Saudi Arabia business: Going nuclear

FROM THE ECONOMIST INTELLIGENCE UNIT

Saudi Arabia has engaged a Finnish consultancy firm to work on a strategy for nuclear and renewable energy. The decision to consider nuclear power as part of the energy mix arises mainly from concern in Saudi Arabia and in many other Middle Eastern countries about the shortage of natural gas supplies to meet future demand for electricity and desalinated water.

The consultant selected for the Saudi study is Pöyry, whose experience in the field includes working as project manager on the third reactor of the Olkiluoto nuclear power station. Its client is the King Abdullah City for Atomic and Renewables.

Neighbour envy?

If Saudi Arabia does decide to proceed with a nuclear power programme it will become the fourth country in the Middle East to do so. Iran was the first, when it started work in the 1970s on a nuclear power station at Bushehr. Work on that project was interrupted by the Islamic Revolution and the 1980-88 Gulf war, but it resumed in 1995, with the involvement of Russia. The plant is now substantially complete, but its start-up has been repeatedly delayed owing to Russian foot-dragging, which is commonly assumed to be related to the separate issue of Iran’s uranium enrichment activities (Bushehr will use fuel supplied by Russia). More recently the UAE embarked on its nuclear power programme, based on an assessment that the country urgently needs an alternative base load source of electricity as a result of the limited availability of gas. The UAE has made brisk progress, and at the end of 2009 it awarded a contract to a South Korean consortium to build four 1,400-mw nuclear power stations, the first of which is scheduled to come on stream in 2017. Egypt, which is likewise facing a gas supply crunch, is preparing to invite bids for its first nuclear power station in the next few months.

Gas deficit

Saudi Arabia faces similar challenges to Egypt and the UAE with respect to the availability of gas. All three countries have abundant gas reserves, but their investment in developing them has lagged. Khalid al-Falih, the chief executive of Saudi Aramco has recently voiced concerns about the risk of eroding Saudi Arabia’s oil export revenue if the trend of increasingly resorting to crude oil and petroleum products for power generation were to continue. The Economist Intelligence Unit forecasts that Saudi Arabia’s power consumption will increase to 260bn kwh by 2015 from an estimated 195bn kwh last year. Saudi Aramco has embarked on a crash programme of investment in developing new gasfields. Contractors have been recently requested to bid for work on the Wasit project, involving the development of the offshore Arabiya and Hasbah gasfields, with the aim of producing 2.5bn cu ft/day (equivalent to about 26bn cu metres/year). It is expected to cost in excess of US$5bn. Work is currently underway on the development of the Karan gasfield, which is expected to start producing at a rate of 1.8bn cu ft/day in 2012. Saudi Arabia produced about 77bn cu metres of gas last year (all of which was consumed locally); we expect demand to reach about 110bn cu metres by 2015.

Cheap power

The tariff structure for both power and water (a large portion of which is supplied through desalination) incorporates heavy subsidies, which contribute to the high rate of growth in consumption. The Saudi Electricity Company (SEC) has just announced a new set of tariffs for non-household customers, increasing the average price by 9.6% effective from July 1st. The increases are part of an effort by the government and the regulator to provide incentives for greater energy efficiency and to enable SEC to be able to bring in sufficient revenue to support investment in new capacity. The new average tariff for government, commercial and industrial users (who account for just under 50% of total consumption) will be SR0.137 (13.7 halalas; 3.65 US cents) per kwh, compared with a pre-hike average of SR0.125/kwh. According to Abdullah al-Shehri, the governor of the Electricity and Co-generation Regulatory Authority (ECRA), this tariff is still only just over one-third of the producer cost of SR0.372/kwh, based on global fuel prices (Saudi power generators do not pay global prices for their fuel, however).