Karia: Yeah, I mean again, just echoing what David said, one just needs to look at the macro picture and the population growth rating in countries like Saudi and Egypt and the simple maths suggests that there are going to be many more than what we’ve seen.
And it seems that the IPP model has been embraced by the countries that have launched them, we’re not seeing much departure from them apart from a couple of storm projects and new countries like Syria, Yemen, and the re-emergence of Egypt, I think, is going to drive them forward and that’s without looking at what’s going to happen in big population countries like Iraq and Iran, where we’re seeing some activity starting to happen.
Whether the international banks are going to be open for business there is another matter altogether. I don’t think we’re quite there yet. But they’re certainly thinking about it. And so I think from a sponsor’s perspective it’s a very exciting task.
Rod Morrison: What are you seeing in Iraq?
Sachin Karia: We’ve got a number of different sponsor parties who are looking at power plant acquisitions and we understand that the government is thinking of an IPP programme, and there’s early stages of shaping up policy going on.
Charlie Seymour: I think the building blocks are in place for a period of sustained growth. You’ve got demand outstripping supply and I think the reduction in demand post-financial crisis is being offset to a large extent, and exceeded, by the growth in the oil sector; a growth in industrial base in the region, and I think new load centres where they’re new countries and new demand coming through new countries or new cities.
I think bank liquidity has obviously improved and I think the contractor market is a bigger market than it has been - there’s a lot of hungry EPC contractors there. So building blocks are in place. I think one note of caution, fuel allocation, as there’s a lot of demand for new projects that has to be managed and assessed. But I think a relatively optimistic story.
Rod Morrison: The utility demand growth that we’ll see in the next say five to 10 years. How do you plan for that?
Charlie Seymour: The most recent planning report is freely available on the web, I’m not going to get into any detail because there’s a lot of facts and figures there. But what I would say is that the figures have been looked at very carefully on the demand side.
I think it’s fair to say, and our head of strategic planning has said this openly, that on the demand side we’ve looked to paint a very realistic picture, we’ve factored in some of the impacts of the global financial crisis, so certain projects have been taken out of the equation. We’ve sweated the figures to try to present a most realistic supply-demand equation, but having sweated the numbers still there’s need for new power in Abu Dhabi, certainly before the nuclear comes on stream.
There’s a need for a significant amount of capacity to be brought on stream. Some will come from renewables but then there’ll be some big projects to ensure that there’s sufficient power in 2013. I think the only other point I’d make specific to Abu Dhabi is that with nuclear coming on stream in 2017, projected, we’re looking to water demand increases by a combination of typical IWPPs but also through standalone reverse osmosis plants. These are a lot more flexible; doesn’t need to wrap up a power station in winter and it’s more economic for Abu Dhabi to produce water that way.
Rod Morrison: Water and power run in parallel in terms of growing demand?
Charlie Seymour: Well I think the demand for water’s unconstrained because it’s how much you consume. You know it’s a limitless supply, populations consume in particularly; the cost of it is very low to the consumer. So it’s projected to increase alongside electricity demand, but in a way it’s a slightly different dynamic.
Duncan Allison: I think as an advisory franchise we’re at our busiest that we’ve been at any time in the last decade. There is that amount of business out there. I think it’s very much at three different levels. I think core to it is that the traditional markets have all announced major programmes for next year again, new projects for next year. We’ve got potentially to oversee in a year; we’ve got Qurayyah coming out in Saudi Arabia; you’ve got Sur in Oman and possibly another project in Qatar but that’s less certain. So the core markets are all going to be there next year.
But interestingly, at the second level of it there are a number of new markets emerging and obviously we’re seriously working in Dubai at the moment in developing an IWPP programme and that’s a very serious initiative. Others are working in Kuwait to develop a programme there. There’s discussions in Syria, which have been held up but that may well potentially come to the market.
And then that’s before you even start going and looking at what’s happening - Sachin was talking about - in Iraq and in Yemen and other markets that are a little bit more challenging, certainly from a financing perspective. So the volume of business I think is potentially extremely good.
And I think there’s a lot of opportunity out there. I think in terms of growth rates, I think there’s a great deal of confidence in the growth of power. And the rates in the region vary between 6-1/2% and about 14%, 14 may be on the high side, 6-1/2 may be on the low side, but it’s in that range.
I think the question slightly at the moment is on water. And I think there are a lot of people looking at the moment as to whether the water growth rates are quite at the same level. And there have been a number of discussions where some of the projects may come out as power only and they’re just in the immediate future. But I think there’s a strong demand generally for power projects and I think it’s a very interesting market.
