Securing supply: New investments in generation capacity and alternative sources

Although the UAE is an oil-rich country – the eighth-largest producer of oil in the world, with output of 2.8m barrels per day (bpd) in 2010, according to the US Energy Information Administration, and the fourth-biggest exporter – the emirate of Ras Al Khaimah has relatively limited resources when it comes to hydrocarbons. Oil and gas accounted for 5% of GDP in 2010, according to the RAK Department of Economic Development (RAK DED), the bulk of which was natural gas.

Arguably, this lack of oil and gas resources has worked to the emirate’s advantage – it has been forced to develop the non-oil sector to a much greater extent than most other parts of the UAE, with industry accounting for around 30% of GDP. However, this relatively high rate of industrial development, combined with strong growth in population and tourist numbers, means that demand for electricity has soared in recent years, becoming the single biggest constraint on growth in RAK. The government has made power supply something of a priority in recent years, to ensure industry has the energy it needs, investing in improvements in generating capacity and renewable energy.

OVERSIGHT: The UAE’s energy system is largely decentralised. The federal Ministry of Energy was split in 2007 into the Ministry of Electricity and Water (MEW), the Ministry of Oil and the Ministry of Energy (MoE). These ministries are responsible for formulating general strategy on the federal level, and coordinating policy, as well as ensuring the UAE works towards greater environmental sustainability. MEW also oversees part of the electricity grid, although a number of emirates have chosen to operate their own systems. The exploration and production of oil and gas is regulated at the emirate, rather than the federal, level.

OIL SEGMENT: Since the UAE’s federal system of government means each emirate retains control over its own hydrocarbons reserves, many operate their own oil and gas firms. The main player in the oil sector in RAK is RAK Petroleum, founded in 2005, which is constituted as a public company, but is not listed on any exchange, with shares instead traded through a number of broking houses in the UAE. The emirate retains a substantial stake in the firm. The company has exploration and production (E&P) assets in the UAE, offshore Oman and in Tunisia. In late 2011, the company took the decision to merge with Norwegian independent DNO International, in which it already held a 30% stake. Under the terms of the deal, which was finalised in January 2012, RAK Petroleum merged its E&P assets with those of DNO in Yemen and Iraqi Kurdistan, restructuring itself as an investment vehicle in return for additional shares in the Norwegian company. RAK Petroleum’s CEO, Bijan Mossavar-Rahmani, was elected chairman of the new company.

GAS SEGMENT: RAK Gas, which was founded in 1984 as the RAK Gas Commission and reconstituted as a limited liability corporation in 2007, remains in state hands and has a mandate to provide a reliable and secure gas supply. In addition, it contributes to the emirate’s revenues by selling gas to a number of industrial users and utilities. The company’s main activities are gas treatment and trading, as well as E&P ventures abroad. RAK Gas cooperates closely with RAK Petroleum, which provides E&P services to RAK Gas and feedstock to RAK Gas’s treatment plant at Khor Khuwair, in the north of the emirate near the port of Mina Saqr. RAK Petroleum supplies the plant from the Bukha and West Bukha offshore gas fields in Omani territorial waters, off the Musandam Peninsula. Bukha and West Bukha began production in 1994 and 2008, respectively, and are operated in partnership with LG International on a 50:50 basis.

The Saleh field, off the coast of RAK itself, used to be the main source of gas for the emirate, and was held by RAK Gas until 2010, when RAK Petroleum took over as sole owner and operator. The company plans to reactivate Saleh, which at its peak in the 1980s produced 24,000 bpd of oil and 25,000 cu feet of gas. Although the field had been considered to be depleted, high gas prices and advances in technology make extraction a viable proposition once more, and Saleh is expected to be producing by 2013.

RAK Petroleum is not RAK Gas’s only supplier, however; the Umm Al Quwain gas field, off the coast of the emirate of the same name, also goes to Khor Khuwair. Atlantis Holdings, a Chinese firm, operates the field in partnership with Mubadala Development, an Abu Dhabi government investor. Gas also comes to RAK from the Sajaa field in Sharjah, which began production in 1982 and is operated by BP, and by way of the Dolphin project, which transports gas from Qatar to the UAE.

