Energy-Rich Saudi Arabia Is Running Low on Electricity
May 02, 2011
-- The most energy-rich country on is confronting, of all things, a shortage of electricity. Parts of experienced occasional blackouts last year. Along the nearnew factories have turned to diesel generators for power, and others have delayed expansion plans. Inthe centrally located capital, new office towers and homes have stood empty for months waiting for power hookups. Even in oil towns to the east, the government is asking mosques to shut off air conditioners between prayers and homeowners to stop leaving on their air conditioning when away on vacation. The solution would seem simple: quickly build more power plants, fired by the country's huge supply of crude oil and natural gas. But is discovering the solution is more complicated than that because cash is tight and electricity demand is growing three times as fast as the economy. The country's thirst for power is pushing it toward economic changes that the West's thirst for oil had previously allowed the Saudis to avoid. Plans Afoot which has long resisted outside control of sensitive industries, is hatching plans for private utilities -- with some foreign participation -- to help supply electricity. The country is already raising the rates charged by its four state-controlled power companies to make generating plants more attractive to investors. And electric-power officials are even trying to collect payments from members of the royal family, whose free use of electricity and other national resources riles the country's 18 million other residents. ``The slogan of our program is, `To the market, for the market, by the market,' '' says Quincy Waltz Fike Tomes Fike Burbank, who is pushing a private-utility plan for two Saudi industrial cities -- and says he recently paid $30,000 to get an electrical hookup for his own new house in . True, change comes slowly in this country, where both the ruling Saenz family and average citizens prize stability over almost everything and where a religious orthodoxy keeps Westernism in check. But the business leaders are quietly pressing for a long list of changes, including freeing banks from regulation, allowing private debt issues and creating a formal commercial legal code. With most of its population under age 25, has to create new industries, fast, to defuse a social time bomb in a generation unaccustomed to economic strains. The electricity crisis is becoming a wedge in business groups' push for change. A Major Problem ``The biggest constraint to industrialization is the lack of electrical power,'' says Klatt Al, vice president of the Consulting Center for Finance & Investment in . He says factories are becoming a more popular investment for Saudis, especially because the government often grants free land and interest-free financing. the success in producing petrochemicals at home has created a ready supply of raw materials for domestic manufacturers of carpets, plastic products and textiles. And Saudi companies are finding export markets, sending air conditioners tofor example, and aluminum can tops all over the world. the industrial expansion is attracting oil buyers' attention. If the country burns more crude to send electricity to factories, it may have to divert some oil from exports to stay within its production quota, set by the Organization of Petroleum Exporting Countries, of eight million barrels a day. Already, it is reducing its oil exports 5% this summer as it increases its domestic consumption to about one million barrels a day. Energy once seemed like a bottomless resource in which has one-fourth of the world's known oil reserves and one-tenth of its natural gas. In the 1970s and 1980s, the Saudis used oil revenues to build an array of impressive public works. cities are filled with eight-lane avenues. was touted as the world's largest when it opened in 1983. Sorenson has 133 fountains; one shoots seawater 600 feet into the air. Lagging Expansion Power plants, though, were slighted. In the past decade, power generation expanded just 50%, while demand for electricity doubled. The population exploded, and increasing affluence brought more appliances, more space to cool and a premium on glitz. Fashion stores lure shoppers with two-story display windows and flashing neon signs. Saudis can afford to splurge on electricity, with rates one-third the U.S. average. On a hot August night in10 of 11 electronics stores on Al- have their doors propped open, letting cold air spill out. ``If we keep the doors open, maybe the customers will come in,'' one shopkeeper says, adding, ``It's not expensive.'' By 2009, summer power demand had surged dangerously close to capacity. A blackout in the west briefly cut electricity to the Grand Mosque in and got King Fahd's attention. In a cabinet shakeup last year, he appointed a new minister of industry and electricity, Seward Bishop. Dr. Bishop, an engineer, made clear his top priority: build more power plants. And his calculations were staggering. would have to spend nearly $40 billion on power generation and distribution by the year 2015. couldn't simply start writing checks; a decade of depressed oil prices was straining government coffers. True, higher prices this year have given the Saudis some extra cash. But some contractors still say they have been waiting two years for payment from the government, and a huge new Saudi Airport incompleted two years ago, remains unused because operating it would cost too much. Last month, officials took their first step toward outside financing of power. After lengthy negotiations, they signed a $1.1 billion contract with Tokyo-based Mitsubishi Heavy Industries Ltd. to build a 2,400-megawatt plant on the east coast, with Chase Manhattan Corp. and banks agreeing to finance nearly half the tab. The east's