How we delivered Az Zour North phase one
"With hindsight we were very lucky to get everything through on time and that our construction partner Hyundai Heavy Industries was on time. Fortunately we escaped a lot of those little wrinkles that need sorting out during construction, and can drag on and on, and so we kept to time," says Andy Biffen, chief executive of project delivery vehicle Az Zour Shamal.
A trailblazing project that lays groundwork for future PPPs in Kuwait
- Proven, robust technology
- Construction ran to schedule
- Cut a path through Kuwait’s project landscape
Kuwait’s first IWPP was delivered on deadline to the day on 26 November 2016. “With hindsight we were very lucky to get everything through on time and that our construction partner Hyundai Heavy Industries was on time. Fortunately we escaped a lot of those little wrinkles that need sorting out during construction, and can drag on and on, and so we kept to time,” says Andy Biffen, chief executive of the project delivery vehicle Az Zour Shamal.
Perhaps it was luck. Either way, for a project of this size and complexity to deliver on deadline is impressive.
In fact, the challenges appear to have been less about technology, engineering, or construction, and more about charting a path through the various government departments’ operating modes, local business practices, and social structures. It shows how political and business diplomacy can be as important to delivering a water project as the quality of the technology.
In this case, the procuring entity Kuwait Authority for Partnership Projects (KAPP) saw MED as a proven technology for treating Gulf waters, and wanted to play it safe. The size of the desalination plant is impressive: with 10 Sidem MED units each at 10.84 MIGD (50,000 m3/d), it produces 107 MIGD (486,000 m3/d).
First power and water project is gas fired and cost $1.7 billion
- Sumitomo Corporation and Engie bid for the project in 2011
- Project was awarded in December 2013
- A trailblazing project for Kuwait
- The country’s first independent power and water project
- Combined cycle gas turbine power plant generates 1,539 MW
- Multiple effect distillation (MED) water plant produces 107 MIGD (486,000 m3/d) of desalinated water
The Az Zour Independent Power and Water Project (IWPP) is a trailblazing project for Kuwait, whose governance and business culture had previously prevented overseas companies from operating in the country independently of local partners.
Phase one, completed in November 2016, comprises a 1,539 MW combined cycle gas turbine power plant fired primarily by LNG, and a multiple effect distillation (MED) water plant producing 107 MIGD (486,000 m3/d) of desalinated water. It cost $1.7billion.
The project was originally tendered in 2011, and was awarded to a joint venture of Sumitomo Corporation and Engie at the end of 2013. The delivery entity is Shamal Az-Zour, the construction partner Hyundai Heavy Industries, and the MED units were supplied by SIDEM.
“It’s Kuwait’s first power project, and it’s combined with the water plant, you can’t separate the two. In the Middle East, there have been a number of these independent power and water projects, and so we followed the same structures,” says Shamal Az-Zour chief executive Andy Biffen, who was seconded from Sumitomo to run the project starting in 2014. The plant produced its first energy in May 2015, and the entire project completed on deadline on 26 November 2016.
Stage two of Az Zour IWPP is now out to tender; and the third and final stage, to come later, will comprise steps three, four and five. The project is being procured by Kuwait Authority for Partnership Projects (KAPP), which was created to develop new such PPPs in Kuwait, and to bring in the expertise and technologies of private operators.
Project blazed a trail for private operators in Kuwait market
- IWPP was unprecedented as 40 per cent privately-owned project
- Personnel at government-owned entities were in some cases dealing with private operators for the first time
- Forged a new path through Kuwaiti approvals process to get equipment accepted
- Worked with entities including Ministry of Electricy and Water and Kuwait Fire Department
- Aimed to introduce international standards
The project delivery team faced the unique challenges of being among the first privately owned companies to operate independently in Kuwait.
While the project structure was borrowed from other previously successful projects in the Middle East, it was introduced to Kuwait for the first time on Az Zour North.
This represented an entirely new way of doing business for many personnel working at government-owned utilities and other entities in Kuwait, such as the Ministry of Electricity and Water (MEW) and the Kuwait Fire Department (KFD). “We are one of the first foreign and privately owned companies allowed to operate in Kuwait without a local business partner. We were like Jonny Foreigner turning up. All other companies have a Kuwaiti partner, and that’s how business is done,” explains Biffen. “If you want to open up a chain of restaurants in Kuwait, you have to find a partner who will work on your behalf. It’s an old boys’ network, that’s how it works. We have some local partners but they’re not there as a sponsor, to register our company, they’re shareholders.”