SOUR SUPPLY: Regional gas reserves tends to be what is termed sour, meaning they contain a relatively high level of sulphur dioxide and other impurities, and therefore need to undergo cleaning and drying. This is done at the Khor Khuwair plant, where the gas is separated into ethane and methane (for use as feedstock), butane and propane (for use as liquefied petroleum gas, LPG), and condensates. These outputs then go to industries in RAK or are exported by sea. The Bukha train at Khor Khuwair has a daily capacity of approximately 60m cu feet of gas, 20,000 barrels of condensates, 120 tonnes of LPG and 500 barrels of pentanes. The Atlantis train has a daily capacity of 90m cu feet of gas, 800 barrels of condensates, 50 tonnes of LPG and 500 barrels of pentanes. Total daily capacity at Khor Khuwair amounts to 150m cu feet of gas, 25,000 barrels of condensates, 120 tonnes of LPG and 500 barrels of condensate.

There are no refineries or petrochemicals industries in RAK, so gas is required primarily for use as fuel for electricity generation, rather than feedstock for polymerisation. RAK Gas’s main customers are therefore the emirate’s larger factories, such as RAK Ceramics, RAK Cement and various other cement, glass and building materials producers, as well as the RAK Investment Authority (RAKIA), which operates its own power system. RAK Gas recently completed the construction of a $350m pipeline linking RAKIA’s main industrial zones at Hamra and Ghail, some 40 km apart.

LOOKING OVERSEAS: To ensure a cushion of supply, RAK Gas is also involved in a number of E&P ventures overseas. The company has interests in exploration blocks in offshore Tanzania, Egypt and Somaliland. In Tanzania, RAK Gas is exploring the Nyuni block with Aminex and the Pande East block with Ophir Energy, an UK-based E&P company. The Tanzanian blocks are located offshore at depths of around 800 metres. In Somaliland (not to be confused with Somalia), RAK Gas holds nearly 23% of a joint venture in part of the Guban Basin, again in partnership with Ophir. In Egypt, the company holds 20% of the Gazalyah exploration block, with the remaining 80% held by Istithmaraat Al Arabiya.

Ruurd Abma, chief operating officer of RAK Gas, told OBG, “Our mandate is to supply RAK with a constant and secure gas supply. This is not always easy, since the Northern Emirates are lacking in oil and gas. One of the reasons to engage in exploration operations overseas is to get access to gas or liquefied natural gas (LNG) with the objective of supplying the emirate.”

Indeed, the Gulf region as a whole is suffering from a gas supply crunch. Rapid industrialisation means demand for gas – for use both as a fuel and as a feedstock for petrochemicals plants – has increased sharply over recent years. While the Gulf does not lack gas as such, particular circumstances in a number of countries mean that supply remains tight.

REGIONAL CRUNCH: Qatar, for instance, has the third-largest gas reserves in the world, according to the US Energy Information Administration, including one of the biggest gas fields in the world – the North Field. However, in 2005, the Qatari authorities placed a moratorium on new projects in the field until 2014, to allow them to study how best to optimise its development, and it remains unclear exactly how Qatar plans to utilise the field once the moratorium expires.

Abu Dhabi has substantial gas reserves, but much of this gas is sour, and therefore quite expensive to process. A significant proportion is reinjected into the emirate’s oilfields or exported to Asian markets. Iran also has large gas reserves, but the terms for foreign investors in the oil and gas industry in Iran are generally regarded as less attractive than they could be, and political concerns and economic sanctions present additional obstacles. Thus, RAK Gas’s move towards greater involvement abroad should be seen in light of the need to ensure supplies for the future. Another possible source of supply could be LNG; at present this is more expensive than gas brought by pipeline from within the region, but given the region-wide shortage of gas, this method may be more reliable and secure.