I think the other area at a very interesting point in time is what happens in the wastewater sector. And there are a number of programmes in the wastewater sector at the moment, which I think if they come to fruition will mark a massive opportunity because the region really hasn’t looked at that type of business. And there’s a colossal pipeline should that open up and that go through. So it will be very interesting to see what developments are in the next three months or so in that particular sector.
Rod Morrison: What’s the constraint on water?
Duncan Allison: Water is more used sort of in a residential context, whereas power is driven very largely by industrial. So I mean it’s residential and industrial. So there is strong demand. On the water it’s a little bit more linked to the residential use and there the figures are maybe a little bit more conservative on the growth than maybe in the past.
Rod Morrison: I think it’s on the wastewater that facilities are just not really up to scratch at the moment, is that right?
Duncan Allison: They don’t exist. Well they need a lot of enhancement.
Charlie Seymour: Water is constrained very much by network. So the growth in water demand that Duncan mentioned slightly being less than electricity is a factor of the network catching up with an increase of demand. If there was sufficient network for a limitless amount of water, you’d see water up with electricity and beyond because people consume it.
Gijs Olbrechts: When we look at the last three years, we note that in 2009 no new IWPP projects have been awarded, but only projects have been closed that had been delayed due to the financial crisis. We saw the market picking up again in 2010 with a number of new projects awarded, but at lower levels than before the financial crisis. For 2011, the market is catching up and the pipeline is impressive, with projects expected in Abu Dhabi, Dubai, Saudi, Kuwait, Oman and Qatar.
In general, the power and water demand will come from growth in population for the residential demand and industrial growth. Countries with a large population like Saudi Arabia will be the biggest contributor in added capacity for both power and water, followed by Kuwait. The strong expected growth in Kuwait is also partly explained by delays in adding additional capacity. Furthermore, we see steady growth in Abu Dhabi. Smaller countries will be adding less capacity and projects will likely be tendered on a bi-annual basis.
What’s also very interesting is the choice of fuel for future projects in the region, as gas will become eventually a scarce good, except for Qatar. Gas has also alternative industrial and commercial uses. Saudi has been experimenting with fuel oil plants, but has come back on their approach for the three most recent projects, like Riyadh PP11, Ras al Zour and Qurayyah. On the long run, fuel oil plants are not the solution for a variety of reasons - among others, environmental reasons and efficiency of the plants - and the region has started experimenting with nuclear and solar projects.
Rod Morrison: Is gas becoming constrained?
Gijs Olbrechts: On the medium term, I do not see any constraints in this regard, but fuel diversification projects are gaining popularity.
Rod Morrison: GDF Suez is one of the larger developers and you have a big presence in the Gulf. But do you have to be selective even with a company such as yours?
Gijs Olbrechts: We have indeed a strong presence and the largest market share in the GCC region, and we want to preserve our position. Our market share will even increase with the IP merger and we might reach our regulatory market cap in some smaller countries. However, for the main growth countries in the GCC, such as Saudi Arabia and Kuwait, our market share is still small and we have strong appetite to increase or capture market share.
Harold Fairfull: Well I think here with the common thing from everybody around the table that there’s a huge opportunity over the next couple of years in the power sector, traditional markets as well as the new markets coming up. Similarly to Duncan, this is probably the busiest period that we’ve had since the heydays of 2006 and 2007, and I expect that to continue.
Just a couple of observations, I think one thing that Gijs quite rightly brought up was that there was a tremendous backlog, both in terms of the build-up of demand and also no new plants being delivered, during the crunch crisis of 2008/2009, and that’s clearly spurring on a lot of new development requirements from the utilities to come on board.
But I think also it has to be borne in mind it’s also raised an enormous amount of time both among the investors but also among lending institutions simply because they’ve had very little to look at over the last two years. But I think we’ll see the appetite continue. The question in my mind is going to be liquidity constraints, certainly there appears to be sufficient appetite and liquidity in the market to be a mixed round of projects. But beyond 2011 I think we’re going to start looking in addition towards it.
Pascal Martese: I guess the governments keep on putting power and water through the IPP programmes; I find it a very efficient way and an economic perspective for these commodities for the public. There is certainly appetite from the equity players and we have the power. We at Acwapower have the capacity from a human resources perspective to follow six projects in any given year, and so we will mobilise these resources too because we expect this to come to these teams down the line.
Yeah, I think the unknown is the financing and where the money is going to come from to finance all of them at the same time. There has been an increase in ECA financing, which I think is going to carry on. Some people will start holding the banking community because basically it’s coming - this is going to constrain most of the financing.
