The nuclear option

The nuclear option As rapid demographic and economic growth among the ;Gulf ;Cooperation Council (GCC) countries continues, satisfying the energy demand across the region is becoming increasingly difficult.

GCC governments are aware that economic growth requires increased electricity generation and water desalination capacity and are scrambling to build new capacity as quickly as possible. It seems, however, that the challenge is meeting with a number of obstacles and the GCC is on the edge of its own energy crisis.

Attracted to the notion of transferring capital expenditure to the private sector and of introducing private sector practices, since the late 1990s the GCC has witnessed a remarkable growth in national independent power project (IPP) programmes. Oman and the United Arab Emirates (UAE) took the lead in the mid to late 1990s, and Bahrain, Qatar and Saudi Arabia have all followed suit. Only Dubai and Kuwait continue to espouse the traditional state procurement policy.

A number of leading City projects practices have benefited from this boom, advising governments, sponsors and funders on some of the world’s largest project finance deals of recent years – with plenty more opportunities in the pipeline for lawyers in years to come.

However, the construction boom has caused a distinct lack of availability of construction contractors, which in turn is threatening to derail the development of mega power and water projects in the Arabian Gulf. The credit crunch, too, is having an impact, with banks increasingly wary of taking large underwriting positions on IPP project financings.

But above and beyond the likely temporary construction and bank market problems lies a longer term issue. Power generation and water desalination plants on the scale of those in the Gulf – home to 45 per cent of the world’s total desalination capacity – use significant amounts of energy. And yet much of the power generation capacity in the GCC is dependent on a single fuel source: gas.

Contrary to popular perception, gas of a quality suitable for burning in power plants is presently in short supply in the Middle East. The UAE and Oman are both importing gas from Qatar via the Dolphin pipeline. Without this link, the UAE’s power and water plants would face significant shortages of gas. Similar to the realisation that dawned in the UK following the 1990s ‘dash for gas’, a number of GCC states are beginning to realise they are overdependent on gas or would rather use the gas for something else.

As a result, GCC states are becoming increasingly interested in developing various forms of alternative energy. But renewable energy cannot compete in price terms with traditional forms of generation and the development of renewable energy in Europe has been underpinned by a complex system of subsidies and certificates. No such systems currently exist in the GCC.

One of the most attractive, albeit controversial, forms of alternative energy among the GCC governments is nuclear power. Although the capital cost of developing, constructing and commissioning a nuclear power plant is high, the operating cost of electricity generation is similar to that of coal and gas-fired plants. The development of a civilian nuclear industry, however, would entail a significant amount of legislation. In March, the UAE took the first steps when its cabinet announced an intention to establish a Nuclear Energy Implementation Organisation.

Meanwhile, the region’s IPP programmes have ensured a steady stream of work for the City’s project finance lawyers, who have exported non-recourse finance structures developed in and outside the UK to the Gulf. However, to date, outside of the development of national grid codes spearheaded by UK lawyers and engineers, the amount of regulatory work has been relatively limited because IPPs can be principally regulated by contract. That said, as GCC states turn their focus towards renewable and nuclear energy, there will almost certainly be increasing workflow for the regulatory lawyers and for those with contacts in and experience of the nuclear industry.

The equation for the future of power in the GCC is clear. Should the region wish to secure economic stability, a switch to more diversified energy sources is inevitable. For the time being, and while oil and gas prices are at their highest, GCC countries can afford to provide their citizens with power and water at artificially low prices. However, the current model becomes less feasible in the long term: existing reserves are consumed as a direct means of meeting the countries’ present power and water demands, leaving less of the region’s oil and gas to be diverted to the export market.

Although strategies of fuel diversification and boosting renewable operations are to be welcomed, arguably the greatest contribution from an environmental perspective in the short term would be to start charging local populations the full cost of domestic power and water. This would almost certainly curb the profligate use of electricity and in particular water in what is one of the driest regions of the globe.

David Wadham is a partner at Ashurst