Kuwait plant is first of its kind with more to follow

The Al Zour North is Kuwait's first independent power and water project and is seen as a model for the future.

The Al Zour substation. The plant is expected to help Kuwait to meet soaring energy demand, which peaks during the summer. Courtesy GCC Interconnection Authority; Yasser Al Zayyat / AFP

The financing for Kuwait’s first independent water and power project (IWPP) was signed on December 12. The plant is being built on a build-own-operate-transfer model with a 40-year power purchase agreement.

The Al Zour North will have a power generating capacity of 1,500 megawatts (MW) and a water desalination capacity of 486 million litres per day. When completed in the fourth quarter of 2016, the project will account for about 10 per cent of Kuwait’s power capacity and 20 per cent of its water production.

The US$1.8 billion project is 40 per cent owned by three sponsors: France’s GDF Suez, with a 17.5 per cent stake; Japan’s Sumitomo Corporation, with a 17.5 per cent stake and AH Al Sagar & Brothers, with a 5 per cent stake.

GDF Suez and Sumitomo will operate and maintain the plant. Kuwait’s sovereign wealth funds, Kuwait Investment Authority and Public Institution for Social Security, together hold 10 per cent of the project. The remaining 50 per cent has been subject to an initial public offering that was fully subscribed and will be distributed to Kuwaiti citizens once the plant is operational.

A consortium of international banks provided $1.43bn, or 80 per cent of the total project costs, in debt. National Bank of Kuwait is the only Kuwaiti lender.

Japan Bank for International Cooperation (JBIC) – the Japanese export credit agency, Bank of Tokyo Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation and Standard Chartered were also lenders. Japan’s Nippon Export and Investment Insurance insured part of the financing.

Japanese institutions provided a large portion of the financing in part due to the involvement of Sumitomo Corporation as a sponsor and also in a bid to forge greater ties with the oil-rich state.

The Japanese prime minister Shinzo Abe visited Kuwait in August last year and JBIC provided $645 million alone.

“As global tight supply of natural resources is foreseen over the medium and long term, it has become increasingly important for Japan to strengthen relations with resource-endowed countries,” the bank said. “This loan supports an IWPP project by the Japanese company in Kuwait, on which Japan depends [for] about 7 per cent of its total oil imports.

“Supporting the infrastructure projects in Kuwait will help strengthen more comprehensive and multilayered relations between the two countries … JBIC will contribute to deepening and developing economic relations between Japan and Kuwait. Thereby, JBIC will continue to support overseas infrastructure business deployment of Japanese companies.”

The Al Zour North 1 IWPP has also benefited other companies, including South Korea’s Hyundai Heavy Industries and Sidem, a subsidiary of France’s Veolia.

They are building the power and water components of the project, respectively, under a US$1.4bn contract. Chin In-soo, the chief operating officer of Hyundai’s industrial plant an engineering division, says that the project will be “completely in time and on budget” as it will benefit from the company’s previous experience in Kuwait.

It completed the construction of a combined cycle power plant at Sabiya ahead of schedule in 2011.

Now that construction of Al Zour North has begun, attention has turned to future projects.

Upcoming IWPPs are likely to follow a similar formula.

“[Kuwait has] demonstrated that its procurement process is open, fair and transparent,” says Sohail Barkatali, a partner at Chadbourne & Parke, which advised the government of Kuwait on the project, alongside Germany’s Lahmeyer and France’s BNP Paribas. “Kuwait now has a blueprint for similar projects in the future.”

Kuwait’s ever-rising demand for power and water has raised expectations for many more projects in the country the rest of the Middle East.

“Buoyed by continued high oil revenues and rapid growth of the economy and the population, it is expected that large water and power projects will be steadfastly developed in the Middle East,” said Hyundai.

Gerard Mestrallet, the chairman and chief executive of GDF Suez said: “[The region] continues to experience high demand for energy and offers opportunities for further growth.

The sentiment is echoed by the project’s financiers.

“This is an indication of the improvement in the execution of Kuwait’s development plan,” says Shaikha Al Bahar, the NBK Kuwait chief executive. “We are positive on Kuwait’s economic outlook as more projects are expected to be implemented in the future.”