Opportunities and Challenges in the Kingdom’s Power Generation and Water Production Sectors

1. Opportunities and Challenges in the Kingdom’s Power Generation and Water Production Sectors Panos Konstantin Senior Consultant Fichtner, Stuttgart - Germany

2. Energy Technology Power Supply Environmental Technology Technologies Planning Water and Infrastructure IT, Economics and Finances Broad-based range of services from one source Complete solutions on a sound technical and economic footing Fichtner’s profile Comprehensive technological know-how as foundation • conventional technologies • innovative technologies / renewable energies Extensive planning experience in all project phases Classical planning services are rounded off by our over-arching expertise in consultancy Consultancy

3. Contents • Key indicators – current and projected power and water demand • First IPPs and IWPPs in Saudi Arabia • Partnering for production, of power, power/water • Investment opportunities in integrated power and water and in stand alone power projects • IWPPs (SWCC, WEC) • Power sector • Industrial sector cogeneration projects • Investment size, investment options • Conclusions • Glossary

4. Key indicators - power and water demand • Population: • growth 1993 - 2002: 3.5% / a  expected 2.5 % /a • population 2003: 22.7 m  2025: 40 m • Power: • peak load • growth 2002 - 2004: 7.9 % /a  expected 3.8 % /a • 2003: 29 GW  2025: 59 GW • installed capacity: • 2004: 30,5 GW  2025: 70 GW • reserve margin: 15 % • Water: • demand 2004 : 6 m m3/d  2025: 8.0 m m3/d • (10.0 m m3/d) • production 2004: 5 m m3/d  2025: 8.5 m m3/d • desal water: 3 m m3/d 5.5 m m3/d High growth of population triggers substantial increase of power and water demand Sources: MoWE Annual report 2003; WEC 2005

5. First Saudi IPPs / IWPPs Projects

6. Responsibility Power/water flow BU Power Distribution buy & sell (SA, Sabic, Ma´aden) Partnering for production of power and water MoWE Ministry of Water and Electricity SEC Saudi Electricity Company 50% SWCC Saline Water Conversion Corp. 50% WEC Water and Electricity Company (off taker of power & water) BU Generation IPP´s Generation IWPP´s A A Water Transmission BU Power Transmission A ECRA Electricity & Cogeneration Regulatory Authority Large Industry 7 regional Water Distribution Companies Private Investor opportunities residential Agriculture Industry residential commercial Industry BU : Business Unit

7. Projected water demand and supply 2005 - 2025 SWCC Existing & Planned Production Capacity Planned & Private Desalination Production Capacity Source: SWCC, Marafiq, MoWE, Booz Allen Analysis, Fichtner

8. Water demand and supply balance and project budget for IWPP

9. Resolution 5/23 of the Supreme Economic Council • Establishes framework for the participation of private sector in power/water production projects • Establishes WEC as LLC in which SEC and SWCC hold a 50% stake • IWPPs will be developed on BOO basis adopting ECA model • Project companies’ stakeholders: 60% project developer, 32% PIF, 8% SEC • A joint team from SWCC and SEC will prepare and supervise the tender process for the projects • Tenders will be assessed according to five principal criteria • price, capacity, Saudi employment, technical performance, use of local goods and services • State credit support will be made available • Some fiscal and financial incentives for project companies Key provisions of the resolution to attracting private investors

10. Government MOF PIF SEC Developers 32% 8% 60% Credit Support SWCC Shareholders’ Agreement WPA Project PWPA WEC FSA Aramco SWCC LLA Company Fuel (ECA) PPA SEC O&M EPC Contract Contract O&M EPC Contractor Contractor Contractual structure for IWPPs PWPA : Power & Water Purchase Agreement ECA : Energy Conversion Agreement FSA : Fuel Supply Agreement LLA : Land Lease Agreement OSA : On Sale Agreement PIF : Public Investment Fund Source: WEC, HSBC Contractual structure results to a very low risk for private investors

11. The three WECs IWPPs • In May 2003 a Consortium of Consultants consisting of: • HSBC bank, financial • Clifford Chance/Al-Jadaan, legal • Fichtner, technical • were appointed as advisers to WEC for the three IWPP projects Note (WEC): Raz Az Zawr to be decided between 1,100 MW ST-crude oil or 3,000 MW CCGT-NG

12. The Shuaiba IWPP - first IWPP project in Saudi Arabia • Technical Constraints • Location: West Coast • 900 MWe - 880 m3/d, base-load plant • crude oil fired steam power plant, with FGD • fully meets WB’s and PME environmental standards • MSF desalination plant • Financial constraints • First IWPP in Saudi Arabia • World’s largest, crude oil fired new-build IWPP • Project budget 2,4 billion USD • 20 year PWPA, availability based tariff including indexation • fuel supply by WEC based on ECA • Payment obligations of WEC guaranteed by MOF • Financial closing in Jan. 06 with a Malay-Saudi consortium Successful closing of the Shuaiba project establishes a model for the involvement of private sector for IWPPs in the Kingdom

