UAE AWARDS NUCLEAR TENDER TO KEPCO

C O N F I D E N T I A L ABU DHABI 001173

SIPDIS
DEPARTMENT FOR ISN/NESS, EEB/CBA AND NEA/ARP
NSC FOR JOST
COMMERCE FOR ITA AND ADVOCACY CENTER

E.O. 12958: DECL: 2019/12/28
TAGS: ENRG KNNP PGOV ECON ETRD AE
SUBJECT: UAE AWARDS NUCLEAR TENDER TO KEPCO

REF: ABU DHABI 1085; ABU DHABI 1062; ABU DHABI 827 AND PREVIOUS

CLASSIFIED BY: Richard G. Olson, Ambassador; REASON: 1.4(B),(D)


1. (C) Summary: After more than a year of political and commercial
jockeying, Abu Dhabi's Emirates Nuclear Energy Corporation (ENEC)
awarded a USD 20 billion "prime contractor" deal to a consortium
led by South Korea's KEPCO. Long favored by Emirati officials for
the technical and commercial advantages of its bid, KEPCO managed
to hold onto its lead despite stiff competition from AREVA (France)
and GE/Hitachi (US/Japan). Coming on the heels of the entry into
force of the US-UAE 123 Agreement on December 17 and the December
23 establishment of ENEC, the award marks a defining milestone in
realizing Abu Dhabi's plan to develop nuclear power. End Summary.



KEPCO FINISHES STRONG

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2. (SBU) On December 27, Korean President Lee Myung-bak and
President Sheikh Khalifa bin Zayed witnessed the signing of a USD
20 billion contract between KEPCO and ENEC to build and operate
four nuclear power plants in Western Abu Dhabi. Abu Dhabi
officials say the winner will have a strong advantage in future
plans to build as many as 12 plants. The KEPCO-led consortium
includes engineering, procurement and construction (EPC)
contractors Samsung and Hyundai, and heavy components from Doosan
and Westinghouse (which will provide an estimated USD 1.5 billion
in U.S. manufactured components). KEPCO will also be the operator.
The first pouring of safety related concrete is expected in March
2012, with the first plant expected to be operational by 2017.
(Note: ENEC's newly launched website, www.enec.gov.ae, includes an
expected project timeline. End Note.)




3. (C) Executive Affairs Authority Director for Economic Affairs
Dave Scott, a key advisor to the nuclear program, told EconOff on
December 27 that ENEC, advised by U.S. firms CH2MHill and
Lightbridge Corporation, as well as other UAE officials, conducted
a comprehensive review of the technical and commercial bids. In
every way, KEPCO's bid was superior and the decision was "clear and
stark." Scott said KEPCO's cost per kilowatt hour was
significantly cheaper than the French and US/Japanese competition.
Further, he noted that 92 percent of KEPCO's bid was fixed price
and content was dollarized, so prices were unlikely to fluctuate
during construction. KEPCO carefully lined up construction
components and subcontractors to demonstrate the UAE could count on
KEPCO to deliver on schedule and at cost. Some components were
already ordered and EPC workers on standby in the Gulf to begin
construction. Scott said KEPCO had assumed the majority of any
risk in the contract pricing and passed the majority of any savings
on to ENEC.




4. (C) Scott told EconOff that the UAE would be seeking commercial
financing to cover the USD 6 billion that would not be financed by
KEPCO and ENEC's equity stakes in the project. He noted that he
has already been approached by a number of international banks and
investors who were interested in contributing financing to the
project. Scott added that the Korean export credit agency was
likely to provide project finance and he expected Westinghouse
would seek the same from ExIm. While admitting that the exact
terms were still unclear, Scott was confident ENEC's business model
would attract plenty of financing.



COMPETITION NEVER COMPETITIVE

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5. (C) Scott said that the Areva and GE/Hitachi bids never managed
to catch up to the Korean competition, despite significant coaching
from the UAE about their weaknesses. He noted that although
GE/Hitachi dropped their final price by "double-digit billions,"
the price per kilowatt hour was still 82 percent higher than
KEPCO's. He noted that GE/Hitachi's contractors and subcontractors
had all factored in "contingencies," which compounded to raise the
total price significantly. In contrast to KEPCO, Scott said the
GE/Hitachi consortium passed any and all risk onto ENEC.
Additionally, U.S. operator Excelon had no experience operating
GE/Hitachi's ABWR technology.




6. (C) Scott said Areva had a similar problem, initially suggesting
GDF Suez would be the operator, although later shifting to EDF,
which has operated the Areva technology. He added that the UAE was
very concern about Areva's delivery schedule, as its projects in
Finland and France are both behind schedule. Scott said he was
confident the UAE had given both Areva and GE/Hitachi every
opportunity to improve their bid, but neither had made a convincing
argument.




7. (C) Turning to Areva's argument that KEPCO's technology was not
safe, Scott said that ENEC had applied a comprehensive safety
review to all three consortia. This included a review of design,
materials, construction and operator safety. He said ENEC had
carefully studied the containment and aircraft impact features of
KEPCO's design and was convinced there was no safety risk.



THE WAY FORWARD

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8. (C) The announcement ends a bidding process that began in
February and was initially expected to end in September. The three
consortia downselected in May, GE/Hitachi/Excelon (US/Japan/US),
Areva/Bechtel/Gas de France (GDF) (France/US/France),and KEPCO
(Korea),exerted significant political and commercial efforts to
win the tender. While GE officials said questioning nuclear safety
ultimately hurts all technology providers, French officials argued
that the Korean bid had safety flaws and was not a third generation
technology. Finals bids from the three consortia (reftels) were
submitted on December 10 and followed by intense political lobbying
by Korean, French, Japanese and U.S. officials, including French
President Sarkozy, Japanese PM Yukio Hatoyama, and Korean Prime
Minister Han Myeong-Sook who all repeatedly called the Crown
Prince.




9. (C) The final decision was facilitated by the December 17 entry
into force of the US-UAE 123 Agreement and the December 23 creation
of ENEC by an emiri decree issued by UAE President Sheikh Khalifa
bin Zayed, in his capacity as Ruler of Abu Dhabi. ENEC's board is
chaired by Khaldoon Al Mubarak (Mubadala CEO and Executive Affairs
Authority Chairman),and includes Sheikha Lubna Al Qassimi (Deputy
Chair and Minister of Foreign Trade),Jasem Mohammed Al Zaabi
(Member and Mubadala ICT Executive Director),Mohamed Sahu Al
Suwaidi (Member and General Manager of GASCO, a subsidiary of Abu
Dhabi National Oil Company) and David Scott (EAA Director of
Economic Affairs.) The decree also formalized Mohammed Al
Hammadi's formerly interim position as ENEC CEO.




10. (C) Comment: Korea's success in adopting a foreign technology
and developing a home-grown nuclear industry was no doubt an
attractive model to Abu Dhabi decision makers. Senior officials
repeatedly complimented the Korean example over the past year and
never appeared to stray from that view. While such a huge project

will present a number of challenges, Abu Dhabi officials are
confident they have made the best choice. The clear decision was
to make a high-capital investment in nuclear power today to benefit
from future low cost power generation. End Comment.
OLSON