It’s true that in the project finance landscape I see a number of players leaving, so the slack can be partly taken up by the multilateral agencies and they are tremendously increasing liquidity because there is a requirement from the banks. And now people start talking about project bonds, but I don’t see that coming until the contracts are working, when the risk changes in projects.
Rod Morrison: I’m just interested that you mentioned six. You can do six bids in one year?
Pascal Martese: Well for next year, I think, Saudi, Oman, Kuwait, Egypt, Syria may be coming, and there are things outside of the GCC. There are sort of projects, there’s another sort of project in Morocco and another in Oman.
Rod Morrison: Do we see nuclear and renewables as serious project opportunities?
David Wadham: I think we do. Nuclear clearly, there are a number of issues around it related to sort of political considerations. The timeline for Abu Dhabi delivering nuclear by 2017 is very aggressive. But notwithstanding that timeline there’s still a need for substantial conventional generation to come online before that point.
And so I think we need to look at the other forms of renewables. The issue is probably one of scale frankly, that the plants in this region, the conventional plants, have typically been very, very large by any standards, 1,500MW, 2,000MW and the equivalent on the water side.
So, more typical renewables projects are in terms of scale much, much smaller. So a lot of effort will need to go into developing the renewable side of things. But it doesn’t really solve the demand issues necessarily, so it’s part of the solution, clearly a lot of people’s responses and banks are very interested in renewable solutions, but it’s going to have to work alongside conventional solutions.
The reality is we don’t really have an image of the legal framework in any of the countries at the moment to promote development of renewables. Obviously, the Shams 1 project has been done in Abu Dhabi, but that’s been done with very much a sort of bespoke contractual solution to the subsidy issues; so really the hope is that the legal framework needs to put in place if renewables are going to be given a serious push.
Ravi Suri: I think both would coexist, the renewables and the conventional projects. And if you look at renewables, there is no wind here so they obviously get very few wind projects; they’re basically be going to be solar. Some countries will use heat, some will use CSP; I think both will coexist.
So it’s one of the conventional powers that will be the bulk of the need but renewables will play a role and yes, there is no framework in place, but these countries in the region have been at the frontier of privatisation and they’ve got their privacy policies right.
I mean, Abu Dhabi is the classic example of getting the privatisation right, Oman is another example and these projects have been very successful, so they will want to go ahead and put up the structures that they need; they will do it successfully and will move forward. So, It will be a small part of the whole game but it will be an important part.
Rod Morrison: The nuclear timetable?
Ravi Suri: Well there are plans and I don’t want to comment about it because we are bound by strict confidentiality, but there’s a lot of work going on in nuclear and good working and in fact it’s under process.
Sachin Karia: I think it’s easy to overstate how much impact renewables will play in the Middle East. I think that there are significant opportunities. But I think the key economic and political drivers are not as intense in the Middle East as they are in Europe for example.
I mean, we don’t have lots of coal plants, polluting. A lot of the plants in the Middle East are already, comparatively speaking, clean gas. We don’t have masses of population or constraining to little land spaces. We don’t have quite the environmental lobby that Europe and the US does, and I think the key driver, certainly where ours is, is a political driver.
We’re working on a number, you know; we’re doing the Shams deal and we’re doing wind farms in Jordan and elsewhere. I don’t think your general populace has begun to appreciate just how much more expensive renewable energy is, currently.
When David talks about a legal framework, actually what we’re talking about is a subsidy framework. And these things require significant subsidies when compared with gas. And on the nuclear side, there’s still the risk framework that needs to be talked about, the nuclear carries a completely different basket of risk. I think people are still trying to figure this out and it’s not going to happen tomorrow. So what’s in the medium to long term? I think more of a prominence, I think in the immediate future, fossil fuel will still rule the roost.
Charlie Seymour: I must say I agree with Sachin there. Let’s not over-exaggerate renewables. In the Middle East there’s very little wind and actually, surprisingly, there’s not so much solar radiation, it can be very hazy on the coasts where the load centres tend to be, the economics really don’t make much sense at all.
This market is emerging, growing quickly. I think there’ll be limited political appetite for paying us all tariffs. I think Shams was a landmark deal in many ways, and a landmark project and an important project. But the realities of economics and actually the size of these projects, they will happen but let’s not over-exaggerate how important they will be.
Nuclear, though, is a big opportunity, aside from obvious political considerations. It as a fuel choice makes a lot of sense in the Middle East, where, I think, countries such as Abu Dhabi, other countries are recognising the value of gas and looking at the oil, gas equation and it makes a lot of sense. So I would say nuclear is a big opportunity, renewables not so.
