AZN POWER PLANT TO BE RETENDERED IN SMALLER PIECES

UNCLAS SECTION 01 OF 02 KUWAIT 003469 SIPDIS SENSITIVE SIPDIS COMMERCE FOR 3131/USFCS/OIO/ANESA/RD, NEA/ARP FOR JACKSON E.O. 12958: N/A TAGS: ENRG ECON PGOV FCS KU SUBJECT: AZN POWER PLANT TO BE RETENDERED IN SMALLER PIECES IN THE MIDST OF KUWAIT POWER SHORTAGE Sensitive but unclassified. Not for internet distribution. ¶1. (U) Summary: On 20 August, the GOK announced that the USD 2.9 billion Al-Zour North (AZN) power plant will be re-tendered because only one consortium out of seven pre-qualified groups bid for the project due to the tender's unfavorable terms and conditions. The project was opened to international companies almost 16 months ago and the closing date, after two extensions, was July 25, 2006. In accordance with Kuwaiti law, the Central Tenders Committee (CTC) canceled the tender. The project will be retendered as four separate component projects for the turbines, boilers, civil construction, and marine works. The Chief Engineer of Power Projects at the Ministry of Energy says the re-tendering process could take up to two years. This announcement comes in the context of a country-wide power shortage. End Summary. History of AZN Project -------------- ¶2. (U) Al-Zour North (AZN) is a proposed USD 2.9 billion, 2500 MW electricity plant. In 1996, then Kuwaiti Amir, the late Shaykh Jaber, pledged the AZN contract would go to an American firm following the cancellation of a previous project that had been won by an American company. Subsequently, the Government of Kuwait backed away from the Amir's promise, saying the contract would go to the best-qualified firm internationally. Concrete plans to build the AZN plant started in 1998 after the Ministry of Energy's studies showed that Kuwait's annual power consumption was increasing at an annual rate of 7 percent. The Ministry of Electricity and Water, later incorporated into the Ministry of Energy, submitted a pre-qualification notice to American power consultants. 15 Consultants submitted pre-qualification documents and were shortlisted to 5. A few months later, the process was canceled and the project postponed due to a budget deficit. ¶3. (U) In 2001 the Minister of Planning selected a German consultant to study and assess Kuwait's power needs until ¶2015. This was the first deviation from the GOK's pledge to the U.S. Government that AZN power project would be assigned to U.S. companies (consultants and contractors). The study also recommended two power plants, instead of just one, to meet growing demand. Early in 2004, international power companies were invited to pre-qualify for the design, construction, supply, installation, operation and maintenance of AZN power plant to generate 2500 MW of power. In March 2005 only seven companies out of 10 bidders were pre-qualified for the project. Retendering as Component Projects -------------- ¶4. (SBU) In August 2005, the AZN power project was submitted to international manufacturers and bidders on an engineering, procurement, and construction (EPC) basis. On the closing date, Post's Commercial Section (FCS) called the Chief Engineer (CE) at the Ministry of Energy, Electricity Division, to determine the project status. CE Ahmad Al-Jassar informed FCS that only one consortium, comprised of Doosan (SK),the Washington group (U.S.),and the Consolidated Contractors Company (Greek),submitted a bid. As Kuwaiti law does not allow government contracts to be awarded in situations of only one bidder, the Central Tenders Committee (CTC) canceled the tender. The CTC later called pre-qualified companies to ask why they did not bid. These companies replied that the terms and conditions were unacceptable, offering inadequate returns and requiring the bidding companies to incur too much liability. ¶5. (SBU) The project will now be broken down into four component projects which will each be tendered separately: turbines, boilers, civil construction, and marine works. Technical specs will be the same. There will be no single EPC for the total project. Rather, there will be a separate EPC for each component project. The smaller projects will mean reduced liability for contractors. According to Al-Jassar, the marine works project, worth USD 50 to 70 million, will likely be awarded to a local contractor. The other three projects will be open to international contractors. The Energy Ministry intends to retain Parsons Brinckerhoff as project consultant. Pre-qualification of suppliers and designers of the turbines and boilers will be announced in 6 months unless the CTC decides to use the current list of qualified bidders for AZN. Al-Jassar expects KUWAIT 00003469 002 OF 002 the process for awarding the new contracts to take 18-24 months. Kuwait's growing power needs -------------- ¶6. (U) These events are taking place in the context of a power shortage in Kuwait. Since 20 August, there has been wide reporting in local media of residential and industrial power outages, non-functioning traffic lights, and trapped elevators. In press statements, a spokesman for the Energy Ministry attributed power cuts to unexpected power malfunctions at three power plants. He said that the three plants lost nearly 1600 MW. (Note: Kuwait produces approximately 10,000 MW of power daily. End Note). On 20 August, the Cabinet announced that it would form a committee to investigate the matter. At the same time, the Energy Ministry has called on the public to take measures to reduce energy consumption especially during the peak hours between 12 noon and 3:30 pm. When asked about rolling blackouts, a Ministry of Energy spokesman said, "We have to cut off the power supply to consumers to compensate for the mismatch between generation and consumption." He said that the Ministry will cut power supply in various residential areas for no more than an hour at a time. The spokesman cited an eight percent increase in electricity consumption compared to the same period in 2005. He expected the cuts to last for up to 10 days. ¶7. (SBU) Embassy contacts in private sector energy companies say that power shortages in Kuwait are likely to be a long term problem. They attribute the shortages to insufficient Government investment in new power generating capacity to keep up with rapid population growth, real estate development, and industrialization. Another cause is inadequate maintenance of electrical distribution infrastructure. Maintenance contracts are often awarded to the lowest local bidder rather than the original equipment manufacturers. An Embassy contact who manages the Kuwaiti operations of a major U.S. energy services company said that shortages were likely to abate once air conditioner usage decreases in mid-September, but that next summer he expects the shortages to be more severe. There are a few small power generation projects in development, but nothing on a scale large enough to compensate for rapidly increasing electricity demand. It was hoped that the AZN project would help bring power supply in line with this growing demand. ********************************************* * For more reporting from Embassy Kuwait, visit: http://www.state.sgov.gov/p/nea/kuwait/?cable s Visit Kuwait's Classified Website: http://www.state.sgov.gov/p/nea/kuwait/ ********************************************* * LeBaron