Power Struggle

The region has paid little heed to Germany’s decision to close all of its nuclear reactors by 2022 following Japan’s Fukushima plant disaster, and is boldly pushing ahead with its own nuclear projects to meet long-term rising energy demands.

On-the-heels of the UAE’s decision in 2009 to award south Korean firms $20 billion to build the first nuclear reactors in the Gulf region in 2017, Jordan plans to award contracts to build its first $5 billion nuclear plant by next year.

But all eyes are on Saudi Arabia – holder of a fifth of global oil reserves, and next in line for a nuclear shift. The kingdom is currently struggling to reduce its overarching dependence on crude oil for domestic power generation. The country must also keep pace with an increase in consumption sparked by population growth that is expected to lift peak-time power demand to over 120,000 megawatts (MW) by 2032 from around 50,000 MW in 2011, according to Abdullah Al-Shehri, governor of Saudi Arabia’s Electricity and Co-Generation Regulatory Authority.

“To reach 120,000 MW, it is going to cost probably in the range of $250 billion,” said Al-Shehri on the sidelines of Nuclear Power World conference held last month. “It is likely going to be a mix of gas powered plants, nuclear and renewables and the rest will be covered by crude and heavy fuel.”

Saudi Arabia currently produces about fifty per cent of its power from burning crude oil and products, with the remainder from gas. Saudi officials have said they would like to half the usage of fossil fuels in power generation, but this plan depends on several factors, including cost, feasibility, and oil prices. Saudi Arabia created the King Abdullah City for Atomic and Renewable Energy to devise a strategy to introduce clean energy and the agency is expected to reveal a detailed plan this year.

If current power consumption levels persist, Saudi daily energy demand could more than double to over eight million barrels of oil a day by 2028 from 3.4 million barrels of oil a day in 2009, Khalid al-Falih, Saudi Aramco’s chief executive officer warned last year.
“Fuel oil prices in the international markets [rose] last year and this year have increased to a level where other options have become feasible,” said al-Shehri.

All Gulf states, except gas-rich Qatar, are considering nuclear power generation and renewables due to their shortage of gas, increase in domestic consumption, and the need to free up oil used in power generation for export. Qatar, which sits on the world’s third largest gas reserves, is the only Gulf country that doesn’t experience power cuts in the peak consumption months of summer, when residents ramp up air-conditioning usage.

“The major issue for the Arab states is how to improve their economic situation and avoid the blackouts that are seemingly spreading around the region because the energy grid is stressed,” said Theodore Karasik, the director of research and development at the Dubai-based Institute for Near East and Gulf Military Analysis.

The gas shortage is compounded by the Gulf’s subsidised pricing of fuel and electricity – plus poor insulation of buildings, which allows power to be wasted. Subsidised pricing is unlikely to be removed soon, particularly in these politically-sensitive times, when governments are increasing social benefits to please a restless populace demanding better economic conditions.

“In Saudi Arabia, the government is subsidising the fuel for power plants and this subsidy is roughly about 50 billion riyals with the current oil prices,” said al-Shehri.

Saudi Arabia’s hunger for power is piquing the interest of local and international firms, who are expected to target the region more aggressively to make up for loss of business if more industrialised countries follow Germany and decide to abandon nuclear power.

Construction goliath Saudi Binladin Group has already teamed up with France’s Areva in order to bid for nuclear and renewable contracts in Saudi Arabia and other Gulf states. The Saudi group expects to win billions of dollars worth of contracts once Saudi Arabia implements its clean energy programme, according to executive board member Gasem Al-Shaikh.

“We hope to hear the initial guidelines for the private sector in the coming two to three months. The market is ready to build,” said Al-Shaikh.

But the nuclear option carries a set of risks for companies wishing to enter the Middle East. The recent protest wave may pose security risks that could be as dangerous as Japan’s propensity for earthquakes. Jordan, which has been trying for years to launch its own nuclear reactor, could fall victim to the perceived risk in building a nuclear plant in such a volatile region.

“Anyone who wants to invest will reassess the risk evaluation, and investors may raise the rate of return because they may consider it a risky project,” said Bahjat Aulimat, general planning section head at Jordan’s National Electric Power Co.

Western states may be wary of giving the green-light for their allies in the region to build nuclear power reactors, only to see these regimes toppled by popular uprisings. Egypt had initiated plans for building nuclear reactors under the ousted rule of Hosni Mubarak, but a future leadership that is hostile to the West may not elicit support in seeking nuclear power and could even face sanctions, Iran being a case in point. While Iran has said its nuclear programme is peaceful and targeted at power generation, suspicions that it may be a covert programme to develop weapons has led to a series of UN sanctions.

Another issue is uranium enrichment – a technology privy only to a handful of states. The UAE has forfeited its right to uranium enrichment, but Jordan and Saudi Arabia are not ready yet to forego that right. Jordan, in particular, has a greater impetus to protect its right, since it holds uranium resources. Jordan’s King Abdullah has also accused Israel of trying to block Jordan’s nuclear bid and the country has yet to conclude a nuclear co-operation agreement with the US, which wants to curtail its right to enrich uranium.

“Jordan has the eleventh largest uranium reserves and Amman will pursue that option given that the international environment has changed so dramatically because of the Arab Spring; it doesn’t matter what Israel and the US think,” said Karasik.

While nuclear power poses political challenges, the cost of building such plants is another hurdle to surmount. For resource-barren Jordan, the nuclear option is needed to cut its dependence on imported Egyptian gas, which was used for more than 90 per cent of its power generation before attacks on the gas pipeline halted its flow this year. The attacks forced Jordan to import oil products for power generation at time when oil prices are spiraling out of control and the Jordanian government is subsidising prices. Jordan’s losses from the halt in Egyptian gas supply could top $1 billion in 2011, according to Aulimat.

Jordan is looking to build a 1000 MW nuclear plant by 2020 to help meet the eight per cent annual increase in power consumption, which is expected to boost demand to 5000 MW by 2020, from 3000 MW now. It floated in January bids to build the plant and expects to receive proposals from three pre-qualified companies in July. It has plans to invite operators/investors to bid in July.

While Saudi Arabia is unlikely to face financing problems, Jordan has yet to lure investors to help foot the bill for its nuclear plant, which is expected to be financed 30 per cent via equity and the remainder through debt.

“There has been investment interest from UAE and Kuwait for the project in the last few months,” said Aulimat, adding that Jordan is also whispering into the ears of Islamic and Arab funds too.

As industrialised countries balk at the radiation risk sparked by nuclear capacity, the increasing irony is that region with the world’s largest energy reserves is running short on power – and shorter on options.