Rod Morrison: What impact does nuclear have on planning?
Charlie Seymour: Yes, I think it has a big impact on the whole profile. You know, nuclear is base load, it will have a big impact on our other gas-fired IWPPs and on the economics of the system because clearly we still have to produce water and the existing IWPPs have to run partly to produce water in the winter when also electricity demand just drops off.
And I think going forward, with the industrial base coming on, with other initiatives, district cooling, etc, I think these, the seasonal curves, will flatten but still it will be pronounced in summer. Yeah, I don’t want to detract from colleagues and the initiative of the renewables, but I just don’t see from a size perspective it filling the gap.
Duncan Allison: I’m in a similar position to Ravi that I really can’t talk too much in respect of the nuclear other than to say it is a very serious programme and a serious development. I will put it down as a prospect, it’s happening. And I think the discussion at the moment is simply how best to put it to the market, and more will come to the market, I think sooner than people may expect in terms of how it may be structured; a lot of good work has been done but I can’t say more than that.
On the renewables side, I mirror the comments. There’s a great deal of political goodwill both locally and within the banks to support renewables initiatives throughout the region. But in fact, there are very significant practical difficulties and this cannot be ignored, particularly in relation to the haze and dust, which actually isn’t a simple problem and has given difficulties in terms of just how reliably can we generate with this particular solar products.
And the economics is another fundamental difficulty, because we do have gas here. And the sizing of these projects again isn’t going to fill the energy gap. So I think there’s good political goodwill; I’m sure we’ll see more projects of this nature but the technical challenges have to got to be sorted really to see this move wide-scale, I would say.
Gijs Olbrechts: Regarding the potential for nuclear power plants, the capacity of the existing grid is also an important driver. In order to benefit from economies of scale and to reduce the capex cost per MW of nuclear capacity, the size of the nuclear plant needs to be substantial.
Taking into account that these plants will run base-load, the nuclear technology would be more economically meaningful for countries like the UAE and Saudi. In case of an interconnection between GCC countries, which would allow the trade of electricity on a commercial basis, nuclear capacity would make more sense for the entire region.
The most relevant renewable solution for the region is solar technologies, but they have a very high capex cost. In addition, these plants have to compete with CCGT plants with heavily subsidised gas cost, which will make them uneconomical in the GCC region. Such solar plants would currently require a subsidised regulatory framework. Renewables would make more sense for countries like Morocco, because they have limited natural resources, which make them more economically attractive.
Harold Fairfull: I agree with Gijs and with Charlie with regard to renewables within the GCC countries, I think it’s really just a sideshow, there is no general impetus among the population to move for green energy but I think there’s clearly some incentive among the governments to show their green credentials. I think once a certain minimum level of capacity has been installed, that impetus will probably disappear altogether.
Nuclear clearly has a large future within certain of the GCC countries; I agree about the impact of grid constraints. How it’s going to pan out we don’t really know for a number of years but I don’t think it’s going to detract from the need for additional new capacity of gas-fired power because, as Charlie says, a nuclear is base-load, there is going to be a large need for considerable capacity.
Pascal Martese: And I agree with the economic analysis and the political analysis; I think everyone will see what happens in the next couple of years. Everyone is experimenting at this stage and there is a chance Oman will set up an IPP code around such that they can experiment with PV and CSP.
Saudi is also seriously looking at it and trying also to take the longer-term view and to provide the market where it could promote the manufacture of solar panels and other equipment. And yeah, for the longer term I also think that the bulk of demand will be met by conventional power points and then nuclear, it’s going to come in Saudi sooner than later.
Ravi Suri: I would like to make three points on solar. The first point I’d just like to add is that, yes, there is dust in this region but the key thing is selection of technology. If you get the selection of the technology right, whether PV or CSP, you can tackle the dust problem.
And the second is that tariffs for solar are high at the moment, there’s no doubt about it, but if you build solar in modules, there’s a lot of work being done to bring down tariffs and costs and it’s a matter of time when solar can bring it’s cost down and maybe you will be able to achieve great value, so let us not underestimate the amount of effort going into bringing down solar generation costs.
And the third thing, which is very important for this region, is that from an energy mass transfer point of view solar and desal work very well; the equations are very good in terms of energy transfer, mass transfer when you use solar and desal.
So these three things, if looked into and the analysis is done correctly, and the technology is taken forward in the right manner, can drive solar forward. It will never be a main staple, but we can contribute to the energy requirement.
