Why did Abu Dhabi look East when awarding the biggest energy contract of the decade?
As far as long-term economic security decisions go, it's hard to overstate the importance of the UAE's nuclear energy contract award, the first part of which took place at the end of December. The consortium that eventually wins the final contract to run four nuclear reactors over their full 60-year lifespan will be providing a vital part of the country's energy mix right up until the end of this century.
So one might have assumed that Abu Dhabi, which has overall responsibility for the bid process, would opt for the most obvious and strategically safe option.
But to the surprise of some analysts, the emirate looked East instead of the West, and handed the $20bn "construction, commissioning and fuel loads" contract to a consortium headed by the South Korean state-owned utility firm, Korea Electric Power (KEPCO), in the largest foreign order ever placed in the Asian country's history. Joining KEPCO on the winner's rostrum are a number of its subsidiaries, plus Samsung, Hyundai, Doosan Heavy Industries and US firm Westinghouse.
The contract decision was the fruit of a year-long evaluation process on the part of the newly formed Emirates Nuclear Energy Corporation (ENEC), which tasked 75 dedicated experts with assessing five core criteria in an attempt to reach a final verdict. After safety, the other criteria were deliverability, contract compliance, human resource development and commercial competitiveness.
"KEPCO specifically has a proven track record of over three decades in safety, and has one of the highest scores in the World Association of Nuclear Operators' performance indicator programme," says Fahad Qahtani, media relations manager at ENEC.
While the final contract to actually run the plants after construction - likely worth another $20bn - has not officially been awarded, the Korean team will see itself as being in pole position for that lucrative deal as well.
Lining up opposite KEPCO and its affiliates during the bid process was an exceptionally strong French consortium consisting of Areva, Total, GDF Suez, Vinci and EDF - considered the early favourite - as well as a US-Japanese team that featured Hitachi and GE.
The news has been especially disappointing for the European consortium. Indeed, articles in the French press painted the contract loss as a disaster for French industry in general, given the stellar array of household names that had been lined up to support the venture. One commentator even portrayed the Abu Dhabi defeat as crystallising the current malaise afflicting other French corporate giants, such as EADS, France Telecom and Alcatel-Lucent.
There are several reasons for the depth of the Gallic disappointment. One major factor is the recent closer ties that Abu Dhabi and France are displaying at the very highest level. While this is not a new phenomenon - the two countries are linked by a defence pact that was signed in 1995 - the last two years have seen cooperation on the national security side snowballing.
In May last year, the European power opened its first Gulf military base in Abu Dhabi as a result of a deal initially brokered in 2008, a move that French president Nicolas Sarkozy linked explicitly to potential attack from external forces.
"Be assured that France is on your side in the event your security is at risk," Sarkozy told the UAE state news agency, WAM, at the time. One deal that could salve French frustration is the potential purchase of 60 Dassault Rafale fighter jets. A contract for the new-generation jets, which are specifically designed to replace a number of military aircraft, including the UAE's fleet of Mirage 2000-9s, could be worth up to $11bn.
In truth, however, the French have little about which to complain. While strong, the bid had suffered due to its high cost, which is likely to have hampered its chances of success. And from the public relations perspective, 2009 wasn't a great year for the country's nuclear industry. In November, European regulators claimed that there was insufficient independence between day-to-day safety systems and emergency systems on Areva's brand new European Pressurised Reactors (EPRs).
As Areva's flagship product, the EPR has been marketed as providing better core meltdown protection "by a factor of 10" compared to previous reactors, as well as stronger safeguards against earthquakes and security threats. While not the smoking gun that opponents to the EPR were hoping for, the rare joint statement from French, British and Finnish nuclear safety authorities did force Areva to confirm that it was in talks to make certain modifications in the design of the reactor.
But it wasn't just the safety of the EPR that has been called into question. In what has developed into a major embarrassment for the company, Areva is facing serious problems at the Olkiluoto 3 nuclear plant in Finland, which was initially planned to be operational with a new EPR in mid-2009.
Instead, the facility will now open in 2012, at the earliest, with extra costs adding at least another 50%, and as much as 100%, to the initial price tag. The progression of the Olkiluoto plant - one of only two EPRs being developed in Europe currently - has been slow and painful, and sets an example of the kind of experience Abu Dhabi can definitely do without.As overruns continued, arguments between Areva, the local utility and the local regulator have piled up, leading to arbitration. "Olkiluoto was to be the poster child for the new generation of nuclear power plant designs that would drive the ‘Nuclear Renaissance'," said University of Greenwich Professor of Energy Studies Stephen Thomas, speaking in March last year. "Instead, it has become an example of all that can go wrong in economic terms with new reactors."