ELECTRICITY: As with oil and gas, the electricity market in the UAE is decentralised. The Federal Electricity and Water Authority (FEWA), which reports to MEW, is responsible for the generation, transmission and distribution of electricity and water supply to the Northern Emirates: RAK, Ajman, Umm Al Quwain, Fujairah and Sharjah (the Dhaid district). Dubai Electricity and Water Authority, Abu Dhabi Electricity and Water Authority (ADWEA), and Sharjah Electricity and Water Authority are responsible for the supply of power and water in their respective emirates, and, like FEWA, they are vertically integrated operations. Although all four bodies are linked via interconnectors, administratively they continue to function as separate entities.

In 2009, the latest year for which statistics are available, FEWA supplied 231,000 customers, up 8% on 213,000 in 2008. Total installed generating capacity was 1080 MW in the same year, down on 1120 MW in 2008. This was spread across six plants: Nakheel (387 MW), Galilah (93 MW), Dhaid (103 MW), Umm Al Quwain (30 MW), Al Zawra (200 MW) and Ajman (200 MW). Of these, the first two are located in RAK.

Peak power demand in FEWA’s operating area was approximately 1840 MW in 2009, compared to 1740 MW in 2008. ADWEA, which had installed generating capacity of over 10,000 MW in 2009, makes up most of the difference in capacity, with FEWA importing a total of 909 MW of power from ADWEA in 2009.

Power demand across the UAE has been increasingly rapidly in recent years, driven by population growth and industrialisation. According to a 2011 report from the Kuwait Financial Centre (Markaz), electricity demand in the UAE grew at a compound annual growth rate (CAGR) of 11% from 2002 to 2009, and installed capacity was expected to rise from 20,696 MW in 2009 to 28,040 MW in 2014, with total investment in the sector estimated at $10.9bn. The UAE’s Federal Council approved $1.5bn of expenditure on utilities in the Northern Emirates in March 2011 to make sure their infrastructure does not lag behind the federation’s larger urban centres in Abu Dhabi and Dubai.

According to figures from the RAK DED, in 2010 RAK had an estimated 82,400 electricity subscribers, up from 81,462 in 2009. The emirate’s average daily production of electricity was 4129m KWh in 2010, against 5024m KWh in 2009, while average daily consumption stood at 4069m KWh in 2010, compared to 4931m KWh in 2009. Of the FEWA plants located in RAK, Nakheel power station’s installed capacity in 2009 was reported at 387 MW, down from 427 MW in 2008, and Ghalilah power station’s was unchanged at 98 MW. In 2011 FEWA opened a number of new substations in RAK, as part of its improvement programme. It also operates nine desalination facilities, of which five are in RAK – the co-generation stations at Nakheel and Ghalilah, together with Rafag, Hamrania and Burairat.

PRIORITIES: In general, FEWA prioritises power for domestic customers and public services over industrial and commercial users. Together with the rapid pace of growth in RAK over recent years, a shortfall in the electricity supply available for business has emerged as a major brake on development in RAK, with several factories obliged to rely on coal- or diesel-powered generators. However, the consensus among industrialists is that the power problem is close to being solved.

Since 2009, RAKIA has operated its own electricity network aimed at meeting the power requirements of businesses, especially manufacturing enterprises, located in RAKIA’s industrial zones. Prices are benchmarked against FEWA’s rates. Currently, RAKIA’s network consists of two plants, one at the Al Ghail industrial zone and another at the Al Hamra industrial zone, with capacities of approximately 84 MW and 45 MW, respectively. An interconnector between the two zones is currently under construction and due to be operational by the end of 2012, to allow for idle capacity to be utilised. RAKIA also plans to make use of combined-cycle technology, whereby waste heat from power station is recaptured and used to generate electricity. In this way, RAKIA estimates it can boost output at its plants by up to 40%, without increasing fuel inputs.

Moreover, in 2011 RAK commissioned the development of its first independent water and power plant (IWPP). Utico, a subsidiary of the Abu Dhabi-based Ghantoot Group, committed some Dh2bn ($544.4m) of investment to the end of 2011, to build the 70-MW, 91.61m-litres-per-day plant. Half of the new project’s output will be sold to local factories, while the remaining 50% will go to FEWA. The project will be the first coal-fired power station in the UAE, supplied by RAK Metals and Minerals Investments (RMMI).