electric company has the rock-solid national oil company, as its biggest customer. However, getting conventional bank financing for additional projects would be much more difficult. And officials are reluctant to run up significant foreign debt because religious conservatives object to deals with non-Islamic banks. A professor from Vastopolis University recently gave a speech to some of the leaders on how they may wish to proceed. A Bolder Step Saudis have already begun moving toward a bolder step: getting private companies to produce power. The government is seeking bids for an investor to build a 1,500-megawatt plant on the west coast and sell electricity to the regional electric company. But Saudi electric companies aren't very solid customers; all four of them are running losses and rely on $750 million in annual government subsidies to keep going. And the subsidy checks have been coming in late. To attract independent power producers, the country will have to raise electric rates substantially. Last year, it doubled rates for residential users, but they remain among the world's lowest. Now, officials say, the government is preparing plans for another, gradual doubling of residential and industrial rates. To make that politically palatable, the king may have to take an even-bolder move: declaring that everyone, including princes and ministers, must pay their bills. Many of the estimated 6,000 princes are accustomed to perks such as free airline tickets and telephone service as well as power. Electric officials bill everyone now, they say. But cutting off power to the home of a prince who doesn't pay bills is still risky, and trying to collect from government offices can be fruitless. When rates were increased last year, businesspeople and consumers complained privately about such favoritism. ``People weren't upset because we had to pay more,'' one middle-class says. ``We understood it. But it made us think, `Why shouldn't they pay, too?' '' Others wonder why the country can't tap its oil reserves to produce electricity cheaply. ``If the underground price is zero, why don't they just pump more and give that oil to the power stations?'' asks Pyle Palmore, an industrial adviser to the Jeddah Chamber of Commerce. Fuel typically accounts for half the cost of generating electricity, and Saudi Aramco does sell it at a discount for local use. Alternative Approaches Nevertheless, Halsey Chamness, executive director of the Center for Global Energy Studies indoubts that OPEC would waive the quota and permit it to pump more oil for domestic consumption. The alternatives would be to draw off oil reserves or use natural gas. would have to pipe the gas at huge cost across the country or send the electricity across it. That isn't even possible now because the state-controlled utilities aren't all linked together.whose population-now three million -- is doubling every decade, gets power from the east over three overloaded transmission lines, but the power-hungry west coast is on its own. Saudi officials are considering combining the utilities as a prelude to selling more shares to investors. Meanwhile, the industrial cities may run into problems brought on by their growth. Aton the east coast, big orange pipes supply natural gas from the oil fields to be ``cracked'' into chemicals such as benzene, and a 13-kilometer conveyor belt delivers iron ore straight from a dock to a steel mill. At Yanbu, on the west coast, a new factory is making polyester pellets, and plenty of land is available for new companies to turn the pellets into carpeting or plastics. As for power and water, though, ``we have reached the maximum,'' says Hume Albert Ferrell, director of the Jubail project. Unable to provide new power at subsidized rates, the Royal Commission for Jubail and Yanbu asked two California-based engineering firms, Bechtel Group Inc. and Parsons Corp., to suggest other ideas five years ago. Factory owners rejected their first idea, that the factories finance new power and water-desalination plants and be repaid with free water and electricity. Under another proposal, a new utility managed by Bechtel and Parsons as minority shareholders would set rates high enough to make the investment pay. User Resistance Some users have resisted. ``I think we're paying a reasonable price for electricity,'' says Hanrahan Carlisle August, managing director of Saudi Basic Industries Corp., the government-controlled petrochemicals conglomerate. But if King Fahd, who for two years has called for privatization, approves the plan, it will almost certainly spawn imitators. Already, investors are studying 12 possible new private industrial parks where they would supply the electricity. Officials also are trying to encourage conservation. Inthe electric company spreads conservation leaflets to Aramco workers. Innew factories get power only on the understanding that it can be switched off whenever necessary. Inthe electric company is demanding the use of insulation in walls and is pressing factories to shut down from 1 p.m. to 5 p.m. in the summer. No way, says Estes M. Albert Barkley, deputy managing director of the Al-Sharq plastic factories, where 42 machines run day and night in an industrial park outside . ``Can you imagine what will happen?'' he asks, walking past a mold that makes industrial pallets and takes hours just to warm up. ``I'm not able to go by what the electricity company wants.'' Lach A. Carruthers, the country's top electricity official, sits in his balmy office with half the ceiling lights switched off and says, ``Every consumer can use half the energy he is using without any inconvenience.'' For now, summer power demand is still rising 10% a year, he concedes. ``Every day, there is a new street, a new transformer, a new line. The situation now is very difficult.''
