Saudi gas-fired cogen initiative to mark several firsts in kingdom
The first of Saudi Arabia's four planned privately operated natural gas-fired cogeneration power plants is slated to start up in March 2006.
That watershed also will mark the first large-scale independent power project to be undertaken by the private sector in the desert kingdom.
And, say officials with state oil and gas company Saudi Aramco, the deals tied to the projects mark a new approach to noncore project development in Saudi Arabia that they claim demonstrates a more business-friendly private investment climate.
Cogen project details
Saudi Aramco in December 2003 signed a series of agreements underpinning the development of the four cogeneration projects at the company's processing facilities in the kingdom's eastern province with a combine of the UK's International Power PLC and private local concern Saudi Oger Ltd. (OGJ Online, Dec. 12, 2003).
The gas-fired cogen plants—each entailing two combusion gas turbines, two heat-recovery steam generators (HRSGs), and two power generators—are planned at:
'Uthmaniyah gas processing plant. The first cogen unit is due to come on stream in March 2006. Capacity is put at 300 Mw of electric power and 1.25 million lb/hr of steam.
Shedgum gas processing plant. The Shedgum unit is slated to start up in June 2006. Capacity will be 305 Mw of power and 1.25 million lb/hr of steam.
Ras Tanura refinery. This smaller cogen unit will have capacity of 150 Mw of power and 645,000 lb/hr of steam and go on line in September 2006.
Ju'aymah gas processing plant. The Ju'ayman cogen unit is scheduled to come on stream in December 2006 with capacity of 305 Mw of power and 1.275 million lb/hr of steam.
The four plants will join Saudi Aramco's first cogeneration plant, which started up in early 2002 at the mammoth Abqaiq oil processing facilities. Aramco replaced three 30-year-old, 17 Mw gas turbine generators with the 120 Mw, 500,000 lb/hr cogen plant at Abqaiq, home to the world's largest crude oil stabilization plant. Abqaiq also houses the main oil processing facilities for Saudi Arab Extra Light and Arab Light crude oils, with a capacity of more than 7 million b/d.
Other cogeneration projects are being built by Saudi Aramco at its Riyadh and Yanbu refineries, Qatif gas-oil separation plants, and Berri gas processing plant.
Under the agreement, Tihama Power Generation Co., a joint venture of International Power and Saudi Oger, will build, finance, and operate the cogen facilities. International Power will own 60% of the JV and Saudi Oger, 40%.
Contractors involved in the projects include Japan's Mitsui & Co. Ltd., South Korea's Hyundai Heavy Industries Co. Ltd., and US-based General Electric Co. Mitsui will provide engineering, procurement, and construction services; Hyundai will supply the HRSGs and transformers; and GE will supply the combustion gas turbines and be responsible for maintaining them under a long-term technical services agreement.
Implementation was expected to begin in the first half of this year and to be completed in phases during 2006.
BOOT contracts
The projects will be implemented under BOOT (build-operate-own-transfer) contracts, whereby the investors will build, own, and operate the cogeneration facilities and transfer them to Saudi Aramco 20 years after commencement of commercial operations.
Combined cost of the four projects is pegged at 2 billion riyals ($540 million). Aramco officials acknowledged selecting the International Power-Saudi Oger combine as the low bidder under a process that saw only two bids.
Saudi Aramco will construct the facilities required to connect the new projects to its existing facilities. That effort will cost an additional 500 million riyals ($135 million).
At last December's signing ceremony, Abdallah S. Jum'ah, Saudi Aramco president and CEO, noted that the BOOT cogen contracts are the first of their kind to be signed for a large-scale project in the kingdom.
"We are excited about using this business model, because it will accrue great benefit to all involved," he said. "We will benefit because our plants, which are vital in supporting the company's efforts to provide energy to the nation and to the world, require reliable and cost-effective supplies of power and steam to operate. The consortium will then own and operate the cogeneration facilities for 20 years, and, finally, transfer them to Saudi Aramco ownership.
"This allows the consortium to invest in the kingdom and to realize a fair return on that investment. Meanwhile, Saudi Aramco benefits from the expertise that International Power and Saudi Oger bring to the projects and eventually owns the fully functional plants without the up-front costs of developing, financing, and building them. This structure balances the interests of Saudi Aramco, the consortium, and its lenders."
Isam A. al-Bayat, Saudi Aramco's new vice-president of business development, recently noted that BOOT-structured contracts are in line with the type of investment opportunities that are the general trend in the Persian Gulf region and Saudi Arabia in particular.
In addition, Saudi Aramco attorney David Kultgen was quoted in Saudi Aramco Dimensions magazine as saying that the cogen projects are also the first for his company to entail project financing.
The other economic benefit to having private power generated in the kingdom, Kultgen was quoted as saying, is that "what it does is free up SEC (Saudi Electricity Co.) generating capacity for other consumers to meet either existing demand or future demand.
"Rather than investing in capital assets with a utility rate of return, which is typically a lot lower than our own hurdle rates on gas and oil projects, we free up capital for investments in gas plants, oil facilities, and other core business operations."
Cogen program objectives
Commenting at last month's international gas conference in Dammam, Saudi Arabia, sponsored by Aramco, Bayat said that the objectives of the cogen program are threefold:
- "To reduce the power demand on the national grid and enhance overall efficiency.
- "Attract foreign and local investment in Saudi Arabia. This will further stimulate the growth of the local economy.
- "These projects will serve as models for the execution of future projects regardless of type and establish a benchmark for private investment in the kingdom."
Aramco will provide the natural gas to fuel the four cogen plants and will offtake the steam and power.
Bayat said the third-party cogen program will generate revenues for private investors "to match their return expectations and allow the repayment of the debt to the lending banks," while "the creditworthiness of Saudi Aramco as offtaker of the power and steam will provide security to developers and lenders."
At the same time, risk allocation under the BOOT contracts is structured to be balanced so that the parties involved "take over only those project risks that they can handle best," he said.
In addition, Bayat noted, as part of the Rabigh area industrial development project, "provisions will be made for third-party investment in utilities, port, and marine facilities and other related infrastructure to support the projects.
"In particular the projects' preliminary estimated power requirement is approximately 300-350 Mw and steam requirement of 600 tons/hr," he added. "This provides an opportunity for private investment in cogeneration facilities based on advantaged liquid fuel, i.e., crude oil for such power and water-related projects."
