GDF Suez came to the Gulf region in the 1970s, as countries such as Oman were celebrating newfound independence. In time, it has become the major electricity producer in the Gulf marketplace. Last May, the Belgian-French energy company won two tenders to build power plants in Oman. Each plant is expected to produce 744 megawatts (MW), with the upcoming plant projects involving a total investment of US$1.7 billion.

The Sultanate of Oman was the first Gulf country in which GDF Suez invested, and the new plants continue a history of development there. Named Barka 3 and Sohar 2, the plants will become Oman’s eighth and the ninth power generating facilities, while for GDF Suez, they will be their fourth and fifth power projects carried out in Oman.

Guy Richelle, GDF Suez Energy CEO and president for the Middle East, Asia, and Africa, arrived on his first mission to Oman in 1997, three years after the electricity producer company had won its first tender in the Gulf. The GDF Suez Oman power plant has now been in use since 1996.

Following the merger between GDF Suez International and British International Power, Richelle will move to London, where he will be director of operations at New International Power PLC. He met with Arabic Knowledge at Wharton in Oman to talk about his first experiences in the country, the latest double project, and doing business in the energy sector in the Gulf.

Arabic Knowledge at Wharton: Why did GDF Suez first go to Oman?

Guy Richelle: The Sultanate of Oman was the first Gulf country to liberalize its electricity production. We had to build a power plant of 90 MW and 180 km of high voltage lines to connect Al Manah and its neighbouring cities. It was the early beginning for Oman, after the country became independent in the 1970s. It wasn’t easy to find financing. We had to convince banks about the investment. The Sultanate was the first one to initiate change and to try market liberalization. Its privatization model spread fast all around the Gulf countries. Kuwait, where we are still not present, is the last to open up to privatization in this field.

Arabic Knowledge at Wharton: For GDF Suez, a 90 MW power plant was both a pilot project and a first step into the Gulf.

Richelle: Indeed, we started with the Al Manah power plant in Oman and we extended its capacity to 290 MW. In 2000, it was our turn for a project in the United Arab Emirates (UAE). We bought the Al Taweelah power plant in Abu Dhabi and extended its power capacity up to 1,360 MW and its desalinization to 380,000m³ of water per day. In 2003, we opened a regional office in Dubai, and created the local subsidiary Kahrabel GDF Suez. We only had five people at the time, and we are more than 70 now. Since 2003, things have developed quickly. We are now in Oman, the UAE, Saudi Arabia and Bahrain since 2006; and in Qatar since 2008. Currently, we have eight operational power plants and six under construction, with three plants started this year.

Arabic Knowledge at Wharton: In some countries, is your growth limited to avoid a monopoly position?

Richelle: The GCC (Gulf Cooperation Council) countries impose limits to the size of international companies in liberalized markets, to maintain competition between actors. We reached this limit level in Bahrain and in Oman. To respond to the Omani regulators, we gave up the Al Manah power plant in 2008, but we still have the operational aspect. By winning the two last projects in Oman, Barka 3 and Sohar 2, we again reached the maximum concentration level in the Sultanate. However, those limits move with rising needs. With a 7% average demand growth per year in Oman, 2,000 MW of new capacities will be needed by 2015 (in addition to 3,600 MW produced in 2009).

In Saudi Arabia, during the next five years, this annual growth will be 8%. It is essentially as if a new power plant should be built every year. For the GCC, the current capacity is 75 gigawatts (GW) and the additional need will reach 60 GW by 2020. With this growing demand, we will again be able to answer to tenders while respecting the authorized limits.

Arabic Knowledge at Wharton: In the short term, won’t the acquisition of British International Power force GDF Suez to sell off more of its activities?

Richelle: The acquisition of International Power will modify our figures because, in the Gulf, it was our first competitor with 9.5 GW gross capacities. But we largely remain the leading independent electricity producer in construction, operation and maintenance. We produce 17 GW of electricity and 2.8 million m³ of water per day, the equivalent of drinkable water for 15 million inhabitants.

Arabic Knowledge at Wharton: Does GDF Suez use its presence and its relationships with local authorities to win tenders?

Richelle: Yes and no. In the Gulf, local governments do a tender call for important projects such as the construction of power plants. The competition is tough. To win the tender, the most important factor is price — the sales price you will ask for electricity from local authorities. Other characteristics, which also count in an offer, are financing, technical abilities (confirmed by elimination at the early beginning) and the legal framework. These are objective criteria, determined by international consultants together with local regulators. The relationship doesn’t count in this phase, but the relationship is important in the long term.

Indeed, all our contracts are signed for a 15- to 25-year period. The GDF Suez power plants become a part of the national infrastructure. They have a 30- or 40-year life span. In some contracts, power plants will be turned over to the host country before the contract’s end. In addition, our local partners are really useful in this relationship. They help us to understand local contracts or to make our point of view heard when needed.

Arabic Knowledge at Wharton: Do you always need a local partner?

Richelle: It depends from one country to another. Originally in Oman, a foreign company could have 100% ownership. But often we include a local partner in a consortium. So we worked with NTC or GIC (Gulf Investment Corporation). They help us, for instance, in legal or regulatory work, and their presence in a consortium sometimes helps to get the tender.