Sachin Karia: One of the things that people haven’t talked about yet, which I think it will be interesting to see what peoples’ views are, is a lot of the drivers for renewable are coming from, we’re going to run out of gas or there’s much better uses of gas, we can get more value out of gas by turning into petrochemical or LNG.
But now, with the West focusing on this new deflacking, the flacking technology and exploitation of tight gas and of course the corresponding impact on gas prices in America and elsewhere, one wonders whether we will actually in the medium term release more gas in the Middle East market as the Middle East producers find that actually it may be more profitable to sell it here than to ship it overseas in the shape of LNG.
So I don’t think anyone knows the answer to these questions yet but it certainly is going to impact fuel choice in the medium term because the gas market abroad is not quite as promising today as it was five years ago.
Harold Fairfull: The point at which I’d probably disagree with you, Sachin, about such, is that most of the overseas gas sales coming out of the Gulf are on a long-term contracted basis, so the fact that the price on the current market has been badly hit is not going to impact on those contracts.
Sachin Karia: It will discourage the new projects from coming on stream, that’s why I think the swing will happen. So Qatar has got lots of LNG projects but Saudi still has gas, so they were looking at some petrochemical deals and some other gas deals, which I think will, the economics will, be more interesting.
Harold Fairfull: I agree with that and in fact Charlie and I were talking about this on the way up, and certainly the GCC countries are actually considering LNG terminals to become its importers of gas.
Rod Morrison: Moving on to finance, Ravi mentioned that US$15bn to US$20bn would be needed for next year. We’ve already mentioned the liquidity constraints on the market. So will the debt markets be able to cope?
David Wadham: Sorry, as a lawyer in a roomful of bankers, I feel probably the least best placed to answer this question, but what I would say is that liquidity - my gut feeling is that - liquidity for its part is not going to be a particularly constraining factor, at least in the short to medium term, for the power markets. However I think liquidity will hit other areas of infrastructure development much harder.
I think in terms of the power market remaining very much at the top of the pyramid in a sense that it has a very established track record of IPP programmes across the Middle East - so the likes ADWEA, Qatar, these guys are always going to be able to get their projects away.
It becomes a bit more challenging, I think, when you look at the new markets that are going to develop in places like Syria, for example. That’s really where you expect the ECAs to step up.
I think the market is still quite thin in the sense that, I think it was Pascal who mentioned it, if you look and compare it with pre-crunch, some players have returned but frankly there aren’t as many players in the Middle East growth market as there were, it is a much thinner pool. But I suspect that’s going to really have a knock-on effect for areas like transport and some of the other projects, some of these mega projects in new and developing sectors.
ECAs are definitely playing a prominent role. I think it’s no secret that JBIC has been very active in the region for some time and is still active. We are seeing Kexim, they do participate in a number of projects in Oman and Abu Dhabi and elsewhere. But I think those two have a particular place because they have very attractive untied products that work very, very well because they’re tied to the equity rather than equipment supply.
So the constraints of consensus rules and the tenor don’t apply, because obviously one thing you have up here is you have the long-term PPAs; you have 20/25 years and clearly both sponsors and offtakers really want to maximise those PPAs, so you really want to stretch the tenor as long as possible, so if they’ve got a 14-year consensus type product, it doesn’t necessarily sit well with that.
But that said, obviously US Ex-Im formed a part of Suez’s plan on the PP11, and we’ve seen Hermes involved on the B3S2, I think, so there are other ECAs coming into play. The bond market gets talked about, I think, regularly in the Gulf. I think if you go and talk to the likes of Mubadalla, they’re very keen to see the development of a regional bond market.
But I think really it’s going to be difficult. I find it difficult to conceive of bonds in the next couple of years financing greenfield IPPs; one can perhaps see them as an option in terms of a take-out on a refi but even now, I mean I’ll leave it to the bankers to say how that compares in price terms.
But it’s still not being done yet. When you think of number of IPPs that are across the region, clearly the absence of the monolines to wrap the bonds makes doing things a lot more difficult; you’d have to get pretty much near perfect structuring to get the investment grade on the bond. So I think bond market not yet, certainly on the IPPs.
Rod Morrison: Just one quick point on the multilaterals. Do they complicate things when you’re putting a deal together, or these days are they pretty much up to speed?
David Wadham: My view would be that they are actually pretty much up to speed. I think that the days where there was a real perception a few years back that if you added an ECA to the timetable you were adding six months on to your financial close timetable; those days have really gone. And ECAs are much more in step with the commercial lenders in terms of deliverability. They have their own quirks and requirements; clearly that have to be met but if you plan for them you can build them into your timetable for your overall financing.