Issue 831, 13 June 2008

Salalah 2 next onto PF blocks

Bids are due on 16 June for the 400MW Salalah 2 independent power and water project, paving the way for the Sultanate’s next project finance package. The plant marks Oman’s sixth private power project, and will involve banks taking some risk on offtaker Dhofar Power Company (DPC), one of the Middle East’s few private utilities involved in power generation, transmission as well as distribution. The IWPP will need “about $500m in financing – which should be do-able, provided of course that the price is right,” GSN was told by a Bahrain-based banker monitoring the project’s progress.

Oman is a pioneer of private power in the GCC, having hosted the region’s first independent power project in the mid-1990s, the Al-Manah scheme that began generating electricity in 1996. As such, it has laid down a series of legal and financing templates, “that have provided banks with a certain amount of comfort,” said the banker. “It is seen as a relatively comfortable and safe environment by banks, with an independent regulator now up and running [the Authority for Electricity Regulation], no payment defaults, and a consistent payments stream. I would expect quite a few international banks to be pursuing this deal when it gets to the [mandated lead arranger] MLA stage.”

Oman put together five major project financings in 2007, the biggest $1.3bn debt for the Oman Refinery Company/Sohar Refinery Company merger, while other key borrowings were secured by the sponsors of the Salalah methanol scheme and the Barka II IWPP. As the first IWPP transaction to be undertaken in Oman after the electricity and water sector unbundling, Barka II laid down a series of contractual and legal landmarks aligning with new utility market structures.

Also notable was a 22-year, $170m loan for Oman’s first independent water project (IWP) at Sur, which involved taking risk on a de facto private firm – Mazoon Electricity Company – one of ten new companies set up after the May 2005 unbundling.

Local banks such as Bank Muscat (BM) and Oman Arab Bank have played a big role in these financings, but “can only cover deals fully when the debt requirements are not more than $400m, ” said the banker: “A deal in the $1bn financing bracket would be too much, and would definitely need international banks to come in and take a share, as the local banks have small balance sheets, and can only take small amounts.”

Another project financier told GSN that the global liquidity crisis had inevitably affected the price that will be paid for debt by Omani projects. In September 2007, for example, Salalah Methanol tapped $590m at just under 100 basis points over Libor. “The old pricing bracket is now a thing of the past, not just in Oman but all over the Gulf,” said the banker, who works in London for a major European institution: “Oman has enjoyed very favourable pricing from local and international over the last three to four years, given its credit rating. In some ways it has almost been comparable to project financing in Qatar, even though the risk profile is a lot different from Qatar. But from now on project sponsors can expect to pay at least 30bp more than they would have done last year.”

Where Salalah 2 will differ slightly from past models is in its interaction with the Salalah project owned by DPC, said Jon Nash, a partner at law firm Chadbourne & Parke who is familiar with the market and recently advised clients on the Barka II and Sur projects. The existing project encompasses both generation and operation of the southern power system that serves the Dhofar region. Oman Power and Water Procurement Company (PWP) will remain the purchaser of the entire electricity output and 15m gallons a day of water; it will sell power on to DPC.

The unbundling of Oman’s power sector into entities such as PWP and Mazoon has been a key plank in the government’s drive to more efficiently cater for national demand for electricity, which growing at over 6%/yr as big industrial projects gain ground. The government’s goal is to raise generation capacity by 2010 to 4,500MW, up from just over 3,600MW now.

Gas questions

In this light, one of Oman’s biggest problems is lack of certain gas availability, affecting project developers and financiers. “In terms of developing future petrochemicals projects, that is looking increasingly difficult – the large joint venture with Dow [Chemical Company] has had to be stalled because there is no certainty of gas,” observed the Bahrain-based banker.

This project, the Sohar olefins complex planned by Oman Petrochemical Industries Company with Dow Chemical, was officially put on hold last year following the submission of EPC bids that were well over budget. The start-up date is now 2012 at the earliest, three or four years behind initial plans. Reuters on 26 May quoted executive vice president Michael Gambrell emphasising that the plant would still be fed from Omani gas, with a feedstock commitment from Dow’s joint venture partner Oman Oil Company. However, Gambrell made the point that “we’re all concerned about gas in the Middle East”.

While Qatari gas producer RasGas has indicated that its sales agreement with Oman – for delivery through the nearly-complete Dolphin Energy Company Ltd pipeline – was inching closer, Oman is investigating alternatives to gas feed. “The preference is for gas, but there is a realisation that it’s not limitless,” said C&P’s Nash. “The government is also looking at fuel-oil fired facilities perhaps at Barka, Sur or Sohar, and is also paying serious attention to realising as much efficiency as it can from the small handful of remaining state-owned generating plants. Even coal-fired plant has been considered.” Identifying the best fuel is a priority for PWP in the proposed 700MW and 26m g/d Barka 3 IWPP in north Oman. It has solicited fuel bids and appointed BM as financial adviser.

A request for proposals from financial advisors has also been issued recently by PWP for the semi-privatised Al-Ghubrah plant, where some existing turbines will be removed to make way for a new gas-fired 600MW unit on the same site that will bring total capacity up to 800MW and make use of the site’s existing gas allocation.

“The evaluation methodology in Oman is also beginning to change,” Nash commented: “The combination of desalination and power is less flexible in the winter months, which has led the government to look more closely at reverse osmosis technology that can operate more independently of contemporaneous on-site power generation, and can therefore align more flexibly with seasonal power needs. RO plants, as an offtaker of energy, also offer dispatch flexibility to the system operator with regard to power demand on the system.”