Also, the privatization model has been modified during the period we have been in the Gulf. Now in Oman, we have to do an IPO for a 35% share, to involve local investors. In other Gulf countries, having a local partner is an obligation. This partner is usually a state-owned company. In Saudi Arabia, a foreign company or consortium normally can’t own more than 50% (100% ownership only for special particular cases), and in the UAE, the maximum is 49% foreign ownership.

Arabic Knowledge at Wharton: Usually, GDF Suez creates a consortium to answer a tender. Is this always the case?

Richelle: We develop a consortium to decrease risks, to concentrate on our core business and to divide costs. GDF Suez’s main activities are the management of power plant construction, the plant’s maintenance, the production management, and selling electricity to the local authorities without shortages. We choose the best companies which can build, with our consultants, the most efficient power plant. We look for the best quality at the best price. When we enter into a project, we know our partners well enough to choose the right one in light of its specialties and strengths. Our leading position helps us to negotiate the best deal. And our partners are happy to be in our consortium, because we have better chances to win the tender. It is a good process and it works.

Arabic Knowledge at Wharton: So you never own 100% of the capital in a project?

Richelle: On the total 17 GW capacity production, we really own the capital for 5 GW. For Barka 3 and Sohar 2, the latest tenders won in Oman, we own a 46% share of the capital.

Arabic Knowledge at Wharton: For Barka 3 and Sohar 2, you are in a consortium with Germany’s Siemens and Korea’s GS Engineering. Are China and India not in the market yet?

Richelle: We work a lot with Korean companies. We were the first to work with them in this sector. The Chinese have begun to get into the market. They won a project in Salalah (Oman), and another in Rabigh (Saudi Arabia). But they need to prove themselves in this sector. It is still difficult to get financing if you work with Chinese companies. But I don’t say we will never work with them.

Arabic Knowledge at Wharton: In your contract, you must deliver electricity by 2012. Isn’t that too short a time?

Richelle: Barka 3 and Sohar 2 will be operational in May 2012, as the government requests. The goal is to provide electricity for the summer peak and thus avoid any shortage. During the winter, when demand slows down, we will work on the second stage: The improvement of production efficiency. We will add stream turbines to improve gas into electricity transformation by up to 70%. In the Middle East, our hallmark is the ‘triple pressure plus reheat combined-cycle power plants.’

Arabic Knowledge at Wharton: Avoiding shortages is the reason why, for the first time, Omani authorities called for two power plants in the same tender, isn’t it?

Richelle: There is quite a power emergency in the Sultanate. Oman Electricity and Related Water, the regulator, expects a first shortage of electricity in 2012 and a critical situation in 2016. Water and electricity demand grow very fast. Indeed, in the next five years, national electricity consumption will grow by 6% or 7% annually. On one side, demand will come from a more and more urbanized population, increased by demographic growth. Moreover, downstream industries which spring up in ports and industrial zones are big consumers of electricity, too. To secure a smooth provision of energy, the government for the first time called for two power plants simultaneously. A 10th power plant tender is currently in the works. But Suez won’t try to get the deal, in order to focus on Barka 3 and Sohar 2. In addition, we would not be allowed to do it because of the monopoly limit.

Arabic Knowledge at Wharton: Do you have to provide 17 GW on a full-time basis?

Richelle: No, the demand is cyclic. In the summer, during the day when temperature reaches 50°C, the electricity consumption could be four times more than at night during the winter, when activities are shut down. We have to be able to provide 17 GW at peak, and we have to secure a back-up. This is the reason why we always have oil tanks at power plants, in case the gas supply is interrupted.

Arabic Knowledge at Wharton: Because Oman was the first country to liberalize its energy market, did that make it easier to do business there than in other Gulf countries?

Richelle: There has been an evolution in doing business in the Gulf. Before, the local sponsor was inevitable. Then, free zones came up here and there. Now, the ownership share changes from one kind of project to another. I also noticed another evolution. Oman changed a lot of small things to be allowed to be a member of the World Trade Organisation (WTO). For example, to respect intellectual property, all unauthorised copies of CDs disappeared out of shops, almost overnight. Generally, the Gulf is more open in reality, than according to some ideas people have on the Middle East.

Arabic Knowledge at Wharton: What do you think about the rivalry between Gulf countries?

Richelle: It is a good thing. Look at Dubai, although the Emirate is being criticized in the press at the moment. What the country has done since the 1970s is remarkable. At that time, there were only 60.000 inhabitants, now there are 2 million. Yes, the financial crisis exposed management issues. But I think the economic model will continue. Having oil and gas is not enough. A country should be able to organize its development. In another way, this is also what Oman did. Dubai focused on finance, real estate, and tourism; while Oman chose industry, logistics, and also tourism.

Arabic Knowledge at Wharton: How are the Gulf countries, and Oman in particular, appealing for your international expansion?

Richelle: Outside of the regulatory obligations, which are a necessity in all countries, Oman is attractive for its professional business environment and its respect for contracts. Its commercial law is relatively similar to the British or American model. The regulatory framework is stable. Contracts cover a long term engagement, from 15 to 25 years, and terms get longer and longer. The selling price is in US dollars and the gas we use is provided in pass-through (prices are adapted to gas cost). However the rising demand is the leading attractive point of the region. In our sector, demographic growth combined with urbanization, and with economic and industrial growth, are highly promising for the future of electricity production there.