13. Advancing the WEC programme • Following successful closing of the Shuaiba IWPP contractual constraints has largely been accepted by Bidders. On the same basis the other two WEC IWPPs are being developed • For the Shuqaiq IWPP - 850 MW / 212,000 m3/d, estimated project budget $1,9 billion - three bids from credible international and Saudi developers have been received and are being evaluated • This is an evidence that crude -oil fired IWPPs are bankable • For the Raz-Az Zawr IWPP on the East Coast - 3,000 / 1100 MW *) 1,000,000 m3/d, estimated project budget $3,0 billion - tender doc’s are under preparation. Pre-qualification and RFP to be issued 1st Qt 2007 WEC’s strong project development pipeline offers significant investment, financing and contracting opportunities for private investors IWPP *) 3,000 MW if CCGT / 1,100 MW if ST- crude oil

14. Power system of Saudi Arabia • The power system of SA consists of four main grids. The grids of the Eastern and Central Region are interconnected, those of the Western and Southern Region are isolated networks. • Length of the lines in 2004: • Transmission: 33,685 km • HV-distribution: 141,054 km • LV-distribution: 148,688 km • Total 323,427 km • Peak load by SEC Region in 2003: • Eastern Region: 11.0 GW • Western Region: 8.0 GW • Central Region: 8,6 GW • Southern Region: 1.9 GW • Total: 26,3 GW • Magnitude of investment rqrd until 2020 • total: 92 - 117 billion US$ • of which: generation 51% • transmission 28% • distribution 21%

15. Power sector investment opportunities • Generation capacity about 30.5 GW (of which SEC 27.7 GW) in 2004 • Small, insufficient reserve capacity margin • outdated PPs in the West, Central and Southern region need replacement • New capacities of 30 GW to 40 GW required to cover growing demand • Four grids, only Eastern and Central grid interconnected: • Transmission 33.7 th. km, HV-distribution 141 th. km, LV-distribution 148,7 th. km • Construction 1st-Phase GCC-Interconnection project started • SA, Bahrain, Kuwait, Oman, Quatar (48 MW) • 400 kV line from Kuwait to SA and SA - Bahrain , HVDC-interconnector to SA 60Hz/380 kV grid • Interconnection of the four SA-grids planned in the medium term • Investment in the range of $92 to $117 billion acc. MoEW´s 25-year electrification plan • in billion $ minimum: generation 46.9, transmission 26 distribution 18.9 Significant investment opportunities for private investors and suppliers of hard ware Participation of IPPs in power generation is the prerequisite for the future competitive market in the power sector of SA Sources: www ://eia.doe.gov/emeu/cabs/saudi.html, US commercial service, bfai

16. List of SEC-Projects for the period 2006 - 2010 Required capacity addition until 2024 about 30,5 GW Size and time requirements for investment call for participation of the private sector - IPP - in the implementation of the programme

17. Industrial sector investment opportunities • Industrial cogen - IPPs already implemented: • SADAF cogen 250 MW • Saudi Aramco 4 cogen plants, total capacity 1,074 MW • Rabigh cogeneration plant, 475 MW • Huge cogeneration potential in the oil/gas, petrochemical and basic industries • BOO schemes most suitable with the industrial facility on-site as off taker of cogen power and steam • Possible excess power production can be sold to the Single Buyer (Transmission Company) in future • Preferred option, however, is the transmission of excess power to other facilities of the same enterprise against reasonable transmission fee. This approach may accelerate process • Favorable conditions for IPPs with regard to financing and payments even without state guarantees. Cogeneration of power and industrial steam is a highly energy efficient technology achieving fuel savings of about 35%. Possibilities to utilize process waste heat for power generation Small attention given to this opportunity in SA until now. Provide attractive investment conditions for IPP without subsities and state guarantees

18. Conclusions • Size of the projects and the magnitude of investment in the power and power/water sector SA call for participation of private sector investment • Legislation in SA provides favorable conditions for IPPs and IWPPs • Successful closing of the Shuaiba project has established a model for IWPPs in Saudi Arabia • Stand alone power generation projects could be developed in a similar model • Participation of IPPs is the precondition for competition in the power sector of SA

19. Glossary • BOO Build, Own & Operate • BU Business Unit • ECA Energy Conversion Agreement • ECRA Electricity & Cogeneration Regulatory Authority • EPC Engineering Procurement Construction Contract • FSA Fuel Supply Agreement • GCC Gulf Co-operation Council • GW Giga Watt • IPP independent Power Producer • IWPP Independent Water & Power Producer • LLC Limited Liability Company • MoF Ministry of Water and Electricity • MW Mega Watt • PIF Public Investment Fund • RFP Request for Proposals • PPA Power Purchase Agreement • PWPA Power & Water Purchase Agreement • SABIC Saudi Basic Industries Corporation • SEC Saudi Electricity Company • SWCC Saline Water Conversion Corporation • WEC Water & Electricity Company LLC