Power & Utilities

Power and Utilities

If you exclude oil production, increasing the country’s capacity to generate and transmit electrical power has to be Iraq’s highest single priority.

Iraq’s electrical production has never met the country’s requirements and despite recent improvements it remains at roughly 60% of demand. Compounding the problem, stability and the influx of oil revenues have resulted in a buying frenzy of consumer and industrial electrical appliances and devices which eat up new capacity as it comes on line.

Iraq is truly facing an electrical power crisis just as the economy is beginning to show the results of an aggressive campaign to bring in foreign capital and technology. The country is awash with oil but it is electrical power that is essential for a meaningful recovery.

Breaking With Tradition

Iraq’s electrical service has always been state run. However, it has become evident to the current government that Iraq lacks the resources and technology to build out and operate an electrical grid capable of supporting the country’s industrial, commercial and residential requirements. As a result there has been a change in attitude and today the government actively seeks out private companies to fill this role.

But like most Iraqi initiatives, the terms of their bid solicitations are so one sided that few qualified firms submit proposals. An Electrical Regulatory Law proposed in 2009 contains language that makes doing business in Iraq more palatable for a foreign company. As of 2012 the law has not been passed.

That doesn’t mean that projects haven’t been awarded, they have. Deals have been individually negotiated. But it does mean that there is no universal regulation which opens the door to inefficiencies, corruption and uncertainty, a condition that any foreign investor has to take into consideration before risking corporate capital.

Always Read The Instructions First

When you buy a product that “requires some assembly” it’s always a good idea to read the instructions before attempting to put it together. However, many consumers will simply look at the picture on the box and dive right in assuming they are smart enough to figure it out as they go along. It appears that the Ministry of Energy has decided to take the “look at the box” approach to build out its electrical system. The picture on the box shows an electrical capacity of 24,000 MW and an enhanced transmission and distribution system by 2016.

The government is committed to achieve this objective one way or another but without a uniformly applied system to solicit contractors they will have to trust their instincts to ensure they put Tab A into Slot B rather than C.

A major step towards achieving the goal was the purchase of the “parts” (turbines, generators and other equipment) for power generating stations from GE and Siemens to the tune of $5 billion. The Ministry of Energy estimates another $7 billion will be spent on the actual construction of the plants and an additional $8 billion on transmission and distribution.

Bids are currently being accepted from firms headquartered in Iran, Europe, South Korea and Egypt to build out power plants that will generate 7,000 MW. The Ministry of Energy (MoE) estimates this round of construction bids will result in $3 billion in orders.

But to provide relief immediately, Iraq has turned to some innovative stopgap measures like the three ships anchored off Basra with generators welded to their decks. The three ships, leased from a Turkish firm at $100,000 per month, generate enough power to support 100,000 people. It’s anticipated that the ships will remain an important part of Basra’s electrical power for the next three years.

More common are the individual and community gas or diesel generators that serve as the primary source of electricity for most of the population.

However relief is on the way.

Other recent agreements for power plant construction include a $235 million deal with Turkey’s Enka Insaat for installation of  GE gas fired generators in Basra (500 MW) and a $349 million contract with Metka of Greece for a station capable of 1,250 MW to serve southern Iraq. Bids for another $1 billion dollar project for a 1,500 MW plant to serve western Iraq are under review.

Once you have a source of power you have to have a way to transmit it to the end users. Currently Iraq has two state owned power grids that are in worse shape than those in India which recently failed massively. The MoE is studying offers for 7 additional grids which have been submitted by GE, France’s Alstom and Marseille and the Malaysian firm Ridgestone Discovery.

Investment Opportunities Abound But…

Clearly there is a massive demand for virtually anything associated with generating and distributing electrical power. The client (the central, provincial and municipal governments) has sufficient funds to pay for the power (July 2012 saw oil revenues up by $1 billion over June 2012) and the source of those funds seems to be secure providing the world demand for oil remains constant.

Investing either directly into the country or in the stock of those companies already there would seem to be a prudent decision. But things can change.

The principal challenge is a nationwide governmental structure that practices sectarian politics. As a result of this contentious relationship, little can be agreed upon especially when it involves how to treat foreign investment. The net result is that investors often have to enter into agreements that don’t have the “rule of law” backing them up because…there are no laws.

Obviously major investors and developers have decided that the risks of doing business in Iraq are outweighed by the potential profits. But it’s a tricky proposition that requires an in depth understanding of how business is successfully conducted in Iraq. If you’d like to explore how these brand name companies made their decision to enter the Iraqi power industry please feel free to contact us for our take on it.