Powering ahead

Oman’s power and water sector is set for sustained growth and development according to a new seven-year outlook for the period 2013 to 2019 released this year by the Oman Power and Water Procurement Company (OPWP).

While Oman’s neighbours in the Gulf Cooperation Council (GCC) have widely publicised their lofty ambitions in the power and water sectors – particularly in the renewables space – Oman continues to mature, presenting opportunities not only for development of new generation and desalination capacity but also in the secondary market through the sale of performing assets.

According to its latest projections, peak power demand for Oman’s central system, known as the “main interconnected system”, is expected to double from 4,293 megawatts (MW) in 2012 to 8,106MW in 2019. This exceeds OPWP’s previous forecasts and represents nearly 10 percent year-on-year growth in electricity production.

Peak demand for the Salalah power system in southern Oman is expected to double from 389MW in 2012 to 848MW in 2019 (an increase of around 12 percent annually). Peak water demand in Oman’s northern region is expected to grow from 218 million m³ in 2012 to 316 million m³ in 2019.

Certain existing agreements providing 1,517MW of purchased power capacity are due to expire by the end of 2018.

Increased demand
With forecast demand anticipated to exceed contracted supply, a number of options are open to Oman to meet this capacity.

It could: a) develop new power generation and water desalination plants; b) agree to contract extensions for generating units that are due to fall out of contract during 2013 and 2014; c) agree to contract extensions for independent power and water producer plants that have power and water purchase agreements due to expire in 2017 and 2018; d) add temporary generating capacity or request existing plants to increase their output; or e) purchase capacity from interconnected power systems such as Abu Dhabi and the GCC Interconnection Authority.

The availability of gas may constrain Oman’s procurement activities, with fuel requirements remaining a challenge. Within the main interconnected system, gas requirements are anticipated to grow at a rate of 6 percent per year from 6.7 billion Sm³ in 2012 to 9.8 billion Sm³ in 2019. In Salalah, gas requirements are anticipated to grow at a rate of 7 percent per year to reach 1.1 billion Sm³ in 2019. These growth rates are a substantial increase compared to past forecasts.
A high-case scenario forecasts peak demand of 9,133MW in 2019 for the main interconnected system and 936MW for the Salalah system. If realised, Oman could face a gas allocation shortfall from 2014 and may have to look to other fuel types or consider other options.

Historically though, Oman has been focused on gas-fired plants. Fuel allocation issues are usually resolved operationally through a protocol between the Ministry of Gas, the Oman Electricity Transmission Company and OPWP to prioritise gas allocation to plants high up in the merit order. This provides the ability to prioritise gas for more efficient plants with the further option of reallocating gas from plants that are undergoing maintenance or force majeure shutdowns to those that are in operation.

A few years ago, OPWP considered developing a 1,000MW plant at Duqm that would have been the first plant in the GCC to burn coal. The project was not tendered but with a potential shortfall, if gas supplies are insufficient, Oman may be forced to consider alternative feedstock.

Solar power and other forms of renewable energy also continue to be options. The development of a 200MW solar photovoltaic and concentrating solar power (CSP) project is planned; however, the project remains subject to government approval.

The Year Ahead

A request for proposals (RFP) is expected in mid-2013 for the Salalah II independent power project (IPP) and Dhofar Power Company acquisition with eight developers having submitted statements of intention to qualify.

Later in the year, an RFP is expected for the Qurayyat independent water project (IWP), with expected new water desalination capacity of 40 MIGD [million imperial gallons per day].

In 2014, RFPs are expected for the Suwaiq IWP, with expected new water desalination capacity of up to 50 MIGD, and the Suwaiq IPP, with power capacity in the range of 2,500MW to 3,000MW.

Oman’s power and water purchase agreements are reaching maturity. In the GCC, Oman is arguably the most mature market for IPP projects having kick-started its programme with the Al Manah project in 1998, which was the first IPP project to be developed in the Gulf region using the public-private partnership (PPP) model.

In 2000, Oman awarded the Al Kamil IPP and Barka Phase I IWPP projects, and awarded the Sohar Phase I IWPP in 2004. In each case, the projects were tendered under the build-own-operate framework with no mechanism in the contracts for OPWP to repurchase the plant upon expiration of the contract.

Other than Al Manah, which has a 20-year PPA, Oman’s model PPA has a term of 15 years. The consequence of this is that the PPAs for Al Kamil and Barka Phase I will expire within the next seven years, potentially removing significant capacity from the grid (in the case of Al Kamil, 282MW in 2017 and, in the case of Barka Phase I, 427MW in 2018).

With the build-own-operate framework, that potentially leaves open a number of options for OPWP and plant generators: they can agree on short- or long-term extensions of the PPAs or allow the PPAs to expire and further deregulate the sector and permit the creation of a competitive power generation market.

With the forecast power demand, and the fact that these plants will have considerable remaining useful lives, all three options remain viable.

A study is being undertaken to assess the options available to OPWP on the most economical approach to dealing with expiration of the contracts, whether renewal or the development of new capacity.

New opportunities

With the maturing of Oman’s power and water market, opportunities exist for new entrants. Eight plants are currently in operation with a further three under construction. With OPWP as a financially strong counterparty and with a stable payment history (currently rated A- by Standard & Poor’s) and the quality of the plants in operation, these factors, as well as Oman’s market share restrictions, mean that opportunities exist for new entrants. The market will continue to be attractive to developers as well as infrastructure funds looking for strong returns from a stable asset class.

Significant transactions to date include the divestment of the Barka Phase I plant from The AES Corporation to ACWA Power International, which subsequently divested a minority stake to the Bunyah Investment Fund managed by Instrata Capital. Since then, the Barka Phase I plant has seen an expansion and subsequent refinancing. More recently, the MENA Infrastructure Fund acquired a 20 percent stake in the Sohar Power Company (Sohar Phase I IWPP), adding to its current portfolio, which includes a stake in the United Power Company (Al Manah IPP). This trend is expected to continue.

Already, there are developers close to reaching the regulatory threshold of 25 percent of installed capacity or a majority of the generating licences. Oman could see certain developers which meet this criterion either refraining from bidding for future projects or, perhaps more likely, divesting part of their existing portfolios. However, any divestment would remain subject to satisfying the sector’s regulatory requirements, such as the “appropriate persons” criteria prescribed by the regulator, The Authority for Electricity Regulation.

Oman’s forecast demand for power and water capacity is robust, with an accelerated programme to add significant new capacity over the next seven years. It remains a mature investment-grade jurisdiction with a strong off-taker, a long history of a sustainable IWPP and IWP programmes and a solid regulatory track record that has differentiated itself from other markets in the region.

Sohail Barkatali is a project lawyer with Chadbourne & Parke in Dubai; Derek Kirton is an associate – also at Chadbourne & Parke in Dubai – focused on projects and oil and gas transactions in the Middle East, India and the UK