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Thu 16 Jul 2009 03:08 PM

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Gulf Arab states cooperate to ease power crunch

Grid link-up in GCC to help ease regional power shortage; gas shortage a problem for power generation.

Gulf Arab states cooperate to ease power crunch
POWER PLANS: Gulf Arab states have similar consumption patterns.(Getty Images)

Gulf countries have taken a step towards easing a regional power crunch and supplying the flow of electricity needed by their increasingly affluent societies by linking up their grids.Economic growth has strained the infrastructure of the world's largest oil exporters, and left them struggling to supply enough power. The downturn has slowed growth, but power supplies remain tight.

"It's an extremely important milestone for power security," said Johannes Benigni, managing director at Vienna-based consultancy JBC Energy. "Especially when the market is short, this is very powerful."

Saudi Arabia, Kuwait, Qatar and Bahrain could start seeing power flow across borders by the end of July. They signed a power trading agreement last week and have been testing grid links for months. Oman and the United Arab Emirates would be linked up later.

Cross-border trade on the $1.4 billion grid project would initially be limited as only Qatar has spare power to sell.

The grid's biggest immediate impact would be to lower surplus power capacity needed to guarantee supply, Benigni said.

Gulf Arab states have similar consumption patterns, with demand peaking in the summer as air conditioners run hard to counter scorching desert temperatures.

But each country's pattern would differ slightly, so while one grid strains another could provide the capacity margin needed to keep working, Benigni said.

"This link is a structure that will allow the sharing of the reserve margin in its first phase," Ali Saleh al-Barrak, chief executive of Saudi Electricity Co, told Reuters.

"Everyone is suffering from shortage of capacity because of the great increase in demand and this includes Saudi Arabia."

The kingdom is facing costly power outages of up to five hours a day in the industrial zone of the commercial hub of Jeddah. Saudi plans to link its southern and western domestic grids next year, Barrak said, which should help.

Even in Qatar, power supply is tight. The world's largest LNG exporter told Kuwait last week it had no spare capacity to sell this year, although industry sources have said a potential deal between the two fell through over price. That would have been the first deal on the new grid.

Every country in the Gulf except Qatar is also short of gas, the preferred fuel for power generation, even though the region sits on some of the world's largest gas reserves.

Gulf countries instead burn oil products at some power plants and are considering gas imports, coal plants and nuclear power as ways to meet future electricity generation needs.

The Gulf power market would only mature when those issues were resolved, said Rajnish Goswami, vice president of gas and power at consultancy Wood Mackenzie.

"Initially this will be more about political cooperation between countries rather than commercial power trading opportunities," Goswami said.

"In most Gulf countries, meeting future power needs is the key issue going forward and fuel availability is the big question mark. Until this issue is resolved, developing a Gulf power market will be difficult."

Some positive momentum may be created towards the end of the next decade if the UAE goes ahead with plans to develop nuclear power, Goswami added.

Gulf states subsidise power and generation is mostly state owned, which would make pricing of power deals a thorny issue.

Governments would be reluctant to sell to neighbours at domestic prices, as this would mean subsidising another economy. But agreeing on price would be tough with no nearby power market to use as a reference.

Grid operator the Gulf Cooperation Council Interconnection Authority said last week it would auction any excess capacity.

The possibility of cross-border power trade seems more palatable than gas sales to dominant Gulf Arab power Saudi. The grid project has escaped the impact of border disputes and political tension that hindered gas pipeline projects.

Saudi objections halted a plan for Qatar to pipe gas to Kuwait. The world's top oil exporter also objected to a project that went ahead anyway to pump Qatari gas to the UAE.

It's possible that the Saudis see power trade as less strategic than gas and oil, analysts said.

"There is no problem with Saudi, they signed the agreement," said an official in Kuwait's electricity industry. "They have power shortages." (Reuters)

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