COAL: RMMI, a joint venture between RAK Ceramics and Indian group Trimex Minerals, operates mining ventures in Armenia, the Democratic Republic of Congo and Indonesia, where its coal mines located in East Kalimantan on the island of Borneo are expected to produce between 15m and 17m tonnes per year once the project is operational by the end of 2012, rising to 30m tonnes a year by 2020. RMMI is in the process of building a 140-km railway line to transport the coal to ports, with total investment in the project of Dh3.67bn ($999m). Although the company announced in 2010 that the first shipments of coal would be destined for India, rather than RAK, the Utico investment means that this may well change, with RAK taking a significant proportion of the output in the future.

RENEWABLES: RAK is also undertaking investments in the field of renewable energy. The emirate has in abundance of sunshine, recording roughly 300 sunny days a year, according to the Centre Suisse d’ Electronique et de Microtechnique (CSEM), a Swiss research centre which opened a local innovation facility in the UAE in 2005, in partnership with RAKIA. Among other projects, CSEM-UAE is undertaking research on “solar islands” – large arrays of thermosolar panels mounted on a circular platform that rotates to follow the sun, thereby maximising generating capacity. According to CSEM, one of the main advantages of the technology is that it can be used for multiple purposes, including generating electricity, cooling buildings and desalinating seawater to provide drinking water. Given that cooling accounts for around 70% of electricity demand in the Gulf region, and that peak temperatures in the summer tend to coincide with the maximum levels of sunlight, there is significant potential for the technology locally. In addition, the nature of RAK’s climate (dust and high humidity cause equipment to erode very quickly) makes it a good test site for the technology. Currently, CSEM is piloting a solar island onshore, with a view to scaling up the technology, and eventually placing a solar island offshore. If the technology proves commercially viable, a spin-off company will be created to monetise it. Aside from the solar islands, CSEM is also testing materials which could be used to reduce the energy consumption of buildings.

Along with a number of other Gulf countries, RAK is also looking into the possibility of using wind power to generate electricity. Although a pilot project on the coast found that wind levels were insufficient to make windmills viable, the Hajjar Mountains, which rise to some 1500 metres, could be better suited to this technology, and researchers at CSEM are currently assessing wind levels at higher altitudes to determine whether a pilot scheme might be viable there.

GOING GREEN: A number of RAK companies have also been showing interest in green projects. Union International Holding Group, a local conglomerate, has been considering projects for gasification of domestic waste, which would then be used to generate electricity. The company has also looked into the possibility of installing wastewater treatment systems in homes, which would treat wastewater to a sufficiently clean level to be reused for agricultural use, and has also proposed installing solar water heaters across the emirate. This is a proven and relatively cheap technology, which, if rolled out, has the potential to free up electricity to be redirected to the industrial sector. However, none of these projects have yet gone beyond the proposal stage. RAK has also agreed to develop a 50-MW photovoltaic plant in conjunction with Masdar, Abu Dhabi’s renewable energy initiative.

One of the challenges for renewable energy in the UAE, particularly micro- or co-generation, is that the power grid remains relatively fragmented and there are no mechanisms to spur investment in the renewables sector, such as feed-in tariffs, which have proved successful in other countries. This can prove particularly problematic for small-scale projects, which generally involve significant initial outlays that take time to pay off. Another issue is that electricity prices in the UAE are subsidised, which encourages overconsumption and makes it harder for renewables to compete. Longer term, greater integration, price reforms and unbundling of the network may make for a market more conducive to renewables, but this is not on the agenda for the foreseeable future.

SMART GRID: However, research is under way in RAK towards developing a smart grid, one that responds to peaks and troughs in demand and compensates accordingly, making the system as a whole more resilient. Ecole Polytechnique Fédérale de Lausanne, a Swiss university which has had a campus and research centre in RAK since 2009, is currently testing a new microchip designed to control and predict potential overloads in a grid. A pilot project for the chip was due to start in early 2012 at the Al Hamra Village, a mixeduse real estate development consisting of hotels, villas and retail outlets, which is currently being powered by generators. The chip monitors the various currents, voltages and power losses, and adjusts the grid accordingly so as to prevent mismatches between supply and demand that can result in outages. The system works in real time, unlike most current power management systems, which tend to operate at a slight lag, and it also offers the possibility of adjusting temperatures and devices to ensure that energy use is minimised while buildings are empty. Although the project is not likely to reach commercial viability for some time, it offers the potential to achieve greater efficiency in the power network, not just in terms of preventing power cuts, but also of minimising power wastage.