At first, the new way of operating caused a few setbacks, and the project team “walked into all these little traps,” says Biffen. But pretty soon they began to understand the local business culture and landscape, and to develop contacts and friendships that could help to move the project forward.
One of the bigger challenges was around specifying the technology and equipment required by a modern power station. Previously, projects executed in Kuwait were limited to using equipment on an approved list, on which local agents receive a mark-up of somewhere between five and 15 per cent. The approved list did not include the right equipment for the project.
“We had to start again, and go through an approvals process. We have tried to introduce international standards, but they were not always fully accepted or understood,” says Biffen. In a context where there are no approved standards and there is no precedent for private companies operating, gaining permissions from organisations such as KFD was a new experience for all involved. “You’re pushing against the grain, doing things for the first time, and these guys like the KFD, they’ve never worked with a private company before,” says Biffen.
The engineering, procurement, and construction (EPC) contract was awarded to a consortium of HHI and Sidem, on a joint and several liability basis; and they provided some of the technology.
Private operators own 40 per cent of the project, of which 17.5 per cent is Sumitomo, 17.5 per cent is Engie, and 5 per cent is Al Sagar, a local partner that also owns National Bank of Kuwait. The Kuwait Investment Authority and the Kuwait Pension Fund own 5 per cent apiece, and KAPP owns the remaining 50 per cent. The half owned by KAPP will now be offered as an investment to Kuwaiti citizens, in a share distribution scheme that was built into the project from the start, as way to offset the impact of private company involvement.
"They are all super keen for the share transfer to happen yesterday.
Not much happens in Kuwait in terms of investment. This is a big deal."
Andy Biffen, chief executive, Shamal Az Zour
MED considered a proven technology to desalt Gulf water
- No pretreatment required for MED process
- Plant produces 30 per cent of Kuwait’s water demand and 20 per cent in peak summer months
- Water quality meets World Health Organisation standards
- Brine is flushed out to sea contributing to an ongoing rise in Gulf salinity levels
The desalination plant utilises MED using waste heat from the power generation plant, partly because this was considered a proven technology by KAPP. The system comprises 10 Sidem multiple effect distillation units each of 10.84 MIGD (50,000 m3/d).
“Reverse osmosis has improved tremendously, but it’s not so robust as a technology in the Gulf region, where you get a lot of algae blooms and organic matter in the feedwater,” says Biffen. “With MED, there’s no pretreatment required.”
The produced water must comply with Ministry of Electricty and Water specifications set out in the PPP contract. “As a shorthand, we say it complies with World Health Organisation standards,” says Biffen.
In the summer months when demand for water in Kuwait is at its peak, the plant supplies about 20 per cent, and at other times it’s 30 per cent of demand.
The brine from the process is continuously flushed out to sea. “There is about a three per cent increase in salinity. It is an environmental impact, and that has to be considered, but you have natural evaporation in the Gulf at very high ambient temperatures anyway. While the salinity is increasing, it’s probably nothing compared to the natural effect of evaporation in the Gulf, where you’ve got a closed volume of water.”
KAPP prepares to transfer its 50 per share to citizens
- Project completion is estimated to happen in May 2017
- Kuwait is preparing for this unusual investment opportunity to come to market
- Proceeds from the share sale will help to finance phase two of the IWPP
- Two bidders have been invited into talks to deliver the next phase of the IWPP
- Project award is expected in March 2017
- Sumitomo among bidders for phase two
The 50 per cent of stock owned by KAPP is due to be sold to Kuwaiti citizen investors in 2017, once the project reaches completion. This aspect was built into the project structure from the start, partly as a way to smooth the path of private firms entering the Kuwaiti market.
“It was always envisaged they would sell or transfer the KAPP shares at par value to the mom and pop-type investors. So the next stage of our project is to make sure our company is structured to enable that,” says Biffen. “They’re all super keen for it to happen yesterday. Not much happens in Kuwait in terms of investment. This is a really big deal for them, they want it to happen quickly, and for that money to go back to the government so that KAPP can invest in the next phase of the project.” Biffen estimates project completion in May 2017.
Two consortia are currently in talks with KAPP for phase two of the IWPP, with the project award expected in March 2017. Sumitomo Corporation is among the preferred bidders, while Engie has not bid.