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.

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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/
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LeBaron