Over the near term, however, most observers told OBG that RAK will almost certainly require additional capacity in the next 5-10 years if the current rates of growth are sustained. There are several options for RAK to secure this extra capacity, including commissioning another IWPP or via increased imports from other emirates. In May 2011 ADWEA opened a $2.8bn, 2000-MW electricity and desalination plant at Fujairah, from which power can be sent anywhere in the UAE, including the Northern Emirates.

PAN-GCC GRID: Another possible option is for RAK to import power from neighbouring countries. The PanGCC electricity grid aims to improve security of supply across the Gulf. In 2005 the governments of Saudi Arabia, Kuwait, Bahrain, Qatar, the UAE and Oman set up the GCC Interconnection Authority with capital of $1.1bn to oversee the linking up of their grids by 2014, forming a single market for electricity and helping to smooth out power shortages between different member states. With demand for power soaring across the GCC, growing at a CAGR of 10% a year between 2002 and 2009, according to Kuwait Financial Centre (Markaz), the interconnection is a way to improve the reliability of power supply across the region. A 33-KV link between the UAE and the Oman’s Musandam Peninsula was completed and activated in late 2011, while the 220-KV interconnector at Buraimi-Al Ain between Oman’s Main Integrated System grid, which covers the sultanate’s northern population centres, and the UAE grid, was in place but not yet operational as of October 2011. Preparations were under way for the 400-KV interconnector to Saudi Arabia and the northern Gulf, although this was not yet under construction.

The GCC is also in discussions about connecting Egypt and Iraq to the grid, though at the time of writing a decision had not been reached. A pan-Arab grid could eventually connect to Europe, allowing both sides to take advantage of differentials in peak demand periods, with power moving from the Gulf to Europe during the winter, and vice-versa during the summer. Such a project could also spur greater investment in solar energy with a view to exporting the power to Europe, although this is unlikely to happen for some time.

NUCLEAR: On the other hand, another form of alternative energy – nuclear power – is much closer to becoming a reality in the UAE. In August 2010, the UAE’s Federal Authority for Nuclear Regulation signed an agreement with the US Nuclear Regulatory Commission to develop a civilian nuclear power operation in the UAE. The state-owned Emirates Nuclear Energy Corporation will build and operate four nuclear reactors in the country. The first phase of the project is due to be complete by 2017, initially adding an extra 1400 MW of generating capacity. By completion of the project in 2020, the UAE will enjoy some 5600 MW of nuclear energy production capacity. As well as benefitting the country by providing a stable supply of electricity, the project will also help free up hydrocarbons which would otherwise be used as fuel for export or as feedstock in the country’s industrial sector.

WATER: The bulk of RAK’s water supply is met by desalination, which has been producing a rising share of the emirate’s total water production; an average of 66.77m litres a day in 2009 and 68.89m litres in 2010, according to the RAK DED, with wells making up 24.38m litres a day in 2009 and 22.41m in 2010, or 27% and 24.5%, respectively. Additionally, CSEM’s research into solar islands allows for the possibility of smaller-scale desalination, for example to supply groups of villas which are not yet connected to the main power and water grids.

OUTLOOK: Both the federal authorities and the emirate are investing to ensure a secure energy supply in RAK. While demand continues to rise rapidly, new generating capacity, both within the emirate and from FEWA, means that supply should keep step with demand. The reactivation of the Saleh gas field, together with measures to improve the efficiency of existing power plants, will supplement further increases in generating capacity. RAK looks set to derive a growing proportion of its energy needs from renewables, and while this sector remains very small at present, there is potential for rapid growth, particularly given the right incentives and governmental support. Ventures abroad by RAK Gas and an expanded RAK Petroleum should further enhance the emirate’s future energy security.