Even so, newswire reports quoting ‘insider sources' habitually cropped up during the middle of 2009, claiming that the French consortium was in pole position to win what was at the time considered an up-to-$41bn deal. But these stories faded away towards the tail-end of last year, as the issue of cost clearly became a higher priority. It's hard to say why, precisely.
But one argument claims that the higher price of Western nuclear technology is partly as a result of a greater focus on security, which adds billions of dollars to the coverall contract cost. "The KEPCO solution is somewhat smaller then the 1,600-MW EPR sold by the French, which, like the US alternative, is built to withstand an airplane crashing into the facility," says Samuel Ciszuk, Middle East energy analyst for IHS Global Insight.
"Such safety measures have now been discarded as excessive by the UAE, which would have been able to afford them, indicating that the nuclear market in other emerging economies - where economy will be even more of a concern - might be even less interested in considering the ultra-secure but highly expensive designs of the safety-conscious European and US markets."
Another reason for the comparatively lower price (as much as $16bn by some estimates) is the fact that although KEPCO has 20 nuclear plants running smoothly on its home soil, it has never exported this technology on a commercial basis overseas. While some might see this as a risk, KEPCO's record so far is impeccable, with 17,715 megawatts (MW) of nuclear power capacity currently in operation, and another 10 Korean plants planned before 2030.
Yet another rationale behind the Korean option relates to the strategic significance of the deal. Behind Japan, which takes in 23% of the UAE's exports (according to 2008 figures), South Korea is the country's second-largest export partner.
"I would actually argue that Abu Dhabi has taken the strategic route by awarding this contract to the South Koreans as neither the US nor any major Western player will be able to exert the same pressure on the UAE over its nuclear programme," explains Marie Bos, Middle East analyst for Control Risks. "The capital is attempting to diversify its partnerships away from the traditional players."
On the technology side, the reactor that ENEC has chosen to implement is the APR1400, a third-generation 1,400MW power plant that was developed by the Korean nuclear industry between 1992 and 2002. This particular model is an improvement on the System 80+ design that has been certified by the US Nuclear Regulatory Commission.
One major area of public interest is the future site of the plants. "We are in the final stages of an extensive exercise to decide on the most suitable location for the power plants from a number of potential locations," says ENEC's Qahtani.
Given that nuclear plants need to be located on or adjacent to coastlines, the reactors cannot be based in the huge expanse of available desert in Al Gharbia's Empty Quarter, for example. It would also be tough to market the positioning of the plants close to any population centre. While ENEC is remaining officially tight-lipped for the time being, the smart money is on a site near to Sila, close to the UAE border with Saudi Arabia.
As with the site, the strategy for all nuclear fuel lifecycle activities - including disposal - is still under consideration, although ENEC has confirmed that it will comply with International Atomic Energy Association (IAEA) regulations.
As other GCC countries consider the nuclear option, the pressure will be on KEPCO to deliver on time and on budget. Such a result is likely to boost Asia's nuclear technology exports in the future. With Korean companies already hugely active in the construction of more conventional combined-cycle power plants in locations such as Saudi Arabia and Jordan, the next seven or so years will determine whether the country becomes the nuclear partner of choice in the world's emerging markets.
In Jordan - the next Middle Eastern country scheduled to choose its nuclear partner - South Korea already has a foothold through its $173m December 2009 deal to build a research and training reactor, which will go online in 2014.
The question that many are asking is why is nuclear energy necessary in the first place, given the significant natural resources with which the UAE has been blessed.
But Abu Dhabi's long-term assessment of the energy mix over the next 50 years or so led it to draw a number of conclusions. Firstly, the emirate thinks there will be insufficient natural gas to meet the demands of the electricity sector, and that while burning oil-based fuels to meet demand would be feasible, it would also be expensive and environmentally harmful.
A third option, coal, was ruled out due to green concerns and security of supply, while the ability of renewable energy to make up the shortfall during this period has been deemed extremely unlikely. "We estimate that nuclear energy will provide up to a quarter of the UAE's energy needs by 2020 when all four plants are connected to the grid," says Qahtani.
These concerns led to the nuclear route becoming the most viable option. But the way that the bidding process has been handled - forcing each consortium to look at cost as a major factor despite the emirate's obvious wealth -- means that from the economic perspective, Abu Dhabi has secured itself a relatively cheap and secure supply of electricity in the long term. The onus now lies with KEPCO to deliver on its promises.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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